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US-China: Significant dial back of trade tariffs in 90-day pause
US and China announced a sharp reduction in tariff rates by 115%. The mutual tariff revisions to 30% on Chinese goods and 10% on US goods will be imposed by 14 May. It will also lower the “de minimis” tariff rate to 54% from 120% effective from 7 May. The flat fee per item will remain at US$100 while the planned increase to US$200 from 1 Jun will be cancelled. While there remain issues that need to be addressed, including the port fees and sector-specific tariffs, the risk of a breakdown in negotiations or significant re-escalation in trade tensions would be lower now due to the establishment of a mechanism to continue discussions.
This will likely pave the way for a more durable trade agreement between US and China in 90 days. Following the Phase 1 trade deal in 2020, we think this would likely commit China to reduce its trade surplus with the US through increasing its imports from the US. It is likely that the baseline tariff rate of 10% will stay or even be raised for China. The two countries are likely to find some resolution to address the Trump administration's concerns about China's role in the fentanyl trade, potentially leading to a removal of the 20% fentanyl-related tariff, in the optimistic scenario.
With the pause, Chinese exporters are expected to resume frontloading of production and shipments to the US in the 90-day window, which would provide a near-term boost to its economic outlook. Suffice to say, we now see some upside potential to our 2025 growth forecast for China of 4.3%, although we will wait for further data and developments before making any changes. Despite the near-term reprieve, China is expected to continue its strategy to boost its domestic resilience and diversify its export markets with continued policy support in these areas.
Central Bank Outlook: We premised our Fed policy call on the impact of US trade policies leading to weaker growth (but not a US recession) with higher one-time US inflation outturns. Given that the Fed is advocating patience amidst tariff uncertainty and this is a 90-day extension, we see this as reinforcing our call for a delay in the Fed rate cuts in the later part of 2025, specifically to Sep, Oct and Dec FOMC meeting, bringing the upper bound of the Fed Funds Target Rate (FFTR) to 3.75% by end-2025. We are also keeping our view for two rate cuts in 2026, implying a lower terminal FFTR of 3.25% in 2026.
For China, considering the new stimulus measures on 7 May and the 90-day dial back in US’ tariff on Chinese imports, we think that the PBOC is likely to hold back from further easing in the near term. As such, we only expect an additional 10 bps rate cut in 4Q25 compared to our previous forecast of 20 bps cut in 2H25. Our revised forecasts for the 7-day reverse repo rate, 1Y LPR and 5Y LPR are at 1.3%, 2.9% and 3.2% respectively at end-4Q25.
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Alvin Liew
Senior Economist
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Ho Woei Chen
Economist
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