Trade Truce or Tactical Retreat? Decoding the US-China Deal to Cut Tariffs and Trade Deficits

The U.S. and China have tentatively agreed to lower punitive tariffs imposed on each other’s goods, marking a fragile step toward de-escalating a trade war that has cost global markets trillions. The deal, announced after marathon talks in Geneva, aims to reduce U.S. tariffs on Chinese goods from 107% to around 45% by year-end and ease China’s retaliatory levies from 125% to similar levels. While the agreement is being framed as a victory for diplomacy, its limitations—particularly the unresolved structural issues at the heart of the U.S.-China economic rivalry—leave investors with more questions than answers.

Key Terms of the Deal

The framework includes exemptions for critical sectors like semiconductors, pharmaceuticals, and auto parts—goods deemed vital for global supply chains. China has created a “whitelist” of U.S. products exempt from additional levies, while the U.S. has narrowed its “de minimis” exemption to limit low-value imports, raising duties on items like those sold on platforms such as Shein from 34% to 90%. Analysts estimate these adjustments could reduce the effective tariff burden on traded goods by 30–40%, though the rates remain far higher than pre-Trump levels (U.S. tariffs averaged 10.9% before 2018).

Historical data shows equity markets tend to rally during de-escalation phases but remain vulnerable to renewed tensions. The S&P 500 fell 12% in 2019 amid peak tariff battles, only to rebound 32% the following year as the Phase One deal was struck. The current deal’s impact may be muted by lingering geopolitical risks and the Fed’s tightening cycle.

The Elephant in the Room: Strategic Minerals and Geopolitical Leverage

The deal’s most contentious issue—China’s export controls on rare earths, tungsten, and other critical minerals—remains unresolved. These materials are indispensable for semiconductors, clean energy, and defense systems, and China produces 90% of global supply. U.S. negotiators demanded Beijing lift restrictions, but China refused, citing national security concerns. Treasury Secretary Scott Bessent acknowledged the “unsustainability” of relying on a single supplier but admitted no breakthrough was achieved.

The data underscores China’s leverage: U.S. imports of rare earths from China surged to $2.3 billion in 2023, up from $1.1 billion in 2018. Without access to these resources, U.S. industries like EV manufacturing and aerospace face supply chain bottlenecks, even as the Inflation Reduction Act seeks to build domestic capacity.

Economic Context: A Truce to Buy Time?

The deal arrives amid deteriorating economic conditions for both nations. The U.S. economy contracted by 0.3% in Q1 2025, raising recession fears, while China’s growth slowed to 5.4%—below its 5% annual target—and forecasts were slashed to 4% for 2025. The $1.2 trillion trade deficit, declared a “national emergency” by the Trump administration, remains unaddressed, as China insists the U.S. must remove all tariffs first.

The deficit has grown steadily since 2018, hitting $1.2 trillion in 2024—up from $378 billion in 2010. The deal’s modest tariff cuts are unlikely to narrow this gap meaningfully, given structural issues like China’s state subsidies for tech firms and U.S. reliance on Chinese manufacturing.

Why Investors Should Be Cautious

While the deal eases immediate trade pressures, it does little to resolve the deeper conflicts driving the U.S.-China rivalry. The Phase One agreement, which collapsed in 2020 due to China’s failure to meet $200 billion in U.S. goods purchases, offers a cautionary tale. Key risks include:
1. Geopolitical Volatility: Tensions over Taiwan, technology theft allegations, and China’s assertive foreign policy remain unresolved.
2. Structural Disparities: U.S. demands for structural reforms in China’s economy—such as ending forced technology transfers—are absent from the deal.
3. Market Overreactions: Equity markets may rally on the news, but a sustained rebound requires concrete progress on tech decoupling, supply chain diversification, and debt ceiling negotiations in the U.S.

Conclusion: A Fragile Truce with Limited Upside

The May 2025 deal represents a tactical retreat rather than a strategic truce. While tariff reductions may boost sectors like semiconductors (e.g., ) and alleviate supply chain bottlenecks, the core issues—critical minerals, technology competition, and trade imbalances—remain unresolved. Investors should treat this as a short-term relief rally rather than a long-term solution. The Fed’s hiking cycle, China’s slowing growth, and the U.S. debt ceiling debate all loom larger, suggesting caution in overreacting to diplomatic gestures that lack substance.

The path forward is clear: without progress on structural reforms and supply chain resilience, the U.S.-China trade war will persist, reshaping global markets for years to come.