China and the United States reached a new trade agreement on May 11, 2025, marking a pivotal step toward resolving one of the world's most serious economic crises: the escalation of the tariff war between the two nations since President Donald Trump returned to office last January. This agreement, the result of marathon negotiations held in Geneva, represents a temporary truce lasting 90 days, which includes a partial suspension and reduction of punitive tariffs in a decisive effort to alleviate the tensions that have shaken the global economy. Under the agreement, the United States will reduce its tariffs on Chinese imports to 30%, down from the previous 145%, while China will lower its tariffs on American goods to 10%, down from 125%.

Key Drivers

The trade agreement between Beijing and Washington marks a significant breakthrough from one of the most significant economic crises in the past few years. Several intertwined factors contributed to the conclusion of this agreement, the most notable of which can be summarized as follows:

1- Disrupted Global Supply Chains: The agreement was reached amid significant economic pressures faced by both nations due to the mutual escalation of tariffs. The United States imposed tariffs of 145% on Chinese imports, while Beijing retaliated with tariffs of up to 125% on American goods, severely impacting bilateral trade. As a result of these protectionist policies, Chinese exports to the U.S. market declined by 21% in April 2025 compared to the same period the previous year, highlighting the extent of the damage to trade relations between the two countries.

2- Mounting Domestic Economic Burdens on the United States: President Trump's insisted that tariffs are a necessary means of "fixing the imbalance" between the U.S. and its trade partners worldwide. However, economic consequence of this decision in the U.S. has backfired. The high tariffs have led to significant disruptions in supply chains, substantial increases in production and transportation costs, and inflationary pressures. This has severely affected key sectors, including electronics, manufacturing industries, and agriculture. Companies have encountered increasing challenges in securing production inputs, rising shipping costs, and diminishing profit margins. Additionally, American consumers have incurred additional costs, as prices for household goods and electronics have significantly risen.

3- Growing Concerns about a Slowing Chinese Economy: The trade war has raised fears of a widespread economic contraction. Data from April 2025 revealed that Chinese factories experienced their slowest growth in over a year, amid declining external demand and shrinking industrial production. This comes at a time when China is experiencing significant domestic economic challenges, most notably a deteriorating real estate crisis and increasing local government debt, which have exacerbated the risks to economic growth. Furthermore, some estimates suggest that the number of jobs at risk could reach approximately 16 million due to the decline in demand for Chinese exports, prompting Beijing to intensify efforts to launch an urgent economic stimulus package.

4- Market Turmoil and Growing Investor Anxiety: The tariff standoff between the two superpowers has caused significant upheaval in global markets. Major stock market indices, such as the S&P 500, Nasdaq, and Hang Seng, have experienced sharp fluctuations, reflecting a notable decline in global investor confidence amid uncertainty over the future of international trade. In this context, multinational corporations and export-dependent industries have expressed profound concern about the ongoing uncertainty, particularly in light of previous threats of retaliatory tariffs. This has led many companies to freeze or reassess their expansion, investment, and hiring plans in an increasingly risky environment.

5- Attempts to Achieve a Set of Strategic Trade Goals: Through the new agreement, Washington aimed to accomplish several strategic trade objectives, most notably reducing the chronic trade deficit with China, and pressuring the latter to implement stringent measures regarding fentanyl exports, which have been directly linked to the escalating opioid crisis in American society. Additionally, Washington sought to broaden the scope of U.S. exports to the Chinese market, particularly in critical sectors such as agricultural products, pharmaceuticals, and high-tech equipment. U.S. priorities also included re-importing essential Chinese components, such as rare earth metals and magnets, which are extensively utilized in strategic industries, including automotive, aviation, aerospace, and semiconductor industries.

This agreement will help pave the way for future purchase agreements, under which China may commit to increasing its imports of U.S. goods in an effort to reduce the bilateral trade imbalance. It is worth noting that prior to the Geneva meetings, President Trump indicated the possibility of reducing tariffs to 80%. However, White House spokeswoman Caroline Leavitt emphasized that Washington would not take this step unless it received tangible concessions from the Chinese side. Some economic analysts and top business executives have pointed out that imposing tariffs exceeding 50% is often sufficient to effectively paralyze trade, which would inevitably harm both economies.

