Trade Optimism Fuels Rally, but Risks Linger in US-China Tensions

The May 2025 US-China trade talks in Geneva sparked a sharp rally in global markets, with stocks and the dollar surging on hopes of easing trade tensions. Yet, beneath the surface, unresolved disputes over tariffs, non-tariff barriers, and geopolitical distrust leave investors questioning whether the optimism is justified.

The Market’s Immediate Reaction: Hope Over Reality

The talks, led by US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer, yielded an agreement to establish a bilateral trade consultation mechanism, aimed at de-escalating disputes. While no immediate tariff cuts were announced, markets interpreted this as progress.

• Dow futures rose 1.03% (427.66 points)
• S&P 500 futures gained 1.31% (75.8 points)
• Nasdaq futures climbed 1.71% (348.19 points)

The US dollar index hit 103.5, its highest in months, while Brent crude rose to $64 per barrel. Even cryptocurrencies joined the rally: Bitcoin surged 2.3% to $62,500, and Ethereum rose 1.8% to $2,450, driven by improved risk appetite.

The Elephant in the Room: Tariffs and Their Fallout

Despite the optimism, critical hurdles remain. The US has maintained 145% tariffs on Chinese goods since April 2025, with China retaliating at 125%. While the US hinted at lowering tariffs to 80%, China demanded reciprocal cuts. Analysts warn that even a reduction to 50% would barely revive trade, as imports from China to the US have already plunged over 50% since the tariffs took effect.

The economic toll is stark:
- US consumer prices rose sharply, with inflation projected to hit 4% by year-end—nearly double the Federal Reserve’s target.
- US GDP contracted for the first time since early 2022, reflecting the drag on imports and consumer spending.

Non-Tariff Barriers: The Stealthy Threat

Beyond tariffs, non-tariff measures threaten to prolong the pain. China has blocked US agricultural exports—beef, poultry, liquefied gas—through bureaucratic hurdles, while the US has increased docking fees for Chinese ships. These barriers are harder to quantify but could persist even if tariff rates decline.

• US imports from China fell over 50%, with shipping carriers reducing transpacific routes to levels exceeding pandemic lows.

Geopolitical Tensions: More Than Just Trade

Chinese state media framed the talks as a “strategic victory,” emphasizing Beijing’s adherence to WTO rules. Meanwhile, US rhetoric focused on “hegemonic interests,” underscoring a lack of mutual trust. Analysts caution that unresolved issues like intellectual property disputes, tech decoupling, and currency manipulation could reignite volatility.

Crypto’s Rally: A Risk-On Echo

The cryptocurrency market’s surge mirrors broader market sentiment. Bitcoin’s 2.3% jump to $62,500 and a 15% spike in BTC/USD trading volumes reflect increased risk tolerance. However, technical indicators warn of overbought conditions: Bitcoin’s RSI hit 68, nearing overbought territory, while the VIX volatility index fell to 18.5, signaling complacency.

What Investors Should Watch

1. Tariff Reductions: A concrete agreement to symmetrically lower tariffs (e.g., US from 145% to 80%, China from 125% to 100%) is critical.
2. Non-Tariff Progress: Resolving bureaucratic trade restrictions and logistical barriers will determine whether trade volumes rebound.
3. Sector-Specific Risks: Sectors like semiconductors and renewables—less reliant on US-China trade—are safer bets until clarity emerges.

The Bottom Line: Caution Amid Hope

While the May talks marked a tentative de-escalation, durable stability requires addressing structural issues. Investors should heed the “buy the rumor, sell the fact” adage: the current rally may fade without tangible progress.

Final Takeaway:
- Market Gains: Stocks and the dollar rallied 1–2% on trade optimism, but unresolved tariffs and non-tariff barriers limit sustained momentum.
- Economic Costs: US inflation could hit 4% by 2025, with GDP already contracting. China risks losing 16 million jobs in tariff-hit sectors.
- Investment Strategy: Diversify into tariff-insensitive sectors and monitor tariff consultations closely. Avoid overexposure to trade-sensitive industries until concrete agreements materialize.

The path to resolution remains fraught with political and economic complexity. For now, the markets are trading on hope—but history suggests that details, not headlines, will ultimately decide the outcome.