US-China Trade Tensions: Analysis of the May 2025 Tariff Pause and Market Impact

I. Executive Summary#

A significant, albeit temporary, de-escalation occurred in the US-China trade conflict following negotiations in Geneva, Switzerland, concluding around May 12, 2025. The core of the agreement involved a 90-day pause in the escalating tariff war, characterized by substantial reductions in the extremely high reciprocal tariffs imposed by both nations earlier in the year.¹ Prior to this pause, tariffs had reached levels described by officials as tantamount to an "embargo," effectively freezing significant portions of bilateral trade and casting a long shadow over global financial markets.²

Specifically, the agreement stipulated that for a 90-day period, the United States would reduce its recently imposed tariffs on Chinese goods from a peak of 145% down to 30%. Concurrently, China agreed to lower its retaliatory tariffs on US goods from 125% to 10%. This mutual reduction of 115 percentage points provided immediate, albeit temporary, relief.²

The market reaction to this announcement was immediate and broadly positive across risk assets, driven by palpable relief from fears of an imminent economic decoupling or a severe global downturn triggered by the trade war.⁵ Global equities, particularly US technology and retail sectors heavily exposed to the bilateral trade relationship, experienced a significant surge. Oil prices rallied on improved global demand prospects, the US dollar strengthened, and US Treasury yields rose as demand for safe-haven assets diminished. Digital assets, including Bitcoin and Ethereum, participated strongly in the risk-on rally. Conversely, traditional safe-haven assets like gold experienced a sharp decline.¹ The sheer scale of this cross-asset reaction underscores the severity with which markets perceived the preceding tariff levels and the potential disruption they posed to global economic stability. The rally reflected not just optimism about future negotiations, but profound relief that a worst-case scenario had been averted for the time being.

Table 1: Summary of Key Market Reactions (Approximate, circa May 12, 2025)

II. The US-China Tariff Agreement: A 90-Day De-escalation#

The agreement announced around May 12, 2025, marked a sharp reversal from the rapidly escalating trade conflict witnessed in the preceding weeks. Beginning in early April 2025, the US administration, under President Donald Trump, initiated a series of tariff hikes on Chinese imports, citing various trade imbalances and practices.¹³ These actions prompted swift and escalating retaliation from Beijing. By early May, US tariffs on virtually all Chinese goods had reached a combined rate of 145%, while China had imposed retaliatory tariffs reaching 125% on US imports.²

These extraordinarily high tariff levels effectively acted as a near-total blockade on bilateral trade, which had topped $660 billion in the previous year.³ US ports reported drastic drops in traffic, and officials from both sides acknowledged that the situation was approaching the equivalent of an embargo, an outcome neither desired.² Beyond tariffs, China had also deployed non-tariff countermeasures, including expanding export controls on critical minerals like rare earths (adding to existing controls on materials like gallium) and adding numerous US companies to its export control and "Unreliable Entity" lists, restricting their business activities.³ The implementation of controls on rare earths, crucial for various high-tech and defense applications, was seen by some commentators as a particularly potent lever influencing the US position.⁵

Against this backdrop of near-frozen trade and mounting economic pressure, officials met in Geneva. The resulting agreement centered on a 90-day "pause" or "truce".¹ The key components were:

• Tariff Reductions: Effective May 14, 2025, for 90 days, the US agreed to reduce its recently imposed additional tariffs on Chinese goods by 115 percentage points, resulting in an effective rate of 30%.¹ China mirrored this commitment, reducing its retaliatory tariffs on US goods by the same 115 percentage points, bringing its effective rate down to 10%.¹ It is crucial to note that these reductions applied specifically to the reciprocal tariffs enacted during the recent escalation phase (since roughly April 2025) and did not necessarily remove baseline tariffs pre-dating this period or other sector-specific duties (like those on steel and aluminum).¹⁴

• Non-Tariff Measures: China also committed to suspending or removing the non-tariff countermeasures it had implemented since April 2, 2025, in response to US actions.³ This included potential relief for companies placed on restrictive lists and a possible easing of export controls, although the precise mechanisms for rolling back some of these complex measures remained unclear.³ The inclusion of these non-tariff elements signaled a potentially broader, though still temporary, cessation of economic hostilities beyond just the tariff rates.