6- Beijing's Aim to Ease U.S. Economic Pressure: From China's perspective, one of its most urgent goals may be to lift or ease U.S. restrictions on advanced technology exports, as well as to secure the continued flow of strategic raw materials essential for its industries. Beijing has also sought to eliminate U.S. punitive measures against its companies, particularly those operating in sensitive sectors such as semiconductors, renewable energy, and electric vehicles. Another priority is to resume exports of rare earth metals, which play a crucial role in solidifying China's position in global supply chains. The Chinese Ministry of Commerce described the agreement as "beneficial to both countries and reflective of shared global interests", expressing hope that "the United States will continue constructive cooperation with China to reach compromises that ensure global economic stability".

7- Preventing Global Economic Disintegration: The World Trade Organization has warned of the disastrous consequences of ongoing trade disintegration between the two countries, noting that this situation could lead to a decline in global GDP of up to 7% in the long term. The International Monetary Fund has also lowered its forecast for global economic growth due to the escalating tariff war between Washington and Beijing. In the face of these repercussions, the two major superpowers realized that the continuation of the trade conflict poses significant systemic risks that threaten the stability of the entire international economic system. This realization prompted them to step back from the brink and seek to restore some balance to the global economic landscape.

In this context, allied countries in both Europe and Asia exerted diplomatic pressure on the United States and China to urge them to reach a settlement, fearing the indirect negative repercussions on global trade flows. In April 2025, the International Monetary Fund lowered its economic growth forecasts for that year for all G7 countries, including Germany and Japan, the third and fourth largest economies in the world, largely attributing this adjustment to the impact of US tariffs.

Potential Implications

This agreement has promoted a notion of stability in global financial markets, amid rising investor hopes for a long-term trade settlement between the two parties. The key potential implications of this agreement can be identified along the following aspects:

1- Temporary Economic De-escalation between Beijing and Washington: Tariffs imposed by both sides are heading towards a significant decline. The United States has reduced tariffs on Chinese goods from 145% to 30%, while China has responded by lowering tariffs on American goods from 125% to 10%. These temporary reductions will remain in effect for 90 days, until August 10, which is just about a month before the conclusion of a similar suspension period for certain US tariffs imposed on the European Union. This development provides immediate relief for exporters and manufacturers in both countries. However, other tariffs established during the trade war initiated by Trump in his first term remain in place, including a 20% tariff implemented last February, amid ongoing accusations that China has not done enough to prevent the flow of fentanyl-related chemicals into US markets.

2- A Positive Boost for Global Markets: The announcement of the agreement resulted in a significant rise in global markets. U.S. market indices concluded their first trading session after the agreement with substantial gains. The S&P 500 closed at its highest level since March 3, while the tech-heavy Nasdaq reached its highest point since February 28.

Asian and European markets experienced a similar rebound, with Hong Kong's Hang Seng Index rising nearly 3% and the STOXX Europe 600 increasing by 1%. Oil prices also rose more than 3%, driven by optimistic expectations for renewed global economic growth. On the currency front, the US dollar rose against both the euro and the Japanese yen, while the Chinese yuan reached its highest level in six months, in a symbolic gesture of the temporary pause in trade tensions. Additionally, shares of shipping giants such as Maersk and Hapag-Lloyd, which depend on global trade networks, also recorded significant gains.

3- Ongoing Uncertainty over the Future of the Global Economy: Although the agreement represents a significant diplomatic breakthrough, it does not address many core issues, such as intellectual property rights, technology transfer, and long-term structural gaps in the trade balance. Several analysts have warned that the 90-day period is merely a temporary reprieve from a more profound confrontation. The full impact of the compound tariffs and reciprocal trade sanctions remains uncertain, and the capacity of both parties to resolve deep-rooted differences within this short period remains questionable.

Achieving a lasting improvement in the bilateral trade balance will require profound structural changes in the economic growth models of both the United States and China, which appears difficult to accomplish in the foreseeable future. Even if an agreement is reached that forces China to increase its imports of American products, implementation challenges will remain. The United States may face a shortage of sufficient quantities to export, in addition to the sensitivities related to strategic competition. Washington is unlikely to export advanced technology and defense equipment to Beijing, while China will not risk becoming overly dependent on the United States in critical sectors such as food and energy. Instead, it will seek to diversify its partners and sources of supply.

