The implications of the US-China trade agreement for market dynamics
Monday’s soaring stocks reflect more than just the pause in the burdensome China tariffs. The provisional suspension of triple-digit trade tariffs between China and the U.S. as trade negotiations commence alleviates the risk of an imminent stagflationary impact on the economy. This is indeed very positive news. It extends well beyond the expectations of investors—not least due to President Trump’s suggestion on Friday that an 80% tariff “seems right.” The existing agreement lowers the additional tariffs on China to 30%, consisting of a foundational 10% that will be reciprocated by China, alongside a 20% duty designed to incentivize China to take further action against fentanyl.
However, a more compelling explanation for the significant rebound—3.1% on S&P futures alongside a 3.8% decline in the gold price as I write—is the apparent emergence of Treasury Secretary Scott Bessent as the key figure in trade policy. In straightforward terms, the adults are present in the situation. On Friday that the stock-market rally observed over the past month may not be as robust as it appears, as it has been bolstered by the significant decline in the value of the dollar. One way to observe this was to assess the S&P 500 by evaluating its value in gold instead of in dollars. Monday morning’s rally altered the landscape. The dollar experienced a rally while gold saw a significant decline, indicating a resurgence of confidence in the U.S. economy. The S&P 500 currently purchases an equivalent amount of gold as it did prior to the April 2 “Liberation Day,” when Trump surprised investors with his “reciprocal” tariffs.
Do not elevate your expectations excessively. It is improbable that tariffs will revert to the levels seen before the Trump administration. Bessent supports the use of tariffs as a mechanism to secure concessions from other nations, particularly China. However, he is not interested in merely the immediate gains that Trump boasted about when he implemented and subsequently lifted tariffs on Mexico and Canada at the beginning of his presidency. Instead, Bessent seeks profound reform of China’s economy, transforming it from a mercantilist exporter into a consumer, thereby fostering more balanced trade. This will, to say the least, be challenging, even if the Communist Party were to consent to it. However, should this approach prove effective—and if other countries with a focus on exports, like Germany, were to adopt similar measures—it would result in the most favorable trading scenario, characterized by a reduction in the U.S. trade deficit not through a decline in imports, but rather through an increase in exports.
China has long discussed the need to boost consumption as a proportion of GDP, yet has seen minimal advancement in this area. Germany has made minimal efforts to enhance private consumption; however, the incoming chancellor is set to elevate government expenditure on military and infrastructure, which is expected to provide short-term benefits. If they cease to maintain ongoing trade surpluses, the U.S. could potentially halt its continuous trade deficit, or at the very least, reduce the size of that deficit. The converse of increased consumption by foreigners is a reduction in the amount of savings they remit to the U.S., necessitating that Americans enhance their savings, either through direct means or by reducing the fiscal deficit.
Certain members of the administration, including Trump himself, have advocated for tariffs for various reasons: to generate revenue to fund income tax reductions and to compensate the U.S. for supplying the global public goods associated with its military and the dollar’s status as a reserve currency. Some members of Congress seek to employ tariffs as a means to curtail China’s emergence as a strategic competitor. At the very least, it is significantly more beneficial for markets that the U.S. employs tariffs to access foreign markets rather than imposing them solely due to Trump’s self-identification as a tariff advocate. Investors ought to remain hopeful that Bessent continues to steer the course.