• Stated Rationale: Officials, including US Treasury Secretary Scott Bessent, publicly framed the agreement as a way to avoid a detrimental economic decoupling, stating "neither side wants a decoupling".² The pause was intended to allow space for further negotiations aimed at resolving underlying disputes and achieving "more balanced trade," with expectations for follow-up meetings in the subsequent weeks.²

Table 2: US-China Tariff Rate Changes (May 2025 Pause)

The structure of the agreement-a fixed 90-day duration and the retention of significant, albeit reduced, tariffs-strongly suggests a tactical maneuver rather than a fundamental resolution. Both nations faced mounting economic pressure from the high tariffs, including inflation concerns and recession risks in the US and threats to export-led growth in China.⁵ The pause provided necessary breathing room to mitigate this damage and create space for dialogue, but it did not address the core disagreements over issues like market access, intellectual property, or industrial subsidies that fueled the conflict.¹ The potential for re-escalation after the 90-day period remains a significant factor.

III. Cross-Asset Market Impact Analysis#

The announcement of the 90-day tariff pause triggered immediate and pronounced reactions across global financial markets, largely reflecting a shift towards increased risk appetite.

A. Equity Market Surge

Global stock markets responded with strong gains. In the US, futures markets signaled a powerful open, with Dow Jones Industrial Average futures climbing around 2.0-2.5%, S&P 500 futures jumping 2.6-3.2%, and Nasdaq 100 futures soaring 3.8-4.0% ahead of the market open on May 12, 2025.¹ This positive sentiment was mirrored in international markets, with Hong Kong's Hang Seng Index jumping 3% and notable gains seen across other Asian and European bourses.¹

The rally exhibited clear leadership from sectors most directly impacted by the US-China trade dynamics:

• Technology: Semiconductor manufacturers, heavily reliant on Chinese supply chains and end markets, saw exceptional gains. Companies like ON Semiconductor, Micron, and Broadcom surged between 6% and 8%, while Nvidia rose 4.8%.¹ The Nasdaq's outperformance relative to other indices underscored the tech sector's sensitivity to tariff relief.¹

• Retail: Retailers sourcing significant inventory from China benefited from the prospect of lower import costs and potentially eased inflationary pressures on consumers. Amazon shares climbed 7.8%, and Best Buy jumped 10.4% in early trading.¹

• Travel: Airlines, including American, Delta, and United, along with major cruise lines, posted gains of around 7%, likely reflecting an improved outlook for global economic activity and potentially reduced friction impacting international travel sentiment.¹

The sheer magnitude of the rally, particularly in these highly exposed sectors, suggests that market participants had previously assigned a high probability to a continued, damaging trade war, significantly depressing valuations. The sudden reduction in this specific tail risk prompted a rapid and substantial repricing.

However, the market demonstrated an ability to differentiate between news events. While most sectors rallied on the trade truce, pharmaceutical stocks such as Johnson & Johnson, Merck, and Pfizer declined by around 3%. This negative performance was directly attributed to a simultaneous announcement by President Trump regarding a planned executive order aimed at potentially lowering Medicare drug costs, highlighting how distinct policy developments can impact specific sectors independently, even amidst a broader market rally.¹

B. Fixed Income Adjustment

In the government bond market, the reaction was characteristic of a "risk-on" environment. US Treasury yields moved higher, signifying a decrease in bond prices. The benchmark 10-year Treasury yield rose by approximately 6 to 8 basis points, reaching levels around 4.43% to 4.46% shortly after the announcement.¹⁰ Shorter-term yields also increased, with the 2-year Treasury yield jumping notably by around 10 basis points to approach 4.0%.¹⁰

