Equity values surge following U.S.-China consensus to temporarily lower import taxes.
Latest Update: May 12, 2025 at 9:31 PM CDT
Stock markets experienced a significant boost on Monday, following the U.S. and China's agreement on a temporary truce in the triple-digit tariffs that had stalled much of the trade between the two nations.
The Dow Jones Industrial Average experienced a surge of over 1,000 points, climbing approximately 2.8%, while the S&P 500 index jumped 3.3%.
This market rally occurred following the countries' decision to slash the financially crippling tariffs for a 90-day period following talks in Geneva over the weekend. The tax on Chinese imports to the U.S. will plummet from 145% to 30%, and the tariff that China imposes on U.S. goods will drop from 125% to 10%.
Many businesses heavily dependent on imports had stopped deliveries to evade paying the triple-digit tariff. During the previous week, cargo traffic at the Port of Los Angeles had dwindled by over a third compared to the previous year, suggesting potential supply shortages in the near future.
Although the remaining tariffs are still significantly higher than before President Trump initiated the trade war, they represent a welcomed improvement.
Economic Consequences of Slightly Lower Tariffs
Even though the tariffs have been reduced temporarily, experts at the Yale Budget Lab anticipate that the U.S. will still confront higher inflation and slower economic growth than it would have prior to the trade war. Nevertheless, the damage is less severe compared to maintaining the higher tariffs. Surprisingly, the decrease in tariffs brings in more revenue for the government, as more importers will now shoulder the tax that was previously chokeholding imports from China.
"One of the drawbacks of tariffs as a revenue-generating strategy is that it discourages imports, which directly clashes with the objective of raising government revenues," explains economist Ernie Tedeschi of the Budget Lab. Because the tariff relief is time-limited while negotiations continue, there remains significant uncertainty about the future trade landscape in three months.
"I was taken aback by how much the U.S. cut the tariffs in connection with this agreement," Tedeschi adds. "This reduction in tariffs has created the possibility that tariffs with China could be lower than both markets and businesses had predicted."
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Enrichment Insights:- Continued Inflationary Pressure: While the lower tariffs ease the financial strain on consumers, inflationary pressures persist, albeit reduced.- Economic Growth: The temporary reduction in tariffs provides relief to businesses and consumers, potentially boosting economic growth by encouraging investment and consumption.- Trade Relations: The agreement reflects an improvement in U.S.-China trade relations, fostering a more favorable trade environment for revived economic growth.- Mitigation of Trade War Effects: Direct trade between the U.S. and China could benefit from reduced tariffs, although indirect exports might not see immediate improvement.
The temporary tariff reduction, as anticipated by the Yale Budget Lab, may slow the rate of economic growth less severely than if the higher tariffs had been maintained. However, inflationary pressure remains a concern for the U.S. economy.
With the decreased tariffs, the government is expected to receive more revenue as more importers will now comply with the tax, thereby encouraging more investing and stock-market growth. Ernie Tedeschi, an economist at the Budget Lab, notes that the reduction in tariffs could potentially lower tariffs with China below the markets and businesses' expectations.