4- Creating New Opportunities for Other International Parties: The 90-day period has incentivized both the United States and China to enhance their bilateral trade relations with third-party countries, aiming to improve their negotiating positions. The suspension of tariffs has also prompted other nations to take positions that may serve the interests of one side or the other. This is evident in the recent framework agreement between the United States and the United Kingdom, as well as in the ongoing negotiations between Washington and several of its major trading partners, including India, Japan, Canada, Mexico, and the European Union. Meanwhile, China continues its efforts to strengthen its geoeconomic position by deepening its economic relations within the BRICS bloc.

5- The Continuation of Sino-American Strategic Competition: Despite the apparent calm suggested by the agreement, strategic competition between the two sides persists and is evident in their hardline positions. The United States continues to demand that China cooperate in combating drug trafficking, particularly fentanyl, and open its markets to American products. In contrast, China rejects portraying the agreement as a concession and affirms its commitment to maintain its leadership in global trade.

The ongoing state of strategic mistrust between the two sides is evident, as expressed by the statements of U.S. Treasury Secretary Scott Bessent. He suggested the potential for cooperation through the establishment of an economic balance, wherein the United States revitalizes its manufacturing sector while China addresses its industrial overcapacity. However, national security issues, such as control over advanced technologies, cybersecurity, and competition in artificial intelligence and green technology, continue to be unresolved sources of tension. The existing agreement has proven inadequate in paving the way for addressing these broader geopolitical challenges.

6- Utilizing the Agreement to Maintain Domestic Popularity: Both countries are attempting to leverage the agreement to strengthen their domestic political positions. In the United States, President Trump quickly presented the agreement as the result of his rigorous and effective negotiating skills, aiming to garner support from the industrial community and bolster his administration's image of economic nationalism. The White House is also seeking to use any progress in the talks as a means to reassure consumers and calm financial markets, which have experienced repeated turmoil due to U.S. trade policy and escalating tariffs. In contrast, Chinese state media portrayed the agreement as a victory for calm and steadfast diplomacy, emphasizing the country's resilience and strategic patience in the face of external pressure.

However, the agreement faces domestic criticism in both countries. In Washington, some lawmakers question its effectiveness in addressing Chinese trade practices, while in Beijing, there are concerns about entering further negotiations under economic pressure.

7- De-escalating Hostile Rhetoric over Tariffs: Following a period of intense escalation in the hostile rhetoric between Washington and Beijing regarding the trade war, the media and political landscape is anticipated to experience a return to a more measured tone in mutual statements. On May 6, 2025, Scott Bessent expressed his desire to reduce trade barriers, considering the current tariffs "unsustainable", adding: "We don't seek decoupling. What we want is fair trade."

On the other hand, although Chinese officials repeatedly vowed to "fight to the end", they have expressed a willingness to engage in further talks, provided the United States demonstrates "sincerity" by beginning to reduce the imposed tariffs. Beijing has recently softened its rhetoric, especially after the U.S. president expressed hope for reaching an agreement with Chinese President Xi Jinping. However, it continues to portray itself as the wronged party in the trade war, emphasizing its role as a responsible power aiming to safeguard the global trade system.

8- The Possibility of Reaching a Long-Term Agreement: Although the current agreement is temporary, it paves the way for a more comprehensive and sustainable trade agreement between the two parties. The mechanism of continued consultations and talks indicates the willingness of both parties to move forward with deeper negotiations. In an interview with CNBC on the day the truce agreement was announced, Bessent indicated that the two parties plan to hold a new round of meetings in the coming weeks.

Meanwhile, the Chinese Ministry of Commerce described the agreement as an "important step" toward resolving bilateral differences, considering it a foundation for enhancing future cooperation. Furthermore, the establishment of permanent communication channels and the mutual recognition of the futility of complete decoupling between the two economies represent positive indicators of the political will to manage the conflict. Consequently, the agreed-upon 90-day period will offer an opportunity to assess intentions, foster mutual trust, and prepare the ground for more in-depth and structured rounds of negotiations.

In conclusion, the recent trade agreement between the United States and China represents a significant step toward alleviating tensions. Although it is temporary, it has provided a sense of relief to global markets and uplifted the spirits of investors who have been impacted by ongoing tensions and reciprocal tariffs. However, the agreement's temporary nature and its limited scope regarding the issues it addresses clearly indicate that the underlying causes of the trade crisis between the two countries remain unresolved. Therefore, the question remains as to whether this truce will lead to a stable trade structure or will merely represent a temporary gain. Nevertheless, at its core, the Geneva agreement represents a crucial—albeit fragile—breakthrough toward a more cooperative path.

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