US-China Trade Breakthrough - A 90-Day Reprieve Amid Continuing Strategic Tensions
US-China Trade Breakthrough: A 90-Day Reprieve Amid Continuing Strategic Tensions
The White House announced on Monday a significant breakthrough in trade negotiations between the United States and China. The joint statement, released on May 12, dramatically reduces tariffs that had escalated to near-prohibitive levels last month. The agreement represents the most significant de-escalation in trade tensions since President Trump returned to office in January.
The agreement suspends 24 percentage points of the escalatory tariffs both sides imposed in early April, reducing U.S. duties on Chinese goods from 145% to approximately 30%, while Chinese tariffs on American products fall from 125% to about 10%. The arrangement will last for an initial 90-day period, creating what Treasury Secretary Scott Bessent called "breathing room for pragmatic dialogue."
Table: US-China Average Tariff Levels Before, During, and After the April 2025 Trade Escalation (as percentages)
| Time Period | US Tariffs on Chinese Goods | Chinese Tariffs on US Goods | Key Events |
|---|---|---|---|
| Before April 2025 | 20.8% | 21% | Relatively stable tariffs with minor increases in September 2024 and January 2025 |
| During April 2025 Escalation | 145% | 125% | Rapid escalation through multiple rounds: April 2 (US imposes 34% "reciprocal tariff"), April 4 (China matches), followed by additional increases on April 5, 9, and 10 |
| After May 2025 Agreement | 30% | 10% | May 12 agreement established 90-day cooling period; US maintained 20% "fentanyl tariffs"; China agreed to remove non-tariff barriers |
"This deal gives American businesses relief while maintaining pressure on China," President Trump said in remarks at Mar-a-Lago on Sunday. "We're talking, but we're watching closely. Very closely."
The temporary nature of the agreement, however, suggests that fundamental tensions between Washington and Beijing remain unresolved. Financial markets rallied on news of the deal — with the S&P 500 Futures surging 2.77% and Shanghai's composite index gaining 4.7% — yet the limited timeframe has analysts characterizing the pact as a strategic pause rather than a comprehensive settlement. Chart showing the immediate percentage gains of the S&P 500 and Shanghai Composite Index following the trade deal announcement.
| Index | Date of Reaction | Immediate Percentage Gain (%) |
|---|---|---|
| S&P 500 (Futures) | May 12, 2025 | ~2.77% |
| Nasdaq 100 (Futures) | May 12, 2025 | ~3.8% |
| Shanghai Composite | May 12, 2025 | Positive Rally (Asian markets rallied)* |
| Dow Jones (Futures) | May 12, 2025 | ~2.2% |
"Both sides recognized they were advancing toward a cliff edge that neither wanted to fall over," said Rachel, a senior fellow at a leading economics research institute. "But make no mistake — this is a truce, not a peace treaty."
Surprising Speed and Scale of Agreement
What struck many observers was the unexpectedly broad scope of tariff reductions. While analysts had anticipated potential cuts to perhaps 50%, the scale of the rollback exceeded most predictions.
"The administration went from maximum pressure to significant compromise with remarkable speed," noted William, a chief Asia strategist at a leading IB. "It suggests an urgency we hadn't fully appreciated."
That urgency likely stemmed from mounting evidence that the tariff war was beginning to inflict serious economic damage on both sides. U.S. manufacturers reported severe disruptions to supply chains, with shortages of key components threatening production lines. Meanwhile, Chinese export-oriented firms along the eastern seaboard were facing order cancellations at rates not seen since the early pandemic.
Vice Premier He Lifeng, who led negotiations for China, framed the agreement as a validation of Beijing's approach. "This agreement demonstrates how mutual respect and equal consultation can address even the most complex challenges in our economic relationship," he said in a statement released through Xinhua.
A Deal with Deliberate Limitations
The agreement's architecture reveals as much in its omissions as its provisions. Special tariffs on electric vehicles, steel, and aluminum remain untouched. So too do pre-April tariffs, including the controversial "fentanyl tariffs" imposed in February and March 2025.
