A Truce in the Trade War? Assessing the Market Impact of U.S.-China De-Escalation

The U.S.-China trade relationship, once a flashpoint of global economic volatility, has entered a fragile phase of de-escalation. Recent signals from the Trump administration—coupled with Federal Reserve Chair Jerome Powell’s cautious stance—suggest a temporary reprieve from the punitive tariff regime that once dominated headlines. Yet, as markets rally, the underlying risks of geopolitical tension, stagflationary pressures, and supply chain fragility remain unresolved. This article dissects the shifting dynamics and their implications for investors.

The Policy Pivot: Tariffs and Talks

President Trump’s acknowledgment that “145% [tariffs] is too high” marks a departure from his earlier “America First” rhetoric. Treasury Secretary Scott Bessent has framed this shift as a “mutual de-escalation,” emphasizing the need for China to rebalance its economy toward domestic consumption. While Beijing has raised retaliatory tariffs to 125%, the White House’s openness to slashing levies to 50–65% has calmed nerves.

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underscores the stakes. Tesla’s 4.3% stock surge () in late April reflected optimism, but its production delays highlight lingering vulnerabilities. Automakers like GM and BYD are racing to navigate China’s dominance in EV markets, where tariffs and export curbs complicate supply chains.

Powell’s Dilemma: Stagflation Lurks

Despite the market rebound, Fed Chair Jerome Powell remains wary. In April, he warned that tariffs risked a “stagflationary shock” akin to the 1970s, with inflation rising alongside slowing growth. The Fed’s “wait-and-see” approach () reflects its dual mandate strain: unemployment remains low (3.4% in March), but core inflation (2.6%) persists above the 2% target.

The reveals volatility tied to Trump’s reversals. A 1.7% Dow plunge followed Powell’s stagflation remarks, while a 3.6% Nasdaq rally greeted tariff easing signals. Investors now demand concrete progress within 90 days—a timeframe analysts like Beata Caranci deem critical: “We have to see it to believe it.”

Sector-Specific Risks and Opportunities

• Technology: Semiconductor stocks like AMD and NVIDIA face headwinds from U.S.-imposed restrictions on Chinese imports. Yet, de-escalation could ease near-term pressures.
• Manufacturing: Railroad operators report no slowdown yet (), but CEOs caution that tariff-driven cost increases may soon curb consumer spending.
• Energy and Materials: China’s rare earth export curbs have boosted lithium and cobalt prices, benefiting miners like Albemarle but complicating EV production timelines.

The Road Ahead: Fragile Consensus

The truce hinges on two unresolved issues:
1. Mutual Reciprocity: Bessent’s vision of a U.S.-China “partnership” clashes with Beijing’s demand for “equality,” not “pressure tactics.” A 125% Chinese tariff ceiling signals reluctance to concede without U.S. parity.
2. Fed Independence: Trump’s flirtation with firing Powell—though retracted—has eroded trust in central bank autonomy. Markets fell 700 points during his initial threats, a reminder of political fragility.

Conclusion: Caution Amid Optimism

The recent de-escalation has delivered tangible gains: the S&P 500 surged 2.6% in April, briefly erasing its intra-year 20% drop. Yet, the index remains 11.7% below its 2025 peak, and the Fed’s dilemma persists. With stagflation risks unresolved and China’s retaliatory tariffs still at 125%, investors must balance short-term gains against long-term uncertainty.

Key data points underscore the fragility:
- Tariff Costs: 70% of tariff burdens fall on U.S. consumers, per the Fed, fueling inflation.
- Geopolitical Risk: China’s share of global rare earth exports (60%) ensures its supply chain leverage.
- Policy Consistency: Trump’s history of reversal—e.g., 2023’s “embargo” rhetoric vs. 2025’s “de-escalation”—warns against complacency.

For now, the truce buys time. But as Beijing and Washington square off over trade terms, investors must remain vigilant. The next 90 days will test whether this pause becomes a lasting détente—or a prelude to renewed conflict.