Indeed, news of a new U.S.–China bilateral trade framework announced last week sent financial markets into a frenzy of bullish optimism. Underneath, it’s easy to see that the tensions remain. Commerce Secretary Lutnick was the one to announce that these two nations had come to a deal. It will be the first series of follow-up deals to steady trade relations after several years of tariff-related squabbling. This latest move comes as both countries are under economic pressure to address stagnating domestic economies. They remain the most worried about inflation generated through tariffs.
In a development that bodes well for bilateral relations, Treasury’s Bessent pointed to the introduction of good-faith tariff pauses. This gesture is a remarkable indication of the intent of both countries to develop a more transparent, predictable, and rules-based trading environment. The Biden administration is counting on Beijing to emerge as a good-faith “stakeholder.” They argue that cooperation is essential to accessing the greatest economic rewards.
The biggest win from the new framework seems to be China’s unprecedented move to remove its own rare earth element export restrictions. These elements are key ingredients for many advanced industries. This change will help make the nationwide flow of vital materials supporting our housing production and infrastructure more predictable and maintainable. At the same time, the U.S. has pledged to not exceed 55% in tariffs, but China only promised a maximum of 10% in tariffs. The United States projected effective tariff rate is around 15%. This amount would be the most since the 1930 Smoot-Hawley Act.
U.S.-China trade relations have been increasingly unstable for years. As PPI’s Rob Atkinson wrote recently, the “slapdash tariff whiplash” hath wrought great uncertainty upon the land, for businesses and would-be investors. The recent trade breakthrough has served to energize a skittish market. Market bulls are back in a big way on the first full day of trading since the announcement. Investors are looking for concrete trade deals to bolster this newfound optimism, or at least some indication from the Federal Reserve regarding future monetary policy.
Beyond trade news, the U.S. has begun the evacuation of their embassy in Iraq. They have raised their own alertness level, expecting an Israeli attack on Iran at any moment. Geopolitical tensions have added another layer of economic uncertainty. It’s critically important for both countries to maintain channels for honest dialogue.
The new, positive momentum for this recent trade framework. Yet fears of tariff-induced inflation continue to loom over the U.S. economy like a dark cloud. The Federal Reserve, under the leadership of Jerome Powell, remains cautious about potential inflationary pressures that could emerge later this year due to elevated tariffs. In light of this uncertainty, market participants have been left anxiously anticipating any clear direction from the Fed.