This rise in yields reflects reduced demand for the safety of government bonds. As fears of an immediate, trade-war-induced economic downturn or deflationary shock receded, investors rotated capital away from safe havens towards assets perceived to offer higher returns in an improving economic environment, such as equities.⁶ The bond market's pricing indicated a lower probability assigned to severe economic disruption that might necessitate holding safe assets or prompt aggressive central bank easing. Easing geopolitical tensions elsewhere, noted around the same time, may also have contributed to the diminished appeal of safe-haven bonds.¹⁰

C. Commodity Price Volatility

Commodity markets displayed a clear divergence reflecting the changing risk sentiment:

• Oil Rally: Crude oil prices surged on expectations that eased trade tensions would bolster global economic activity and, consequently, energy demand. US benchmark West Texas Intermediate (WTI) crude gained over 4%, adding $2.48 to reach $63.50 per barrel. Brent crude, the international benchmark, saw similar strong gains.¹

• Gold Slump: Conversely, gold, a traditional safe-haven asset, experienced a sharp sell-off. Gold futures prices fell significantly, dropping around 3.75% to trade near $3,218 per troy ounce, marking their lowest point since early May.⁹ This decline was driven by the increased appetite for riskier assets and a reduction in perceived geopolitical and economic uncertainty, diminishing gold's appeal.⁶ A strengthening US dollar likely added downward pressure on the dollar-denominated commodity.

The opposing trajectories of oil (a pro-growth, risk-sensitive commodity) and gold (an anti-growth, risk-averse asset) provided a textbook illustration of the market's interpretation. The tariff pause was viewed, at least in the immediate term, as a net positive for global growth prospects and a reduction in systemic risk.

D. Digital Asset Rally

The positive risk sentiment extended to major digital assets. Bitcoin (BTC) experienced a notable surge, pushing its price towards the $104,500 - $105,700 range shortly after the news broke.⁷ Ethereum (ETH), the second-largest cryptocurrency, also rallied, gaining over 3% on the day to trade around $2,560.⁸ Gains were also observed across various altcoins, indicating broad participation within the crypto space.⁸

This rally occurred in lockstep with the surge in equities and other risk assets, suggesting that digital assets were largely trading as part of the broader market reaction to the positive macroeconomic development.⁷ The strong positive correlation reinforces the view that, during this period, major cryptocurrencies were highly sensitive to global risk appetite shifts and macroeconomic news, rather than operating entirely independently of traditional financial market drivers.

E. Currency Market Dynamics

The US dollar strengthened broadly against major international currencies following the announcement. The Bloomberg Dollar Spot Index rose, and the DXY index broke above key technical resistance levels.⁸ The Euro weakened against the dollar, with the EUR/USD exchange rate falling to levels around 1.1078-1.1103.¹ The dollar's gains were particularly pronounced against the Japanese Yen, traditionally viewed as a safe-haven currency, with the USD/JPY rate climbing significantly to trade above 148.¹

The dollar's appreciation likely stemmed from a confluence of factors. Increased confidence that the US economy might avoid the sharpest negative impacts of the trade war, coupled with rising US Treasury yields making dollar-denominated assets more attractive ¹⁰, supported the currency. Furthermore, the reduction in global tail risk may have improved the relative outlook for the US economy or led to the unwinding of certain funding trades, paradoxically benefiting the dollar despite the perception of a US policy adjustment.⁵ This complex reaction highlights that currency movements were driven by more than just the perceived outcome of the trade negotiation round, incorporating relative economic resilience and interest rate differentials.

