The U.S.-China trade deal announced in Geneva early Monday far exceeded Wall Street expectations, with both countries slashing tariffs. The S&P 500 jumped to its highest level since March 5, nearly a month before the imposition of reciprocal tariffs sent markets plunging and set in motion a test of wills between President Donald Trump and Chinese President Xi Jinping. Amazon, whose marketplace depends on Chinese imports, is among the top-performing S&P 500 stocks.
The deal announced on Monday essentially gives China the same deal that the U.S. gave to every other country on April 9, temporarily reducing reciprocal tariffs to 10% during a 90-day negotiation period.
Trump Takes A Mulligan
In announcing relief from reciprocal tariffs for the rest of the world on April 9, Trump had singled out China for harsher treatment because it had retaliated with tariffs of its own.
Trump hit Chinese imports with an additional 50% tariff, on top of the 54% rate applied in his second term. Beijing matched that 50%, further incurring Trump's wrath.
"Based on the lack of respect that China has shown to the world's markets, I am hereby raising the tariff charged to China by the United States of America to 125%, effective immediately."
Beijing responded by hiking its tariff on U.S. goods to 125%, prompting Trump to go a step further to 145%.
Now we're back to where things would have been on April 9. A 20% tariff imposed in February and March for China's role in fentanyl trade remains in place, as does a 10% reciprocal tariff.
Beijing also agreed to unwind its retaliatory measures since April 2, with the exception of a 10% tariff.
U.S.-China Deal Shrinks Recession Risk
The 90-day cooling-off period will provide a big enough window to revive cargo shipments from China and keep shelves stocked, making recession unlikely.
In the wake of the U.S.-China trade deal, the 10-year Treasury yield jumped six basis points to 4.44%, a one-month high. Meanwhile, markets are pricing in a longer pause before the Federal Reserve resumes rate cuts. Odds of a rate cut at the July 30 Fed meeting fell to 39% from 60% on Friday.
Markets are essentially pricing in one fewer rate cut this year. Odds of 75 basis points in rate cuts this year have fallen to 39% from 57.5% on Friday.
Trump Tariffs On Specific Industries Remain
Trump tariffs have had two distinct aims. One is to advantage domestic production for specific industries deemed key to national security via sectoral tariffs. The other is to shift imbalanced bilateral trade via reciprocal tariffs. The U.S.-China deal covers the latter, but not the former.
For example, 25% automotive tariffs would still apply to auto parts imported from China. However, Trump provided some relief to U.S. automakers on April 29, offsetting tariffs on non-USMCA parts equating to 15% of a car's list price in the first year and 10% in the second year. That's meant to give automakers time to shift production.
Steel and aluminum tariffs of 25% apply. Trump also has signaled plans to target semiconductors and other electronics, copper and pharmaceuticals with sectoral tariffs. The White House might be more likely to move forward with more sectoral tariffs now that financial markets have strengthened following the de-escalation of reciprocal tariffs and the U.S.-China trade war.
On April 12, Trump exempted the Apple iPhone, semiconductors and other electronics from the tariffs applied on Chinese imports starting April 2. The earlier 20% tariff tied to fentanyl still applies.
More Good U.S.-China Trade News To Come?
Ahead of U.S.-China talks in Switzerland, Beijing had indicated a readiness to tackle the country's role in exporting fentanyl, contributing to U.S. drug overdoses. Treasury Secretary Scott Bessent said that China is "now serious about assisting the U.S. in stopping the flow of precursor drugs."
While China has previously pushed back against charges that it's a major culprit in the opioid crisis, a cooperative, full-fledged effort could lead to reductions in the 20% fentanyl tariff.
U.S.-China Chip War Poses Risk For Trade Thaw
The surprising extent of U.S.-China de-escalation in the deal announced on Monday is a reflection of the fact that Trump's trade war centered on China is largely a war of choice. Stepping back from it by downsizing Trump tariffs helps avoid economic disruption without sacrificing security goals.
However, the ongoing U.S.-China chip war, which is broadly considered to be a critical matter of national security in Washington, is intertwined with and may complicate trade negotiations.
Jarring progress demonstrated by China's DeepSeek and Huawei in recent months has shown that U.S. leadership in artificial intelligence is eroding much faster than previously believed. That may lead the Trump administration to double down on chip and chip-equipment export restrictions targeting China and other countries.
On the other hand, Trump is being lobbied to take a less-exacting approach than the Biden administration by tech giants such as Nvidia, even though China has found workarounds for chip export controls.
If Trump takes a hard-line approach, China is likely to follow through on its April 4 move to limit exports of rare earth materials that are key to missile technology and a wide range of military and commercial technologies. That could stall talks to permanently lower tariffs.
The U.S.-China trade deal suggests that "the near-term economy is being prioritized over the long-term security agenda," Deutsche Bank strategist Jim Reid wrote on Monday.
In that sense, the spiraling of the U.S.-China trade war and the financial market backlash it caused may have strengthened China's negotiating stance. But it's too early to draw conclusions.
S&P 500
The S&P 500 leapt 3.1% in Monday afternoon stock market action, sailing past its 200-day moving average that had been a ceiling of late.
The S&P 500 finished last week up 13.6% from its 52-week closing low on April 8, though 7.9% below its Feb. 19 all-time closing high.
Shipping stocks were among Monday's biggest winners. ZIM Integrated Shipping surged 16%. Top S&P 500 performers included Amazon.com (up 8%), Best Buy (up 5.5%) and Tesla (up 6.5%).
Chinese stocks were also getting a lift on Monday. PDD Holdings, which operates Chinese online retailer Pinduoduo and online marketplace Temu, gapped up 6.75%, making it among the top Nasdaq 100 performers. Alibaba, set to report quarterly results on Thursday, popped 6.5%.
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