Analysis-China and the US to Talk Trade War Ceasefire, not Peace

China–U.S. Trade War

Economic

Summary:

China is at the epicentre of U.S. President Donald Trump's global trade war that has roiled financial markets, upended supply chains and fuelled risks of a sharp worldwide economic downturn.

China and the United States start their first major Trade War Two meeting on Saturday to pull back from what analysts describe as a lose-lose situation for their economies, without much clarity on what a win would look like for either side.

China is at the epicentre of U.S. President Donald Trump's global trade war that has roiled financial markets, upended supply chains and fuelled risks of a sharp worldwide economic downturn.

Washington wants to reduce its trade deficit with Beijing and convince China to renounce what the U.S. says is a mercantilist economic model and contribute more to global consumption, which would imply, among other things, painful domestic reforms.

Beijing resists any outside interference with its development path as it sees industrial and technological advancement as crucial to avoid the middle income trap. It wants Washington to remove tariffs, specify what it wants China to buy more of, and be treated as equals on the global stage.

The two sides seem much further apart and at greater risk of a major fallout than during their first trade war in Trump's previous term.

And as U.S. Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer meet China's economic tsar He Lifeng in Switzerland, none of these outcomes look realistic, analysts say.

The triple-digit, two-way tariffs are not the only point of tension in the weekend talks. Non-trade issues such as fentanyl, tech restrictions and geopolitics including the war in Ukraine are likely to further complicate the path to any resolution to a trade conflict that is disrupting the global economy.

Indeed, in an indication of how deeply non-tariff issues are in the mix, China is sending a top public-security official to the talks, a source familiar with the plans said.

"They're not going to resolve anything this weekend, other than just trying to determine if there's going to be a process, and what the agenda items will be," said Scott Kennedy, an expert in Chinese business affairs at the Center for Strategic and International Studies in Washington.

The best-case scenario for financial markets at this early stage would be an agreement to bring down tariffs from an excess of 100% - widely seen by markets as a virtual trade embargo - to levels that would allow products to flow each way, but still be hefty on American and Chinese businesses.

Trump, who unveiled the details of a new trade agreement between the United States and Britain, has signaled that punitive U.S. tariffs of 145% on Beijing would likely come down, and on Friday floated an alternative figure for the first time, saying on his social media platform that 80% "seems right." Even that is 20 points above the level he pledged on the campaign trail last year to levy against Chinese goods, and it was unclear how it would be received by the team from China, if it is presented by his negotiating team at all over the weekend.

"I expect Beijing will insist on receiving the same 90-day waiver on tariffs that all other countries received to create conducive conditions for negotiations," said Ryan Hass, director of the John L. Thornton China Center at the Brookings Institution, adding that breakthroughs are unlikely.

"Since the U.S. decisions to escalate tariffs were made arbitrarily, the decision to de-escalate tariffs can similarly be made arbitrarily."

Most analysts don't expect a waiver. But a tariff reduction, however small, and an agreement for follow-up talks that could eventually encompass non-trade issues like fentanyl would still be seen as a positive outcome by investors.

"If there is a temporary truce or symmetrical rollback of tariffs, that would be conducive to future potential holistic negotiation efforts," said Bo Zhengyuan, Shanghai-based partner at consultancy firm Plenum.

TEMPORARY DE-ESCALATION

While either side might be able to dress any rollbacks as an early win to their domestic audiences, Chinese factories and their workers are likely to start feeling the tariff pain in coming months, while Americans are staring at higher prices and unemployment.

And the root cause of the conflict will still be there.

The lopsided global trade environment in which most economies around the world rely too heavily on affordable and efficient Chinese production on the supply side and wealthy American consumers for demand won't be fixed by next week.

But markets for now are at least relieved that the world's leading powers have a chance to walk back from a path of escalating threats that investors feared might spill over from trade into finance and other areas.

Lynn Song, ING's chief Greater China economist, expects any de-escalation to bring back tariffs to around 60%, in line with Trump's pre-election pledges.

This would "still be high enough to bar many products with suitable alternatives," but also "a level that allows importers to buy products without substitutions with less pain," she said.

RHETORICAL POSTURING

Before the Saturday meeting, much of the back-channel preparations between China and the United States were bogged down by disputes over fentanyl, the seniority of negotiating officials, and the tone of rhetoric used by the U.S., Reuters reported on Friday.

