On November 11, the United States and China reached an important agreement. On their end, they will reduce bilateral average tariffs by 115 percentage points, producing a dramatic turning point for both countries’ trade fortune. Just this week, the two countries announced a new agreement. It is intended to increase overall prosperity through greater economic collaboration and is intended to help resolve long-standing trade disputes. Under that frame of reference, the signed agreement will have the U.S. cutting tariffs on Chinese imports from 25 percent to 10 percent. Concurrently, China agreed to lower its existing tariffs on U.S. products from 25% to 10%. During this 90-day period, the two sides will continue working to reach an agreement on the resolution of trade disputes on both sides.
The announcement of the corresponding tariff reductions sent U.S. stock markets on one of their most successful one-day rallies ever. In enthusiastic response to this news, NASDAQ 100 futures were up by 4.1% in premarket trading, illustrating that markets would welcome an easing of trade tensions. At their highest, Dow Jones futures were up 2.7%, with S&P 500 futures up 3.2%. The increase is the market’s strong reaction. They tell the story of what’s assumed to be an easing of trade tensions between the world’s two largest economies.
The treaty further recognizes the shared desire of both parties to boost two-way trade. As part of the framework, China has pledged to increase its consumption of U.S. goods, which could lead to a more balanced trade relationship. Second, the U.S. will do more to reshore factory production, seeking to strengthen our homegrown manufacturing base. These components signal an important organizational shift and help drive the Trump administration’s larger strategic decoupling agenda from China. This strategy is meant to lessen our reliance on supply chains in China.
Given this backdrop, it’s important to lay out the overall structure of U.S. tariffs to frame one of the key requests in this agreement. For reference, the current U.S. tariff structure is a uniform 10% tariff. Moreover, on top of that there is a separate 20% “fentanyl” tariff, making it a total of a 30% tariff on certain Chinese goods. The average tariff on all Chinese products will be reduced from 25% to 10%. This recent shift is now codified in their new collective bargaining agreement. This major cut represents the start of an important new policy direction which could eventually become a big deal for many affected industries that depend on cross-border trade.
Reactions in the market to today’s announcement have not been confined to equities only. Gold prices were laying beyond a big sell-off, down about 2.85% in premarket trading after cutting through calling Monday’s flush. This drop is a sign that investors are probably shifting their portfolios. They’re counting on a more robust economic forecast providing the impetus for them to move away from safe-haven assets such as gold.
The surge in U.S. Treasury yields has subsided somewhat. The increases are between 1% and 2.5% on the yield curve at various maturities. When Treasury yields rise, that’s a sign that investors are more optimistic about economic growth. This is consistent with the positive mood we’ve observed throughout equity markets since that tariff announcement.
The U.S.-China pact would be a watershed development in worldwide trade relations. This is a testimony on both sides’ deep commitment to stabilizing their economic ties, and further advancing their economic cooperation. For the next three months, negotiations will be ongoing. For future trade relations and economic initiatives, market participants will be glued to news that will influence direction.