MORNING BID EUROPE-US, China Move Toward Trade Talks, But a Deal Seems Distant

The U.S.-China trade talks in Geneva (May 9–12) marked a critical yet tentative step toward de-escalating the world’s most severe trade conflict in decades. While diplomats and economists welcomed the in-person discussions—after a year of tariff escalations—both sides remain far apart on major concessions. The EU, though not directly involved in the talks, faces ripple effects from the standoff, caught between U.S. protectionism and China’s redirected trade flows.

The Current State of Talks: Hope Amid Gridlock

The Geneva meetings brought U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng to the table, but expectations were intentionally muted. Bessent emphasized de-escalation, not a deal, acknowledging tariffs were “too high” but stopping short of committing to reductions. China, meanwhile, reiterated demands to address U.S. “unilateral actions” while privately grappling with economic strain.

Data reveals a stark decline: trade fell from $668 billion in 2023 to an estimated $150 billion in 2025, with cargo ships from China to the U.S. plummeting by 60% in April alone. JPMorgan forecasts an 80% drop in Chinese imports to the U.S. by year-end.

Economic Fallout and Market Reactions

The trade war’s toll is now visible in both economies:
- U.S. Economy: Contracted in Q1 2025 due to businesses stockpiling goods pre-tariffs. The IMF warns of recession risks, with the U.S. among the hardest-hit nations as global partners retaliate.
- China: Factory activity saw its fastest decline in 16 months (April 2025), prompting the People’s Bank of China to cut reserve requirements by 0.5% and key interest rates by 0.1%.

Markets, however, reacted positively to the talks. Dow futures rose 200+ points (0.6%), while S&P 500 futures gained 0.7%, signaling hope that de-escalation could avert deeper pain.

The EU’s Role: A Trade Diversion Destination

While the EU is not a formal party to the U.S.-China talks, it has become a key beneficiary—and casualty—of the conflict. China’s exports to the U.S. have collapsed, but redirected flows to the EU have increased by ~9% in sectors like IT equipment and auto parts. The European Central Bank notes this shift reflects structural similarities between Chinese exports to the U.S. and the EU.

However, the EU faces its own challenges:
- Trade Barriers: U.S. tariffs on all imports (10% base rate) and sector-specific levies (25% on steel, autos) disrupt EU supply chains.
- Policy Divergence: Germany’s new government under Chancellor Friedrich Merz has vowed to “de-risk” ties with China but faces internal debates over export controls. A proposed relaxation of licensing rules drew criticism as “naive,” risking EU unity on security vs. economic interests.

Key Challenges to a Deal

1. Geopolitical Posturing: China insists on “fighting to the end,” betting its economy can withstand pain longer than the U.S. Meanwhile, President Trump’s rhetoric—“their economy is collapsing”—hints at gradual tariff reductions but no timeline.
2. Structural Barriers: Both sides remain entrenched on core issues like intellectual property, subsidies, and market access. Bessent estimates normalization could take 2–3 years.
3. Global Protectionism: The WTO reports a 160% rise in trade-restrictive measures (169 new barriers in late 2024), with the U.S. extending tariffs to allies like Mexico and Canada.

Conclusion: Navigating a Fragile Landscape

Investors must brace for prolonged uncertainty. The Geneva talks averted immediate escalation but lack the teeth to resolve systemic issues. Key takeaways:
- Trade Volumes: U.S.-China trade could shrink to $150 billion in 2025 (down from $668 billion in 2023), with global welfare losses hitting 2% (IMF).
- EU Opportunities: Redirected Chinese exports may boost sectors like manufacturing, but supply chain fragmentation and U.S. tariffs pose risks.
- Policy Watch: Monitor U.S. tariff rollbacks (if any), China’s stimulus effectiveness, and the EU’s stance on China (e.g., July’s EU-China summit).

For now, caution prevails. Investors should prioritize defensive sectors (e.g., healthcare, utilities) and avoid overexposure to trade-sensitive industries until concrete progress emerges. As Bessent noted, “De-escalation is the goal—not a deal.” A resolution, when it comes, will require far more than the goodwill on display in Geneva.