In May, talks in Geneva led to a 90-day truce between China and the United States. Meetings have continued in recent weeks, and a new compromise was reached after two days of negotiations in London.
The details of this "framework agreement", which should eventually lead to the end of the trade war between the United States and China, are unknown. However, rare earth materials, essential for new technology, defence, and renewable energy sectors, were at the heart of the discussions. China extracts 60% of these rare earths and refines 90% of the world's production. In retaliation for the U.S. trade attacks, Beijing had limited exports of these critical raw materials, which was beginning to cause problems for some American companies.
In concrete terms, China has reportedly committed to reviving the export of rare earths in exchange for the end of the American ban on the export of certain products, such as aircraft engines. However, the United States maintains an additional 30% tariffs on Chinese imports on top of the 25% previously in force.
Six months of truce
Therefore, the London agreement does not mean the end of the trade war. The relaxation on rare earth exports is only valid for six months, and China will certainly use this strategic weapon again if Trump persists in maintaining high tariffs.
During Trump's first term, several agreements were supposed to end the trade war, yet relations between Beijing and Washington have since steadily deteriorated. The financial markets were not particularly happy after the announcement of the London agreement, proof of the scepticism surrounding it.
Stocks prevented inflation
In May, inflation rose slightly in the United States, to 2.4% from 2.3% in April. This is the first time since January that the annual increase in consumer prices has increased. This is due to a rebound in food and transport services prices. The disinflationary effect of energy also slowed down, with a less pronounced annual decline in energy prices in May (-3.5% compared to -3.7% in April).
The new tariffs have not yet really impacted the May inflation figure because most of the products sold came from stocks built up before they were introduced.
Thus, while they should have risen sharply with the new trade barriers, the prices of cars and clothing have decreased. The additional tariffs are expected to gradually be passed on to inflation in the coming months.
Therefore, the American consumer is likely to see the price of many products increase more or less sharply, depending on their origin and the ability of companies to pass on the additional cost of customs duties in the final price. Unless the hatchet of the trade war is definitively buried, U.S. inflation in the coming months is therefore highly uncertain.
Fed operates on a foggy road
This is a delicate situation for the U.S. Federal Reserve, which is sailing without much visibility. But in all likelihood, if inflation continues to be moderate, it is likely to cut its key rate further in the autumn. This prospect weakened the dollar in the foreign exchange market, which fell to $1.15 to the euro immediately after the publication of the inflation report. Take advantage of the greenback's weakness to invest in the United States. Buy U.S. stocks in a balanced portfolio. Dollar bonds also have a place in a properly diversified portfolio.
Record trade surplus in China
Chinese exporters continue to avoid the pitfalls of the trade war. In May, China's exports grew 4.8 percent year-on-year. However, last month, U.S. tariffs caused shipments to the United States to fall 34.5%.
However, Chinese companies have found other outlets or have transited their goods through third countries. In May, exports jumped to Japan (+6.2%), Taiwan (+7.5%) and especially the European Union (+12%), which is set to replace the American market, as well as Asian neighbours (+14.8%), which serves as relays to circumvent American customs barriers.
Despite the trade turbulence, Chinese exports grew by 6.1% in the first five months of the year compared to the same period in 2024.
At the same time, due to weak domestic demand and the authorities' desire to favour local production to the detriment of foreign products, imports have decreased by 4.9% since 1 January. As a result, China's trade balance in the first five months of the year recorded a record surplus of $471.9 billion compared to only $337.2 billion in 2024.
This good performance of Chinese foreign trade is currently supporting economic activity, which is also penalised by domestic difficulties, particularly the weakness of household consumption.
The Chinese consumer's reluctance was also reflected in May when the annual price declined for the fourth consecutive month (-0.1%).
Internal market development is needed
Beyond the current good foreign trade figures, there is no doubt that the Chinese economy, whose development has been based on exports for decades, will emerge weakened from the trade war. To mitigate the negative impact, it must find other sources of growth by developing its domestic demand.
This is a difficult process to carry out, and it is even more so today with the international tensions that worry households. But we remain confident in the Chinese authorities' ability to succeed in this economic transformation.
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