Fitch sees trade war de-escalation after Geneva talks

May 14, 2025 (MLN): The recent joint statement from the US-China economic and trade meeting held in Geneva on May 12 signals a notable de-escalation in the ongoing trade conflict between the world’s two largest economies, according to Fitch Ratings.

However, the rating agency cautions that uncertainty will persist without a comprehensive agreement, particularly regarding future tariff levels and the impact of existing duties.

As per the agreement, the US will suspend for 90 days the 34% reciprocal tariffs imposed on April 2 and cancel the planned escalation to 125% announced in early April.

Both countries will lower their headline bilateral tariffs by 115 percentage points.

This move brings US tariffs on Chinese goods down to 30% a combination of a 10% reciprocal rate and 20% fentanyl-related tariffs while Chinese tariffs on US imports will stand at 10%.

A mechanism will also be established to facilitate ongoing dialogue on trade and economic matters.

Fitch sees this development as an effort to prevent a severe breakdown in bilateral trade, which could have disrupted global markets.

The rollback of the 34% tariff to 10% mirrors the US's broader tariff strategy under President Trump’s April 9 Executive Order, which introduced similar adjustments for other trade partners.

Notably, this agreement reverses a sharp escalation in US-China tariffs that had previously soared into triple digits.

Following the April tariff hike, Fitch had revised its global GDP growth projection for 2025 down to 1.9%, citing fears of a significant downturn in trade activity between the US and China.

Monday’s deal, which reduces the US effective tariff rate (ETR) from 23% to 13%, could soften the impact on global economic growth.

Still, this is well above the 2.3% ETR seen in 2024, due to remaining sector-specific tariffs and a general 10% baseline.

Despite the agreement, Fitch stresses that the trade war is far from over. US Treasury Secretary Scott Bessent characterized the move as part of a broader “economic decoupling for strategic necessities,” emphasizing a shift away from dependence on Chinese imports.

While not pursuing total decoupling, the US continues to enforce the highest ETR for China among all its trade partners currently estimated at 31.8%.

This figure includes earlier duties on steel and autos and a 10% baseline tariff on most countries, as well as exclusions granted on select electronic goods on April 13.

The reduction from the previous peak ETR of 103.6% signals a policy shift, though the Trump administration appears committed to an import substitution strategy aimed at bolstering domestic manufacturing and reducing trade deficits.

This could mean further instability in trade flows and global supply chains.

The effects of tariff-related market behavior are already visible, with a surge in imports ahead of higher duties contributing to a 0.3% annualized GDP contraction in the US during Q1 2025.

Trade data is expected to remain volatile in the coming quarters.

Although private-sector demand remains relatively strong, the unresolved nature of trade negotiations continues to weigh on investment across various sectors.

Fitch plans to revisit its macroeconomic projections in the upcoming June 2025 Global Economic Outlook.

While recent US trade policy has been marked by abrupt changes, Fitch notes that if the current de-escalation endures, it could present upside potential for global growth beyond the forecasts made in April 2025.

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