Conflicting statements from both sides over who approached whom led to a further hardening in Beijing's public messaging, as one state newspaper warned of a "protracted struggle".

However, China last week signalled through a state media-affiliated blog that engaging in talks "does no harm at this stage" and that Beijing can "use this opportunity to observe, and even draw out the U.S.'s true intentions".

Analysts say that Beijing's attempts to portray Washington as the more anxious and pressured party give it political cover to engage in talks, as well as projecting strength domestically.

"We are not watching anymore for who blinks first, but for how either side will spin the other as having blinked first," said a Beijing-based diplomat.

Source: Reuters

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Commodity

China–U.S. Trade War

Chinese buyers bought between 400,000 and 500,000 metric tons of wheat from Australia and Canada in recent weeks, traders said, as heat threatens to damage crops in China’s agricultural heartlands.

China is the world's top wheat grower and also imports large amounts of grain when domestic supply falls short of demand.

Earlier this week, Henan province, which grows about a third of China's crop, issued a risk warning as hot, dry weather threatened the wheat growing in its fields.

Chinese buyers have purchased four or five 55,000-ton shipments of wheat from Australia for delivery in July or August and around 200,000 tons from Canada, sources at two major trading firms in Australia said. The wheat is of milling quality.

The bookings from Australia were the first made by China from the country since last year, said one of the traders.

COFCO, the state-owned Chinese firm that handles most of the country's wheat imports, did not immediately respond to a request for comment.

China has in recent years been one of the world's biggest wheat importers, buying in around 11 million tons worth $3.5 billion in 2024. Australia and Canada are typically its biggest suppliers.

But shipments slowed sharply after China reaped large wheat and corn harvests last year and have since remained low.

China delayed or redirected shipments from Australia earlier this year and imported less than a million tons of wheat in the seven months to March 31, Chinese customs data accessed through Trade Data Monitor show.

One of the sources said their company had lowered its forecast of Chinese 2025 wheat production by around 5 million tons but there was no guarantee that more purchases would follow because China has large wheat inventories.

"China is well self-sufficient in feed grains this crop year with heavy stocks," said Rod Baker, an analyst at Australian Crop Forecasters in Perth, adding that faltering economic growth in China was also depressing demand for grains.

Talk of Canadian wheat sales to China has echoed around agricultural business circles in Winnipeg, Canada's grain industry capital, according to traders. Few concrete details on the sales have emerged.

Chinese buyers would have avoided buying U.S. wheat due to tariffs and the trade war between Washington and Beijing, one trader said. China in the past has been a top destination for U.S. wheat sales.

The drop-off in Chinese imports earlier in the current 2024/25 season had contributed to subdued international wheat prices, with benchmark futures in Chicago still near a four-year low touched last July.

Along with weather risks to China's upcoming harvest, attractive prices may have lured Chinese importers back into the market as the 2025/26 season approaches, traders said.

BARLEY

Chinese importers also booked a large amount of barley, according to traders.

Some said that six panamax bulk carriers carrying around 360,000 tons of French or Ukrainian new-crop barley had been sold for delivery in July or August, with others putting the volume much higher at around 1 million tons, also for shipment this summer.

"Chinese wheat and barley import buying has been very quiet in the past year and these are the first major deals I have seen in many months," a German trader said.

Feed barley purchases with optional origin were from Ukraine or France. The deals were done at a price of around $250-$254 a tonne delivered to China, one trader said.

Source: Reuters

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Economic

China–U.S. Trade War

President Donald Trump said on Friday an 80% tariff on Chinese goods "seems right," suggesting for the first time a specific alternative to the 145% levies he has imposed on Chinese imports ahead of closely watched weekend talks between the two countries.

U.S. Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet Chinese economic tsar He Lifeng in Switzerland to discuss containing a trade war between the world's two biggest economies.

It could be the first step toward resolving a damaging conflict that has already entangled global supply chains.

Asked how the president arrived at the 80% figure, White House spokeswoman Karoline Leavitt said, "That was a number the president threw out there, and we'll see what happens this weekend."

Trump will not unilaterally bring down tariffs on China, however, she stressed.

"We need to see concessions from them as well," she said.

China is also sending a top public-security official to the talks in Geneva, a source familiar with the plans said. The development, first reported by the Wall Street Journal, is an indication of the importance of the issue of fentanyl trafficking to the talks and the wider U.S.-China relationship.

Trump cited the fentanyl scourge as the rationale for the initial imposition of punitive import taxes on goods from China, Canada and Mexico earlier this year.

