The Chinese scholar Lao Tzu wrote that "the journey of 1,000 miles begins with a single step." Today, the United States and China took a giant step toward restoring and revamping their trade relationship.
Yelling "Cut"
China and the U.S. conducted their first formal trade talks of 2025 over the weekend. And on Monday, May 12, they announced the outcome of their negotiations. The U.S. has agreed to roll back the tariff increase on Chinese goods from 145% to 30%, with China lowering its counter-tariffs to 10% from 125% for 90 days beginning May 14.
This agreement was a substantial announcement, as it effectively cuts the overall tariff applied to U.S. imports by around 10%. In turn, this move could reduce the projected one-time hit to U.S. inflation by a percentage point.
In addition, the two countries agreed to continue further discussions aimed at reducing the size of the U.S. trade deficit and addressing other trade-related challenges.
Market Fireworks
In response to the tariff announcement, markets appeared to be in a celebratory mood. As of roughly 10:00 a.m. Eastern time this morning:
- S&P 500 up 2.6%
- Crude oil up 3.2%
- Gold down 2.9%
- U.S. 10-year Treasury yield up 7 basis points
1,000-Mile Journey
Although today's action was an important step, it may only be one of many in the thousand-mile economic journey. Even with today's tariff relief, the U.S. has still seen the largest increase in effective tariff rates in many decades (remember that a baseline 10% tariff against many other trade partners is still in effect). Moreover, the trade developments with China and other nations could still have many twists and turns. We cannot completely rule out the risk of tariffs coming back after the pause expires. In fact, the first trade war between the U.S. and China had several tariff hikes, reductions and more hikes before the final signing of the "Phase One" deal.
Right now, we continue to believe that economic uncertainty remains elevated. Prior to today's announcement, we assessed that the risk of the U.S. economy tipping into recession over the next year was 40%. With today's encouraging news, we may lower that risk estimate in the days to come. But even with a reduction in recession risk, it's likely that recession risk will remain above the 15% to 20% norm for some time. Against this backdrop, we continue to stress the power of building diversified and robust portfolios and sticking to long-term goals.