IV. Expert Perspectives and Future Outlook#

While markets reacted with immediate relief, expert commentary quickly introduced notes of caution, emphasizing the temporary nature of the agreement. The 90-day timeframe was widely highlighted, with analysts stressing that this pause does not guarantee a lasting resolution or a permanent ceasefire in the underlying trade dispute.³ Uncertainty regarding the outcome of negotiations during this window, and what might transpire once the 90 days expire, remains high.¹

Furthermore, while the tariff reductions were substantial, the remaining rates (30% for US tariffs on Chinese goods, 10% for Chinese tariffs on US goods) are still significantly elevated compared to pre-trade-war levels and continue to represent considerable barriers to trade and investment.³ Economists acknowledged the "substantial relief" the pause offered to both economies ¹⁴ but warned that the lingering tariffs and persistent uncertainty would likely continue to constrain economic activity.³ The pause was likely motivated by the tangible negative economic impacts already being felt, including contractions in US manufacturing activity and PMI readings, broader inflation and recession fears, and specific sector pressures, such as in agriculture and consumer goods.⁵ This suggests that mutual economic pain served as a significant catalyst for the temporary de-escalation, implying future negotiation dynamics may also be heavily influenced by prevailing economic conditions.

Critically, the 90-day truce does not address the fundamental points of friction between the US and China. Core disagreements concerning market access, intellectual property protection, state subsidies, fentanyl precursor chemicals, and other structural issues remain unresolved and will need to be tackled in the forthcoming talks.¹ Officials indicated that further meetings were expected within weeks to begin addressing these more complex matters.³

Despite the challenges, the stated objective from officials on both sides to avoid a complete economic decoupling provides a crucial context.² The pause can be interpreted, in part, as a deliberate step back from the brink to prevent such an outcome, maintaining channels for dialogue and trade, albeit under strained conditions. However, the fragility of this truce is underscored by the fixed deadline and the substantial issues yet to be negotiated, creating potential for renewed market volatility as the 90-day window progresses.

V. Concluding Remarks#

The US-China agreement announced around May 12, 2025, represented a significant, though explicitly temporary, step back from a rapidly escalating and economically damaging trade war. The mutual reduction of recently imposed tariffs-from 145% to 30% for the US and from 125% to 10% for China-provided substantial relief to global financial markets that had been bracing for a potential decoupling or severe downturn.

This relief manifested in a strong, broad-based risk-on rally. Equities, particularly in trade-sensitive sectors like technology and retail, surged globally. Commodities linked to economic growth, such as oil, rallied, while safe-haven assets like gold and US Treasuries sold off, pushing yields higher. Digital assets participated robustly in the rally, trading in line with other risk assets, and the US dollar strengthened on the back of rising yields and an improved relative economic outlook.

However, the 90-day duration of the pause underscores its temporary nature. The remaining tariff levels are still historically high, and the fundamental disagreements between the world's two largest economies remain unaddressed. While the immediate market reaction was one of pronounced relief from extreme tail risk, the underlying situation remains fraught with uncertainty. The progress, or lack thereof, in negotiations over the 90-day window will be critical. Market participants must remain vigilant, as the potential for renewed volatility persists should talks falter or the deadline approach without a further agreement or extension. The pause has bought time, but a sustainable resolution to the complex US-China trade relationship is far from assured.

Works cited#

1. Futures on Wall Street soar after China and US agree to pause most of their sharp tariff increases - AP News, accessed May 12, 2025, https://apnews.com/article/stocks-markets-trade-trump-catl-62fbd84396aaea011c68231363b283de

2. U.S. and China to ease tariffs significantly for 90 days, White House ..., accessed May 12, 2025, https://www.cbsnews.com/news/us-china-tariffs-deal-90-days-trump-admin-trade-talks-progress/

3. US and China take a step back from sky-high tariffs and agree to pause for 90 days for more talks - AP News, accessed May 12, 2025, https://apnews.com/article/china-us-switzerland-tariffs-negotiations-b3f5174d086e39b2522ab848ddad9372

4. US-China trade deal: Countries agree to slash tariffs, enact 90-day pause, accessed May 12, 2025, https://www.livenowfox.com/news/us-china-trade-deal-tariffs-may-12-2025

5. Trump vs. China: another tariff U-turn? - The Week, accessed May 12, 2025, https://theweek.com/business/economy/trump-vs-china-another-tariff-u-turn