Trump's 20% tariffs on fentanyl-related imports from China, instituted in February and March, will remain in place. As Treasury Secretary Bessent noted, "we could see some amount of the fentanyl tariffs perhaps come off" but only with "excellent engagement" from Beijing on addressing the fentanyl issue.
The agreement maintains a 10 percent global baseline tariff and sectoral tariffs of 25 percent on steel, aluminum and cars. As confirmed by multiple sources, this means these Chinese goods, including electric vehicles, steel, and aluminum, will continue to be subject to separate tariffs outside the scope of the Geneva agreement.
Rather than creating any new verification mechanisms, the joint statement indicates the two sides will establish a mechanism for continuing consultations on economic and trade relations. This mechanism will be led by Chinese Vice Premier He Lifeng and US Treasury Secretary Scott Besent and US Trade Representative Jameson Greer as representatives.
The 90-day window appears designed to test whether further progress is possible. There's a chance to extend the arrangement beyond this period, but as officials have indicated, this would require "good faith effort, engagement and constructive dialog" from both sides.
Supply Chain Calculus
A critical factor shaping the negotiations was the deep interdependence of manufacturing supply chains. According to Oxford Economics, 47% of U.S. imports from China in 2023 were "manufacturing inputs" used by American factories to produce finished goods domestically.
Table: Composition of U.S. Imports from China in 2024 and Manufacturing Inputs Percentage
| Category | Imports from China 2024 (Billion USD) |
|---|---|
| Electrical and electronic equipment | 127.06 |
| Machinery, nuclear reactors, boilers | 85.13 |
| Toys, games, sports requisites | 32.04 |
| Plastics | 21.53 |
| Furniture, lighting signs, prefabricated buildings | 20.94 |
| Vehicles (excluding railway and tramway) | 17.99 |
| Articles of iron or steel | 13.17 |
| Optical, photo, technical, medical apparatus | 12.34 |
This dependency gave China unexpected leverage. "Beijing understood that they can find substitute buyers much easier than American manufacturers will be able to find alternative suppliers," said Louise, a senior China economist.
In Shenzhen, that reality was evident at a leading producer, which manufactures specialized electronic connectors for American industrial equipment. "Our U.S. customers were calling daily, practically begging us to hold shipments until tariffs came down," said operations director Zhang. "They simply couldn't source these parts elsewhere in the required timeframe."
The agreement's timing also proved fortuitous for U.S. retailers preparing for holiday inventory builds. "Another month of these tariffs and we'd have seen significant price increases across consumer electronics, apparel, and household goods," said Katherine, a retail shop owner in New York.
Markets React with Enthusiasm and Caution
China's offshore yuan strengthened to 7.224 CNH/USD, its strongest level in roughly six months, while COMEX copper futures traded near $4.65/lb, up 15.09% year-to-date. Spot gold slipped 1.4% to $3,277.84/oz on reduced safe-haven demand, and praseodymium-neodymium oxide averaged 443,071 CNY/t, marking a 6.04% gain since January 1.
Offshore Chinese Yuan (USD/CNH)
China's offshore yuan rose about 0.2% on May 12, reaching 7.224 CNH per USD, its firmest level since late November 2024 as investors welcomed easing U.S.-China trade tensions. It had surged past the psychologically important 7.20 mark the previous day, trading at 7.2160 as of 09:00 GMT. This represents a clear vote of confidence in China's economic resilience.
Copper (COMEX)
Front-month COMEX copper futures were quoted at approximately $4.65 per pound on May 12, 2025, trading within a $4.48–$4.74 range as markets anticipated potential demand increases from U.S.-China tariff relief. Year-to-date, copper has climbed 15.09%, reflecting robust industrial sentiment spurred by hopes of revived Chinese consumption.
Gold
Spot gold fell 1.4% on May 12 to $3,277.84 per ounce, as improved U.S.-China trade prospects reduced investor appetite for safe havens. U.S. gold futures mirrored this slide, dipping nearly 2% as traders rotated into equities and other risk assets.
Rare Earths
China's spot praseodymium-neodymium oxide averaged 443,071 CNY per tonne in April 2025, supported by tight export controls and strong downstream demand. Since the start of 2025, prices have risen by 6.04%, or 30,000 CNY/T, as manufacturers from EVs to aerospace compete for scarce material.
