The United States and China are reportedly making progress in their trade negotiations, possibly enough to avert another round of tariff increases. They struck a deal to delay tariffs for 90 days. This step could significantly reduce inflationary pressures in the U.S. economy. It provides the Federal Reserve with much needed flexibility in formulating future monetary policy decisions. The de minimis exemption as it currently stands permits inexpensive Chinese products to flood the U.S. market at a threshold of 120%. This cap excludes a number of companies from being able to benefit right away.
The deal struck between the two economic titans is an encouraging sign of a tentative step toward de-escalating the trade conflict. Last week, officials declared a 90-day moratorium on such tariffs. This new step is designed to foster a more predictable trading climate and contribute to the easing of inflationary pressures that have buffeted the U.S. economy in recent months.
Despite this encouraging progress, the reality of new trade dynamics is even more complicated. Fast fashion companies like Shein and PDD likely won’t experience significant gains from the tariff relief. This is largely due to the extremely high exemption threshold currently in effect. The 120% de minimis exemption also further restricts the timely entry of low-value goods. This limitation undercuts the intended economic benefits of the tariff pause for these companies.
This welcome—and overdue—reprieve from tariffs would offer relief to U.S. consumers grappling with higher prices. Analysts largely agreed that the pause would help curb inflation’s grip. This would provide the Federal Reserve valuable flexibility to raise or lower interest rates, as appropriate. Since the beginning of the pandemic, the Fed has been laser-focused on inflationary trends. With escalating tariffs finally off the table, it is much better poised to take decisive action.
The markets may have reacted positively to the announcement with huge rallies immediately following the news, but real uncertainty remains – especially in hard-hit sectors. European and U.S. futures fell as investors continued to focus on the potential fallout from the truce in Ukraine. Key sectors, most notably semiconductors, are strained. This is a result of the strategic decoupling between the U.S. and China, motivated by national security arguments.
Market reactions have varied since the announcement. The U.S. dollar strengthened at least in part on optimism for better U.S.-China trade relations. At the same time, gold and the Swiss franc weakened, showing a broader move by investors toward riskier assets. U.S. treasuries were lower as market participants adjusted their positions given the changed circumstances.
I think a lot of companies are going wait-and-see. They’re holding off on major investment decisions till they get a better sense of how these negotiations will play out in the months ahead. Manufacturers in the U.S. still operated under a cloud of uncertainty due to the tariff pause and what that would mean long term.
While market participants continue to look for more news along these lines, attention will shift to coming economic indicators. The next U.S. Consumer Price Index (CPI) report should reflect inflation holding relatively stable. This data will go a long way toward informing what type of monetary policy the Federal Reserve should pursue going forward. Analysts predict more variable inflation trends ahead. They expect these changes to be acutely tied to the progression of the Administration’s trade negotiations and tariff policies.