US-China Trade Talks Offer Glimmer of Hope, but Risks Remain

Investors greeted the recent U.S.-China trade talks in Geneva with cautious optimism, as both sides reported “substantial progress” in resolving their tariff war. However, the lack of concrete details and lingering geopolitical tensions have left markets balancing hope against persistent risks. The talks, held amid record-high tariffs and shifting trade patterns, underscore a fragile path toward de-escalation—one fraught with unresolved economic and strategic divides.

The Talks: Progress, but No Breakthrough

The May 2025 Geneva discussions marked the first high-level U.S.-China trade talks in over a year. Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer emphasized “constructive” dialogue, while Chinese Vice Premier He Lifeng called it an “important step.” Key points of agreement included the need to reduce “unsustainable” tariff levels. The U.S. had imposed 145% tariffs on Chinese goods, while China retaliated with 125% tariffs—a punitive regime that has crippled bilateral trade.

President Trump proposed lowering U.S. tariffs to 80%, but no final agreement was reached. China’s demands for “sincerity” from Washington and its framing of itself as the “aggrieved party” suggest further concessions may be required. Meanwhile, non-tariff barriers persist: China continues to block U.S. beef and LNG imports, while the U.S. hikes docking fees for Chinese ships.

Market Reactions: Volatility Amid Mixed Signals

Markets initially rallied on the news. The S&P 500 rose 1.2% in the 24 hours following the talks, with industrials and tech stocks—particularly those reliant on China-U.S. trade—gaining ground.

However, skepticism soon set in. The Dow’s gains faded by the end of the week as investors noted the absence of tariff reduction specifics. The MSCI China Index, which had surged 4% pre-talks, retreated 1.5% by May 12, reflecting lingering doubts. Analysts highlighted the gap between U.S. optimism and China’s guarded rhetoric.

Economic Data: A Fragile Recovery?

The trade war’s economic toll is stark. U.S. imports from China fell 21% year-on-year in April, while China’s exports to the U.S. dropped 2.5% in the first four months of 2025. To mitigate losses, Chinese exporters rerouted 21% of exports to Southeast Asia, with shipments to Indonesia and Thailand surging 37% and 28%, respectively.

Yet this shift has not insulated the economy. China’s factory activity hit a 16-month low in April, with new export orders plummeting to a 20-month trough. Goldman Sachs warns up to 16 million jobs—2% of China’s workforce—could be lost in industries tied to U.S. exports. Deflationary pressures are intensifying: China’s consumer price index is projected to fall 0.1% year-on-year in April, while producer prices may decline 2.8%.

Risks Ahead: Geopolitics and Structural Barriers

The talks occurred alongside stalled Iran nuclear negotiations and U.S. Middle East diplomacy, raising concerns about regional instability spilling into trade. China’s state media emphasized “strategic patience” and criticized U.S. “economic bullying,” signaling no quick compromises.

Non-tariff barriers also loom large. China’s ban on rare earth mineral exports—a critical U.S. defense and tech input—remains unresolved, while U.S. restrictions on Chinese tech firms persist. Both sides acknowledge that reducing tariffs to 50% or lower is essential to restore trade flows, but neither has committed to such a move.

Conclusion: A Fragile Equilibrium

While the Geneva talks marked a rare step toward dialogue, investors must temper optimism. The U.S. and China remain locked in a high-tariff stalemate, with neither side willing to concede major ground. Key risks include:

1. Tariff Reductions: A drop to 80% U.S. tariffs is still unconfirmed, and China’s 125% levies remain untouched. Without deeper cuts, trade volumes will stay depressed.
2. Non-Tariff Barriers: Bans on commodities and tech restrictions could negate tariff reductions’ benefits.
3. Geopolitical Tensions: U.S.-China competition in Asia and the Middle East could reignite trade conflicts.

The market’s best-case scenario—a phased rollback of tariffs to 50%—would likely stabilize equities and commodities. However, without transparency, such an outcome remains speculative.

For now, investors are best advised to focus on sectors insulated from trade volatility. U.S. firms with diversified supply chains (e.g., ) and Chinese companies pivoting to domestic markets (e.g., Alibaba’s e-commerce growth in rural China) may outperform.

The path forward is narrow. As Morgan Stanley’s Laura Wang noted, “Even incremental progress requires political will neither side has fully demonstrated.” Until then, markets will oscillate between hope and fear, anchored by the unresolved question: Can the world’s two largest economies find common ground—or will the trade war endure?

Data sources: U.S. Census Bureau, China Customs, World Bank, Goldman Sachs Research, Morgan Stanley Equity Strategy.