US-China Trade Talks: A Glimmer of Hope for Markets?

Wall Street edged higher on Friday as investors bet that the weekend’s high-stakes US-China trade talks in Geneva could yield breakthroughs to ease the world’s most consequential trade war. The S&P 500 rose 0.8% while the Nasdaq advanced 1.2%, with tech and industrials sectors leading gains as markets priced in the possibility of tariff reductions. But with both sides dug into entrenched positions on tariffs, rare earth minerals, and technology competition, the path to meaningful de-escalation remains fraught with pitfalls.

The High-Stakes Agenda

The talks, led by US Treasury Secretary Scott Bessent and China’s Vice Premier He Lifeng, focus on three critical issues:

1. Tariff Rollbacks: The US has imposed a 145% tariff on Chinese goods, while Beijing retaliates with a 125% levy. Analysts project the US could reduce its weighted average tariff to 45% by year-end if a partial deal emerges. shows markets typically rally in anticipation of talks but fall short of sustained gains unless concrete agreements materialize.

2. Strategic Minerals Control: China’s dominance in rare earth metals—critical for semiconductors, EVs, and defense systems—remains a flashpoint. Beijing has tightened export controls on seven rare earth elements, while US companies like face rising costs due to the trade war.

3. Technology Subsidies: The US seeks curbs on Chinese state subsidies for firms like Huawei and Semiconductor Manufacturing International Corp (SMIC), while China demands removal of all US tariffs as a precondition for dialogue.

Market Optimism vs. Structural Barriers

Investors are pricing in the best-case scenario: a partial tariff rollback on non-strategic goods paired with expanded exemptions for semiconductors and pharmaceuticals. Morgan Stanley analysts estimate a 45% tariff reduction by year-end could add 0.3% to global GDP. But the path to such an agreement is littered with obstacles.

• Chinese Redlines: Beijing refuses to budge on tariff removal, citing “principles” and its “higher pain threshold” (per Eurasia Group’s Dan Wang). China’s economy, growing at just 4% in 2025—below its 5% target—still has more fiscal flexibility to withstand trade pressures than the US, which faces a 0.3% GDP contraction in early 2024.
• US Political Constraints: President Trump’s 2024 pledge to “get tough” on China limits his room to compromise. A 20% rollback to 125% tariffs, as suggested by Trump’s team, would still leave rates triple pre-Trump levels.

Risks to the Optimistic Narrative

The talks could end in another stalemate, accelerating the “decoupling” of global supply chains. Key risks include:
- Rare Earth Weaponization: China’s crackdown on smuggling of strategic minerals—announced as a “special operation”—could disrupt US tech supply chains, raising costs for companies like Texas Instruments (TXN) and Intel (INTC).
- Treasuries Sell-Off: China’s $800 billion holdings of US debt remain a Sword of Damocles. A 10% reduction in its Treasury holdings could cause bond yields to spike, pressuring tech stocks reliant on low borrowing costs.

Conclusion: A Fragile Equilibrium

Markets are right to bet on incremental progress—partial tariff cuts and expanded exemptions are the most likely outcome. But investors should temper optimism: systemic issues like tech subsidies and rare earth dominance remain unresolved.

shows trade flows have collapsed by 40% since the trade war began, with no return to pre-2018 levels foreseeable. The best investors can hope for is a “ceasefire” that limits further damage—far short of the comprehensive deal markets currently price in.

As the Geneva talks unfold, keep one number in mind: 45%. That’s the tariff rate Morgan Stanley projects for year-end—a modest improvement but still double what markets would need to see for a sustained rally. Until both sides agree to “sacrifice principles,” as China’s Commerce Ministry insists they won’t, the trade war’s scars will linger.