China and US trade talks possible: What does that mean for traders?

Following the tariff-based trade war that Trump’s US administration and China have entered, heads seem to have cooled. The US has proposed trade talks, presumably as a means to reach an amicable solution, rather than continuing tit-for-tat tariff increases. China is currently assessing the proposal.

Why are trade talks needed?

The US made the first step on February 1st, imposing, among others, a 10% import tariff on goods from China. As these are announced, China threatens countermeasures. Soon, on February 4th, the tariffs are put into action, and China retaliates by launching an anti-monopoly investigation into Google and introducing sweeping duties for many American goods.

China’s tariffs, including 15% on coal and liquefied gas products and 10% on oil, some of the US’ main exports, take effect on February 10th. Soon after, on February 13th, Trump announces plans for reciprocal tariffs, which experts warn could send markets into disarray and erode existing trade relations.

The next period is somewhat calm, until March 4th, when the US doubles import taxes on Chinese goods to 20%. China retaliates by imposing 15% tariffs on US farm goods, and imposing export controls and other restrictions on about two dozen US companies. An additional threat looms over China, as Trump announces a 25% tariff on any country that buys oil from Venezuela. China bought 68% of oil exported from the South American country in 2023.

Reciprocal tariffs taking effect

On April 2nd, the reciprocal tariffs are announced, increasing the tax on Chinese goods to 34%. These build onto previous levies, putting the total tariff on Chinese goods at 54%.

This triggers an accelerated exchange, as China threatens its own reciprocal measures on April 4th. It plans to impose 34% tariffs on all US goods along with further export controls as retaliation to Trump’s structure.

The US reciprocal tariffs go into effect on April 9th, but are soon frozen for 90 days for countries excluding China. Trump doubles down on his stance, raising import taxes on Chinese goods to 125%, on top of the existing 20%. As a reaction, China imposes an 84% tariff on US goods. Soon after, on April 11th it takes an even sharper stance, upping that number to 125%.

Finally, the US exempts some electronics from the reciprocal tariff structure, while noting that non-reciprocal taxes, notably on goods from China, will remain.

How trade tariffs effect the markets?

The US-China trade tariff war (and the US tariff policy in general) had a profound impact on both global and local financial markets. During the uncertain time when Trump’s trade policy announcements shifted regularly, key indices in the US saw some of the worst losses since COVID. Additionally, the US dollar weakened against many global currencies amid a lack of trust.

Additionally, JPMorgan Chase has forecasted a 60% chance of the US entering a recession. Meanwhile, China’s economic forecasts shrunk, as its manufacturing and exports slowed, and it was forced to make strategic partnership changes.

The competition between two global superpowers has also had a rippling global effect. Beyond individual shares suffering, the International Monetary Fund (IMF) has decreased its global growth rates from 3.2% to 2.8%.

However, outlooks weren’t fully bleak, as some policies, like the tariff freeze caused markets to surge upwards in optimism. Gold, due to its status as a safe haven asset, also saw significant surges, reaching record highs. But overall, it was a time of chaos, tension, and increased volatility.

A possible end

The US has expressed a desire to engage in talks with China surrounding their mutual trading policies. A message was extended through relevant channels expressing a possible start of negotiations, as stated by China’s Ministry of Commerce.

However, that doesn’t mean that the end is in sight. China is only considering these negotiations, with both countries still locked into a de facto trade embargo. Beijing has stated that the US will need to meet a number of preconditions for talks to initiate.

According to China’s spokesperson, this is because the tariff hike was initiated unilaterally by the US. To correct this, the US will need to display sincerity, a willingness to correct its mistakes and cancel the hikes it imposed in the first place.

Market reactions – Sweeping optimism

Markets seem to be eagerly awaiting the end of this trade war. The very announcement of an eventual solution has caused numerous markets to shoot up.

The Chinese yuan has shown an immediate reaction, strengthening as a response. Similarly, the Hang Seng index is optimistic, immediately rising after the announcement.

The optimism is global. On the day of the announcement, stock futures have also shown a reaction, as investors rush to capitalise on the lighter mood.

However, traders nor large companies aren’t out of the woods yet. Many companies, like Amazon and Apple, are prepping for a tougher business climate. And without any further context, it’s impossible to predict how talks will go, and how the markets are to react.

Possible implications for traders

Until now, reactions have been fairly sharp, so traders may want to prepare for extended volatility. If talks hit speedbumps, the markets may take a dive as a reaction. For traders, it’s key to keep a close eye on talks, as any further news is likely to have a significant impact.

Safe haven assets, such as gold and the Japanese yen, have shown strong performance during uncertain financial climates. Historically, traders have used portfolio diversification and the inclusion of similar safe trading instruments as a method of mitigating the risk associated with turbulent financial markets.

For more risk-oriented traders, future markets may hold ample opportunity. Since the reactions to the news are fairly significant, those who accurately predict the outcomes may capitalise on the fairly large jumps and drops that may occur depending on how the talks go. However, until talks reach a conclusion, only uncertainty is certain. It’s clear that global markets are eagerly awaiting a resolution to the situation and a return to a more regular global economic climate. Unfortunately, decisions happen suddenly, and there’s little indication of when and how important events will play out.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.