China's embassy in Washington did not respond to a request for comment.

"China should open up its market to USA – would be so good for them!!! Closed markets don't work anymore!!!" Trump wrote in an all-caps social media post, opens new tab. "80% tariff on China seems right. Up to Scott B.," he added moments later.

China's foreign ministry has decried what it calls abusive and bullying economic tactics and said that China remains firmly opposed to what it calls an unsustainable approach to trade by the U.S.

Ryan Majerus, partner with the King & Spalding law firm and a former senior Commerce Department official, said the expected decline in port and trade traffic may have created some pressure to start addressing the U.S.-China trade impasse in Geneva.

"I don't see an easy off-ramp for either party," he said. "We could see a more limited agreement that lowers the tariff rates to a degree, depending on what China is willing to do."

The weekend talks come on the heels of Trump's first agreement with a major trading partner: Thursday's announcement of a pact with Britain. While that fueled some optimism in markets, it was fairly limited in scope, and a range of details still need to be hammered out.

"The U.S.-U.K. trade agreement may be better than nothing, but it is not significant enough to warrant a change to our forecast," Nancy Vanden Houten, lead U.S. economist at Oxford Economics, wrote on Friday. "While talks this weekend between U.S. and Chinese officials may yield some progress, expectations for a significant reduction in tariffs seem unwarranted."

Oxford estimates that lowering tariffs on China to 80% would bring the overall effective import tax rate from all the tariffs imposed by Trump so far to 18% from around 22% now. That would still be three times what Oxford had estimated at the start of Trump's term and far above the 2-3% average from before he returned to office.

US STOCKS MUTED

While Trump has indicated on several occasions that he expects the punitive tariff rates on China to come down, he had not until now floated a precise alternative.

Even though 80% is just around half the current rate, it remains extraordinarily high, above even the hefty 60% rate that Trump proposed while campaigning for president last year. It was not clear how it would be received by China amid what Bessent has already cast as an effective trade embargo between the two countries.

What level tariff rates settle at – and not just for China – has been a central focus for investors rattled by months of financial market volatility arising from the chaotic rollout of Trump's aggressive trade policies.

U.S. stocks, which have recouped a significant chunk of their losses since mid-February's record high, finished slightly lower for the week after a quiet session on Friday. The dollar was weaker against a basket of major trading partners' currencies.

Since taking office in January, Trump has hiked the tariffs paid by U.S. importers for goods from China to 145%, in addition to those he imposed on many Chinese goods during his first term and the duties levied by the Biden administration.

China hit back by imposing export curbs on some rare earth elements, vital for U.S. manufacturers of weapons and electronic consumer goods, and raising tariffs on U.S. goods to 125%. It also imposed extra levies on some products including soybeans and liquefied natural gas.

Trump's push on tariffs is widely seen to be elevating risks to the U.S. economy, with concerns that they will lift prices for American consumers and businesses while at the same time cutting into the demand that has so far propped up the job market.

Trump is already facing dropping approval ratings over his handling of trade as Americans brace to pay more for clothes, electronics, toys and countless other goods that emerge from Chinese factories.

China's government is seeking to mitigate closures, bankruptcies and job losses at manufacturers struggling to find viable alternatives to the U.S. market.

Representing the meeting's host, Swiss Vice President Guy Parmelin, who also serves as economic minister, emerged from separate bilateral meetings in Geneva with the U.S. and Chinese delegations with optimistic words for reporters.

"It's already a success," Parmelin said. "The two sides are talking ... If a road map can emerge and they decide to continue discussions, that will lower the tensions."

Source: Reuters

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Political

Commodity

Iran has agreed to hold a fourth round of nuclear talks with the United States on Sunday in Oman, Foreign Minister Abbas Araqchi said on Friday, adding that the negotiations were advancing.

U.S. President Donald Trump, who withdrew Washington from a 2015 deal between Tehran and world powers meant to curb its nuclear activity, has threatened to bomb Iran if no new deal is reached to resolve the long unresolved dispute.

Trump's special envoy, Steve Witkoff, plans to attend the talks in Oman, a source familiar with the matter said on Friday.

Western countries say Iran's nuclear programme, which Tehran accelerated after the U.S. walkout from the now moribund 2015 accord, is geared toward producing weapons, whereas Iran insists it is purely for civilian purposes.

