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US and China Agree to Cut Tariffs For 90 Days to Defuse Trade War
The US and China reached a deal on May 12 to cut import tariffs on each other’s goods for 90 days, starting from May 14.
As such, the US will lower those tariffs from 145% to 30%, while China’s retaliatory tariffs on US goods will drop from 125% to 10%.
The respite follows high-stakes talks in Geneva, Switzerland, over US President Donald Trump’s reciprocal tariffs.
On April 2, the US imposed a 34% “reciprocal tariff” on Chinese goods. This tariff was on top of a 20% tariff that President Trump had previously imposed on Chinese products since starting his second term. However, China retaliated with similar measures.
A tit-for-tat tariff escalation followed, and the US and China hiked tariffs against each other. In the end, the US imposed a 145% tariff on China, while China imposed a 125% tariff on the US goods.
The massive tariff war between the world’s two biggest economies has roiled financial markets and intensified trade tensions.
Trump’s escalation sent financial markets tumbling and left US retailers warning that they might run out of goods.
US & China Agree to Cut Tariffs
US Trade Representative Jamieson Greer and Treasury Secretary Scott Bessent announced the tariff cuts at a news conference in Geneva on May 12.
Under the agreement, the United States would reduce the tariff on Chinese imports from 145% to 30%. At the same time, China would lower its import duty on American goods from 125% to 10%.
The 30% US tariff includes an existing 20% tariff intended to pressure China to prevent fentanyl from entering the United States. It also includes the same 10% “baseline” tariff President Trump imposed on imports from most countries worldwide.
The lower tariffs will remain for 90 days to cool tensions and allow more negotiations.
China agreed to suspend or revoke countermeasures adopted in retaliation for escalating tariffs. These include the removal of restrictions on the export of rare earth metals and magnets, vital components for cars, aircraft and semiconductors.
In addition, China will remove American companies from its export control and unreliable entity lists. Furthermore, China also agreed to lift its ban on Boeing plane deliveries.
Read: China’s Central Bank Cuts Interest Rates Amid US Tariffs
Global Market Reactions to the US-China Tariff Cuts
The US and China’s deal to cut tariffs on each other’s imports for 90 days led to a surge in stocks and the dollar.
In the US, the S&P 500 gained 184.28 points, the Dow Jones Industrial Average gained 1,161 points, and the Nasdaq composite gained 779.43 points.
Apple’s shares spiked 8.1%, while Amazon’s stock soared 8.6%. Dell Technologies shares jumped 7.8%, and Best Buy’s stock was up 6.6%.
The Chinese stock markets also reacted positively. The Shanghai’s composite index gained nearly 1%. Hong Kong’s benchmark Hang Seng Index surged by 3%
Alibaba’s stock surged by 5.7%, while JD.com and Baidu saw gains of 5.7% and 4.6%, respectively. In addition, Chinese electric vehicle manufacturers XPeng, NIO, and Li Auto’s stock surged by 8.1%, 5.9%, and 5%, respectively.
In Europe, the STOXX 600 rose 1%. The deal also boosted shares of European shipping giants, with Germany’s Hapag-Lloyd jumping 14% and Denmark’s Maersk up more than 12%.
The dollar extended gains, with the euro down 0.8% at $1.1164. At the same time, the Yen weakened against the US Dollar at 146.945.
The Benchmark 10-year US Treasury yields increased 6 basis points on the day to 4.435%
The euro fell 1.5% to $1.1078. The Yen weakened, and the US Dollar surged up 2.1% to $148.49.
Oil prices experienced a substantial uptick. Brent crude futures rose by $1.05, or 1.6%, settling at $64.96 per barrel, while US West Texas Intermediate (WTI) crude grew by 93 cents, or 1.5%, to $61.95 per barrel.
Stakes between the US and China
Bilateral trade between the US and China topped $660 billion (€595 billion) in 2024, a little more than Belgium’s nominal GDP.
The US-China trade has put global financial markets and businesses on edge. It began in February when President Trump imposed a 10% levy on Chinese imports. By April, Trump ratcheted the tariffs on China to a staggering 145%. China upped its tariff on US products to 125%.
The world’s two largest economies have long competed for economic dominance and relied on each other as major trading partners.
While the US is China’s largest export market, China is the US’s third-largest export market, behind Canada and Mexico.
During his first term, Trump waged a trade war on China, seeking to balance the US trade deficit with the country. In 2024, the US recorded a $295.4 billion trade deficit with China, the largest trade deficit of any trading partner.
The 90-day deal will allow the US and China to reach a more substantive agreement. The agreement ends an impasse that had halted much trade between China and the United States.
Many American businesses had suspended orders, hoping the two countries could strike a deal to lower tariff rates. Chinese factories have experienced a sharp decline in export orders to the United States, heaping additional pressure on the Chinese economy.
To circumvent the US tariffs, Chinese producers looked to expand trade to Southeast Asia and other regions. Global investors and businesses must contend with economic uncertainties about whether the truce will last.