After two days of negotiations in Geneva, US and Chinese officials decided to suspend the prohibitive tariffs imposed last month for 90 days.
This unexpected agreement sent stock markets soaring, erasing the heavy losses in early April.
Discreet Discussions
With Washington's trade attacks, Beijing opted for a strong approach, responding to U.S. tariffs with Chinese sanctions.
As the escalation progressed, Chinese products entering the United States had to pay a 145% penalty, while American products were subject to a 125% levy before entering China.
At such levels, these taxes completely halted trade between the two countries. In addition, non-tariff barriers were also implemented to restrict and sometimes ban certain exports.
In this titanic battle between China and the United States, neither side held back, and both claimed to be ready to fight to the bitter end.
But behind this belligerent rhetoric, the two sides held discreet discussions. This has borne fruit. For 90 days, Chinese and American customs duties have been reduced to 10% and 30%, respectively, since May 14th.
The new taxes will still penalise trade between the two countries, but they will no longer de facto prevent it.
Underestimated consequences
There was no doubt that Trump's trade war would penalise economic activity in China and the United States. However, the American president underestimated the consequences for his economy.
In recent weeks, economic leaders have issued numerous warnings to urge the American President to negotiate. West Coast ports, where Chinese products arrive, anticipate a sharp decline in activity.
There will be a shortage of work for dockworkers and all stakeholders in the supply chain. Up to a million independent truckers, heavily indebted from the purchase of their trucks, risk facing financial difficulties without Chinese goods to transport across the country. Major retailers fear empty shelves and soaring prices. The industrial sector fears supply problems that will hamper production, as they did during the COVID-19 lockdowns.
In China, economic actors have also relayed their concerns to political authorities. Millions of manufacturing jobs are threatened, which will fuel the social unrest the Beijing government is desperate to contain. Therefore, it was vital for both parties to restore, at least partially, trade.
The 90-day suspension of customs duties is good news. But fundamentally, it doesn't solve anything.
The U.S. wants more autonomy
The United States still wants to repatriate part of its industrial production to its territory, diversify its sources of supply abroad so that it does not depend on Chinese products, and ensure its autonomy for certain strategic products.
To achieve these objectives, it is essential to contain Chinese imports but not completely block them because it is not possible to sever trade bridges overnight without causing serious economic disruption in the United States.
China prioritises economic activity
China, for its part, wants to preserve its economic activity while diversifying its trade to reduce its dependence on American customers and increase its technological autonomy.
It is, therefore, essential to maintain access to the American market while establishing other profitable trade relationships.
With the truce, the Americans and Chinese have bought themselves time to negotiate, in a calm climate, the level of customs barriers that will allow the United States to achieve its long-term objectives without causing a short-term collapse in Chinese production. They have 90 days to divorce amicably rather than by breaking all the dishes.
Stock indexes are improving
The trade war launched by Donald Trump on April 2nd caused a collapse in the stock markets. By imposing significant tariffs on products from all countries worldwide, the American president would plunge the global economy into recession and trigger a major financial crisis. Trump's rash decisions penalise economic activity and generate significant volatility in the financial markets.
However, six weeks after the launch of the trade war, stock indices are now generally at a higher level than before the April 2nd announcement. In the meantime, the suspension of sanctions has indeed reassured investors.
Cool head is a blessing
For investors, the past few weeks have served as a reminder that reacting on the spur of the moment is never a good idea. Those who rushed to sell in early April to limit their losses before the supposed continuation of the stock market crash were ill-advised.
As tensions and calming phases in the trade war ebb and flow in the coming months, financial markets will continue to experience significant fluctuations.
The ongoing decoupling between the United States and China will penalise both economies. But they will continue to grow and still offer investment opportunities. Buy both U.S. and Chinese stocks and see our recommended portfolio:
