May 14th 2025.
In any war between two unequal forces, it's usually easy to predict the outcome - the stronger side will most likely emerge victorious while the weaker side suffers defeat. However, when two powerful forces collide, the result is not as clear-cut. This was the case with the war between Ukraine and Russia, where US President Donald Trump tried to use his aggressive tactics, but realized that the same approach would not work in the trade war against China, a formidable opponent.
Trump initially imposed an outrageous tariff of 145 per cent on Chinese goods, but eventually had to back down and settle for a 30 per cent increase after facing intense pressure. On May 11th, a truce was declared for 90 days. Similarly, China also had to lower its retaliatory tariff of 125 per cent on US goods. However, the damage to the global business and economy had already been done, making stakeholders wary of the temporary truce. This only goes to show the unpredictable nature of Trump's trade war.
While the US may consider this truce a victory, the financial markets see it as a surrender. After US Treasury Secretary Scott Bessent's announcement in Geneva, where he had been holding talks with China, stocks rose and bond yields increased. This truce does not mean a return to the status quo before Trump's second term in office; instead, the tariffs on Chinese goods have been reduced from 145 per cent to 30 per cent for the initial 90-day period. In return, China has also lowered its tariffs on US imports to 10 per cent, a significant shift from the 125 per cent they had initially imposed. However, this still falls short of a trade embargo.
The two sides have agreed to continue discussing and working towards a sustainable, mutually beneficial economic and trade relationship. This language is far more diplomatic compared to Trump's rhetoric of being "looted, pillaged, raped, and plundered" by other nations. This shift in tone could be attributed to the President's growing unease, possibly due to warnings from retailers about potential shortages and data showing a decline in shipments to US ports.
Initially, Trump was confident in his tariff war and even dismissed concerns about shortages of toys, suggesting that children should be content with just a few dolls, even if they cost a little more. However, the shortage of essential goods is a different matter and could have led to a situation similar to the Covid pandemic, with critical items becoming scarce in the world's largest economy. It seems that the White House realized a tactical retreat would be the wiser choice. This change in stance also raises hopes that Trump may be more open to negotiation and compromise with Beijing, potentially softening some of the more aggressive aspects of his trade policies.
However, the fear and uncertainty that have gripped investors in the global trading community since the announcement of new tariffs have not been fully dispelled. Other countries are also left wondering how their own tariff levels will be affected after the 90-day pause. Companies around the world are uncertain about how to proceed, as they do not know which parts of the policy will remain and how wise it would be to continue working with the US.
During a press conference following the pause in the US-China tariff war, Bessent's words were telling. When asked if the trade war was necessary, given that negotiations had shown progress could be made through talks, he stated that the process would have been too slow and uncertain without substantial gains. Perhaps there is a method to this madness after all.
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