6. U.S. & China Agree to 90 Day Tariff Pause - The Global Treasurer, accessed May 12, 2025, https://www.theglobaltreasurer.com/2025/05/12/us-china-trade-truce-tariff-reduction/

7. US-China Tariff Cuts Spark Bitcoin Surge to $104,500 - AInvest, accessed May 12, 2025, https://www.ainvest.com/news/china-tariff-cuts-spark-bitcoin-surge-104-500-2505/

8. BTC, ETH, Altcoins Spike as US and China Announce Temporary Tariff Cuts - CryptoRank, accessed May 12, 2025, https://cryptorank.io/news/feed/76ba2-btc-eth-altcoins-spike-as-us-and-china-announce-temporary-tariff-cuts

9. Gold Futures Slump as U.S., China Agree to Substantial Tariff Cuts - Update | Morningstar, accessed May 12, 2025, https://www.morningstar.com/news/dow-jones/202505123026/gold-futures-slump-as-us-china-agree-to-substantial-tariff-cuts-update

10. US Dollar Forecast: Bullish Outlook After 90-Day U.S.-China Tariff Pause | FXEmpire, accessed May 12, 2025, https://www.fxempire.com/forecasts/article/us-dollar-forecast-bullish-outlook-after-90-day-u-s-china-tariff-pause-1518269

11. U.S. stock market futures today: Dow soars over 900 points, S&P 500 and Nasdaq rally as trade truce fuels optimism - Nvidia, Tesla, and Microsoft in focus, but should investors stay cautious? - The Economic Times, accessed May 12, 2025, https://m.economictimes.com/news/international/us/u-s-stock-market-futures-today-dow-soars-over-900-points-sp-500-and-nasdaq-rally-as-trade-truce-fuels-optimism-nvidia-tesla-and-microsoft-in-focus-but-should-investors-stay-cautious/articleshow/121110008.cms?UTM_Source=Google_Newsstand&UTM_Campaign=RSS_Feed&UTM_Medium=Referral

12. Instant View: US-China agree to cut tariffs, 90-day pause | The Straits Times, accessed May 12, 2025, https://www.straitstimes.com/asia/instant-view-us-china-agree-to-cut-tariffs-90-day-pause

13. China's Comprehensive Retaliation Against U.S. Tariffs | Insights - Holland & Knight, accessed May 12, 2025, https://www.hklaw.com/en/insights/publications/2025/04/chinas-comprehensive-retaliation-against-us-tariffs

14. Is US-China trade war over or tariff cuts may be just a temporary fix? All your FAQs answered - The Economic Times, accessed May 12, 2025, https://m.economictimes.com/news/international/global-trends/trump-tariffs-is-us-china-trade-war-over-or-tariff-cuts-may-be-just-a-temporary-fix-all-your-faqs-answered/articleshow/121110601.cms

15. US & China Agree to Lower Tariffs for 90 Days - Farm Policy News, accessed May 12, 2025, https://farmpolicynews.illinois.edu/2025/05/us-china-agree-to-lower-tariffs-for-90-days/

16. US-China trade tensions ease, Nasdaq 100 jumps 6.4% | Market Navigator | IG International, accessed May 12, 2025, https://www.ig.com/en/news-and-trade-ideas/weekly-market-navigator--28-apr-2025-250428

17. Trade tensions ease as Fed and BoE prepare key rate decisions | Market Navigator, accessed May 12, 2025, https://www.ig.com/en/news-and-trade-ideas/weekly-market-navigator--5-may-2025-250505

18. Trade Truce: U.S. and China Roll Back Tariffs for 90 Days - The Toy Book, accessed May 12, 2025, https://toybook.com/trade-truce-u-s-and-china-rollback-tariffs-for-90-days/

19. The more Trump talks about making trade deals, the more confusing the tariff picture gets - AP News, accessed May 12, 2025, https://apnews.com/article/trump-tariffs-deals-china-trade-02986c700a2d46c8b1ba85afe77d139f