Trump’s trade policy: The Chinese hold the upper hand

Signs of easing have emerged in the trade dispute between the United States and China. Although President Donald Trump is presenting the agreement as a triumph, it was in fact Washington that was forced to make concessions.

"It was the Americans who blinked first" – this is perhaps the most concise summary of the current state of the tariff conflict between China and the United States. Tariffs on Chinese goods in the US now stand at 30 per cent, down from a prior 145 per cent. Imports from the US into China are subject to a 10 per cent tariff, previously 125 per cent. These measures are to remain in place for an initial period of 90 days.

The trade-weighted average tariff rate has thereby dropped to around 17 to 18 per cent. Including exemptions for electronic goods, the figure is closer to 14 per cent – significantly lower than the 25 per cent level that applied prior to the ‘90-day deal’.

Growth in the US is nonetheless expected to slow, although a recession may yet be avoided. Should one materialise, it is likely to be relatively mild. While unemployment is expected to rise slightly, it should soon stabilise. Inflationary pressures are set to ease following the agreement, potentially running 0.5 to 1 percentage point lower than previous forecasts.

Clear advantages for China
China stands to gain substantially more from the accord. Its labour market and the domestic economy will be far less adversely impacted by lower tariffs. Shipping rates had already indicated a marked slowdown in trade flows between the two nations. The Chinese Purchasing Managers' Index recently dipped just below the 50-point threshold – signalling contraction rather than growth. Relief following the suspension of tariffs led to a 3 per cent average rise in Chinese equities.

More importantly, China has demonstrated that it holds the stronger position. President Trump came under considerable pressure as a result of the trade conflict, most notably reflected in the bond markets, where US Treasury yields surged. Additional anxiety was caused by the potential disruption to supplies of rare earth elements from China. In this strategically vital segment, China enjoys a quasi-monopoly, processing around 90 per cent of the world’s rare earths. The complex and environmentally damaging nature of their production means it is not easily relocated – a fact China is acutely aware of and has leveraged to its advantage.

This development significantly enhances China’s negotiating position for the future.

A positive long-term signal for markets
The agreement is also likely to contribute to a sustained calming effect on global markets. Although record highs have not yet been reclaimed, investors are now better positioned to digest further policy moves by the Trump administration. It is now evident that the President is not entirely indifferent to economic repercussions.

Furthermore, a pattern established during Trump’s first term is repeating itself. In 2017, equities in emerging markets – including China – outperformed their US counterparts in every quarter, as measured by the MSCI Emerging Markets Index. Returns ranged between 6 to 11 per cent, compared to 3 to 6.5 per cent in the S&P 500.

The divergence in 2025 is even more pronounced. By 21 May, US equities posted a slightly negative return, while emerging markets rose by around 10 per cent. Chinese shares did even better with gains of around 17 per cent. A key reason is that emerging markets can more readily counter demand shocks through stimulus, whereas the United States finds it far more challenging to mitigate supply shocks. The latter require new factories, sufficient labour, and – critically – time. And time, above all, was something Donald Trump lacked.

2025 year-to-date performance of S&P 500 vs. emerging markets in % (USD)

^{S&P 500 Index vs. MSCI Emerging Markets Index, MSCI Brazil Index, MSCI India Index, MSCI China Index und MSCI Hongkong Index; Performance YTD 2025 (in USD);
Source: Bloomberg, MSCI, S&P, 21.05.2025}