Strategic Calculations Behind the Deal
The agreement reflects complex strategic calculations on both sides. For the Trump administration, mounting economic pressures coincided with growing concerns about global instability, including the recent Pakistan-India border conflict that has drawn diplomatic resources away from the China relationship.
"There's a recognition in Washington that fighting on too many fronts simultaneously is unsustainable," said Elizabeth, a senior advisor at a think tank. "This creates space to focus on immediate security challenges while maintaining a framework for addressing trade concerns."
Chinese calculations appear similarly multifaceted. Recent diplomatic outreach to Russia and ASEAN countries strengthened Beijing's position, while domestic economic challenges – particularly in the property sector – created incentives to stabilize the external environment.
"Beijing is playing a longer game," observed Minxin, professor of government. "The 90-day window allows them to demonstrate resilience to domestic audiences while continuing to implement their 'dual circulation' strategy of reducing dependency on American markets."
Did you know? China’s "Dual Circulation" Strategy is a major economic shift that prioritizes boosting domestic demand and innovation (internal circulation) while strategically engaging with global markets (external circulation). Launched in 2020, it aims to reduce reliance on foreign technologies and exports, strengthen economic resilience, and foster long-term self-sufficiency amid global uncertainties and geopolitical tensions.
A senior Chinese economic official characterized Beijing's approach as "strategic patience." "We recognize that the American political cycle creates certain pressures," the official said. "Our focus remains on long-term economic resilience rather than short-term concessions."
Congressional Resistance Emerges
Not all stakeholders welcomed the agreement. Senator Tom Cotton of Arkansas called the deal "premature concessions to Beijing" and signaled that congressional Republicans might seek to legislate hardline approaches to China trade regardless of the administration's negotiations.
The administration faces a narrow path forward, balancing demands from business interests for trade normalization against growing bipartisan hawkishness toward China. "They've bought themselves three months, but the fundamental political dilemma remains unresolved," said Derek, a resident scholar of economics.
The Road Ahead: Critical Milestones
The agreement establishes a clear timeline for implementation and evaluation. On May 14, both countries will officially modify their tariff structures, with customs agencies issuing detailed guidance to importers and exporters.
A first bilateral technical working group will convene in Washington on May 20, followed by an initial compliance assessment expected by mid-June. The most critical milestone comes in early August, when both sides must decide whether to extend, modify, or terminate the 90-day arrangement.
"That August decision point is already casting a shadow over planning horizons," said Mary, a senior fellow at a leading research institute. "Companies are reluctant to make long-term commitments based on what may prove to be a temporary respite."
Indeed, many manufacturers indicated they would continue diversification strategies initiated during previous trade tensions. "We're proceeding with our Vietnam facility regardless," said Richard, owner of a contract manufacturer based in Guangdong province. "One agreement doesn't erase the fundamental uncertainty in the relationship."
Beyond Tariffs: The Unfinished Agenda
The agreement leaves numerous contentious issues unaddressed. China's rare earth export controls implemented in April remain largely intact, though sources indicate administrative processes for export licenses have been informally expedited.
Intellectual property protections, forced technology transfer, and market access for U.S. financial services firms – long-standing American concerns – await discussion in the newly established dialogue mechanism.
Most significantly, the agreement does nothing to resolve fundamental disagreements about industrial policy and economic systems that have driven tensions between the countries for more than a decade.
"This deal addresses symptoms rather than causes," said David, a former Treasury representative in Beijing. "The structural issues that drove decoupling pressures haven't disappeared; they've just been temporarily set aside."
WTO Implications and Global Trade Governance
The bilateral nature of the agreement continues a trend of sidestepping multilateral trade governance mechanisms. While WTO Director-General Ngozi Okonjo-Iweala publicly praised the progress, the organization remains sidelined in resolving the world's most consequential trade relationship.
Previous WTO rulings against Trump's China tariffs remain stalled in the organization's inactive appellate body, due to Washington's blocking of judicial appointments. "This bilateral approach further weakens the rules-based trading system," said Chad Bown, senior fellow at Peterson Institute and expert on WTO dispute settlement.
