Trade Truce or Temporary Pause? US-China Deal Sparks Optimism, but Risks Linger

The US and China’s May 2025 trade talks in Geneva delivered a glimmer of hope to global markets, with stock futures surging and the US dollar climbing on news of a potential breakthrough. However, the absence of concrete details has left investors balancing cautious optimism with lingering skepticism. The deal’s success hinges not just on tariff reductions but on addressing systemic issues—from non-tariff barriers to geopolitical tensions—that could derail a fragile truce.

The Deal’s Fragile Foundation

The negotiations marked the first high-level engagement between the world’s two largest economies since the US imposed 145% tariffs on Chinese imports in April, followed by Beijing’s retaliatory 125% tariffs. These punitive measures brought bilateral trade—a $600 billion annual exchange—to a near standstill, sparking fears of a global economic slowdown. While US officials framed the Geneva talks as a “step forward,” the White House’s May 11 announcement lacked specifics, with Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer deferring details to a joint statement expected on May 12.

Market Moves and the Data Behind the Optimism

The immediate market reaction was unequivocal: US stock futures rose sharply. Dow futures climbed 1.03%, S&P 500 futures gained 1.31%, and Nasdaq futures jumped 1.71%—a clear vote of confidence in the deal’s potential.

However, the rally may have been premature. Analysts caution that the agreement’s vague framework leaves critical questions unanswered. For instance, will the US lower tariffs to the 80% rate proposed by President Trump? Will China reciprocate with concessions on non-tariff barriers, such as restrictions on US agricultural exports? And what mechanisms will enforce compliance?

The Clouds on the Horizon

Even if tariffs are reduced, non-tariff barriers—such as China’s bans on US beef and LNG, or US port fees for Chinese vessels—remain unresolved. These issues could continue to disrupt trade flows and inflate domestic prices. Goldman Sachs analysts warn that current tariff levels could push US inflation to 4% by year-end, a stark contrast to the Federal Reserve’s 2% target.

Meanwhile, geopolitical tensions loom large. China has positioned itself as a defender of WTO rules while portraying the US as an economic bully, a narrative amplified by state media. Beijing’s reluctance to formally endorse the deal—despite US claims of “substantial progress”—suggests a tactical delay to secure better terms.

A Delicate Balancing Act for Investors

The market’s enthusiasm reflects a desire to avoid further escalation, but investors should proceed with caution. Key risks include:
1. Tariff Volatility: Trump’s “strategic uncertainty” approach means tariffs could rise again if concessions aren’t met.
2. Transshipment Risks: China’s 8.1% surge in exports to Southeast Asia in April hints at circumventing US tariffs, distorting trade data.
3. Inflation Pressures: Even reduced tariffs may not offset existing cost increases, squeezing corporate profit margins.

Conclusion: A Fragile Truce, Not a Permanent Fix

The US-China trade deal represents a tactical pause rather than a lasting solution. While markets rallied on the news, the absence of concrete terms—tariff levels, enforcement mechanisms, and sector-specific concessions—leaves room for disappointment. Investors should prioritize:
- Diversification: Reduce exposure to tariff-sensitive sectors like tech, autos, and agriculture until terms are clear.
- Inflation Hedging: Consider commodities or Treasury Inflation-Protected Securities (TIPS) amid rising price pressures.
- Geopolitical Monitoring: Track China’s formal response and any shifts in US trade rhetoric, as delays or breakdowns could trigger a sharp sell-off.

The Geneva talks averted immediate disaster, but the path to sustainable trade stability remains fraught. As the old Wall Street adage goes: “Don’t mistake a pause in the storm for the end of the hurricane.” With $600 billion in trade at stake, the stakes for investors couldn’t be higher.