The WTO Appellate Body is inactive primarily because the United States has blocked the appointment of new judges to the panel. This ongoing blockage has paralyzed the WTO's highest dispute settlement body, creating a crisis within its mechanism for resolving international trade disputes.
European and other trading partners expressed cautious optimism about the deal's implications. "Anything that reduces tension between the U.S. and China benefits the global economy," said Valdis Dombrovskis, European Commission Executive Vice President. "But we continue to advocate for multilateral solutions to shared challenges."
Investment Implications: A "Tradable Window"
For investors, the agreement creates what IB strategist Jonathan calls "a tradable window for cyclical positioning." His team recommends increased exposure to input-intensive U.S. manufacturers and Asian cyclical stocks, while maintaining hedges through positions in gold miners and rare-earth producers.
"The Geneva accord removes the extreme left-tail risk of a trade blockade scenario," Jonathan wrote in a note to clients. "But the 90-day timeframe preserves significant uncertainty for August and beyond."
Currency strategists continued strength for the yuan in the near term, potentially reaching 6.70 against the dollar by late June, while projecting a modestly steeper U.S. Treasury yield curve on reduced inflation concerns.
A Strategic Pause, Not a Resolution
As delegates departed Geneva on Sunday evening, the prevailing sentiment was one of cautious relief rather than diplomatic triumph. "We've pulled back from the brink," said a European diplomat who observed the talks. "But the fundamental contest between these economic models continues."
The agreement represents what Treasury Secretary Bessent described as "a mutual recognition that extreme tariff escalation was unsustainable for both economies." In his words: "The consensus from both delegations is that neither side wishes to be decoupled. The imposition of these very high tariffs was akin to an embargo, which neither party desires."
Yet the limited timeframe and rigorous verification mechanisms suggest both Washington and Beijing view this as a tactical adjustment rather than a strategic pivot. The U.S. gains breathing room to demonstrate economic "wins" while maintaining pressure on China. Beijing demonstrates resilience while continuing to prepare long-term adaptation strategies.
As one senior Chinese negotiator put it in a moment of candor during a coffee break: "We are not solving problems here. We are buying time to see if problems can be solved."
For businesses caught in the crossfire of great power competition, that time is precious but insufficient for long-term planning. The fundamental question remains whether this temporary arrangement will lead to substantive discussions addressing the structural issues driving U.S.-China tensions, or merely represent a pause in what has become the defining economic relationship of the century.
SIDEBAR: Winners and Losers in the Geneva Agreement
WINNERS:
U.S. Consumer Goods Manufacturers With 47% of U.S. imports from China being manufacturing inputs, the tariff relief reduces cost pressures ahead of holiday inventory building. Companies like Whirlpool and Hasbro see immediate margin improvements.
Chinese Export-Oriented SMEs Factories along China's eastern seaboard regain order flow after weeks of cancellations, while the strengthened yuan tempers imported inflation for their input costs.
Global Export Hubs Countries like Vietnam, Mexico and Malaysia that had faced potential "trade diversion" tariffs see those risks diminish substantially.
WTO and Multilateral Institutions After years of being sidelined by bilateral approaches, Geneva-based trade governance gains a modest legitimacy boost as the chosen venue for the agreement.
UNDER PRESSURE:
Congressional China Hawks The deal constrains legislative efforts to force permanent decoupling, though many are already signaling opposition to extending the agreement beyond 90 days.
Strategic Metal Supply Chains With China's export controls technically still in place, U.S. electric vehicle manufacturers and defense contractors continue facing uncertainty about critical mineral supplies.
Tail-Risk Hedge Funds Funds positioned for extreme market volatility see those bets rapidly devalued, though many analysts expect repositioning before the August review deadline.
Small U.S. Steel Producers While their special tariff protections remain intact, broader economic optimism reduces the premium they've commanded as "deglobalization winners."
FACT BOX: Key Dates in the 90-Day Window
May 14, 2025: Official implementation of tariff modifications May 20, 2025: First bilateral technical working group meeting (Washington DC) June 15, 2025: Expected release of initial compliance assessment August 12, 2025: Decision point on extending, modifying, or ending the arrangement