"The negotiations are moving forward, and naturally, the further we go, the more consultations and reviews are needed," Araqchi said in remarks carried by Iranian state media.

"The delegations require more time to examine the issues that are raised. But what is important is that we are on a forward-moving path and gradually entering into the details."

Witkoff, in an interview with Breitbart News, said the Iranians had stated that they do not want a nuclear weapon and the United States will "take them at their word" on this point.

"If that’s how they feel, then their enrichment facilities have to be dismantled. They cannot have centrifuges. They have to downblend all of their fuel that they have there and send it to a faraway place — and they have to convert to a civil program if they want to run a civil program," he said.

The fourth round of indirect negotiations, initially scheduled for May 3 in Rome, was postponed, with mediator Oman citing "logistical reasons".

In a separate statement on Friday, Omani Foreign Minister Sayyid Badr Albusaidi said that after "coordination with both Iran and the U.S.", the fourth round of negotiations was set to take place on Sunday in Muscat.

Araqchi said his planned visit to Qatar and Saudi Arabia on Saturday was in line with "continuous consultations" with neighbouring countries to "address their concerns and mutual interests" about the nuclear issue.

Source: Reuters

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Commodity

China–U.S. Trade War

Oil rose as algorithmic traders fled short positions amid renewed optimism about trade talks between the US and China this weekend.

West Texas Intermediate climbed 1.9% to settle near $61 a barrel, the highest in over a week, as the Trump administration weighs reducing levies on China to de-escalate tensions and temper the economic pain in both countries. The rally was limited by President Donald Trump’s comments that an 80% tariff on China “seems right.”

Meanwhile, commodity trading advisers, which tend to exacerbate price swings, liquidated short positions to sit at 91% short in both WTI and Brent on Friday, compared with 100% short on May 8, according to data from Bridgeton Research Group.

Crude has tumbled from a mid-January peak on concerns the trade war will dent economic growth, while OPEC+ is reviving idled production. Measured optimism on trade negotiations has helped prices recover some ground after starting the week near the lowest since 2021. Fuel markets have also provided positive signs, with one gauge of strength in gasoline reaching the strongest in about six months.

“WTI breaking back above $60 has likely triggered short-covering from newly established positions,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Group. “Optimism around potential progress with China is also providing support.”

Still, while Trump hailed the pact with the UK as historic, specifics of the deal indicated it fell short of the “full and comprehensive” agreement he had promised. And even though Trump said negotiations with China would result in tangible progress, Beijing reiterated on Thursday its call for the US to cancel tariffs ahead of talks.

The US, meanwhile, sanctioned a third so-called teapot refinery in China — along with port terminal operators, vessels and individuals — for allegedly facilitating the trade of Iranian crude. Hebei Xinhai Chemical Group was the main target of the action.

The UK also sanctioned senior executives in an oil trading network that it says has been helping key Russian oil exports flowing. The country also plans to target more than 100 oil tankers.

Source: Bloomberg

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Cryptocurrency

Ethereum has experienced its most impressive rally in four years following the long-anticipated Pectra upgrade. This major protocol update has injected new life into the world’s second-largest cryptocurrency, reigniting investor enthusiasm and pushing ETH into a fresh upward trajectory.

The Pectra upgrade is the network’s biggest change since the Merge, enhancing staking efficiency, validator functions, and Layer 2 scalability. These technical enhancements not only bolster network performance but also reaffirm Ethereum’s commitment to overcoming past challenges and setting the stage for its next growth chapter.

ETH PRICE REPORT

After the upgrade was activated, Ethereum’s price jumped by 16%, showing a strong increase that indicates renewed confidence in the market. At the time of the rally, ETH’s price soared from earlier levels of around $1,900 to push above the $2,300 mark, increasing nearly 20% and setting off a wave of excitement across trading platforms.

Data from leading market trackers now reflects a fresh trading sentiment, with investors rushing to position themselves ahead of further gains. The boost in ETH’s price, driven by the technical revival from the upgrade, also indicates a broader shift in risk-on sentiment, as market participants see Ethereum as a key indicator of digital asset resilience in uncertain times.

LOOKING AHEAD: BROADER CRYPTO IMPLICATIONS

The Pectra upgrade not only marks a milestone for Ethereum but also carries major implications for the entire crypto ecosystem. With enhanced staking and smoother validator operations, Ethereum is now better positioned to support a new generation of decentralized applications and smart contracts.

This significant price rally, the most substantial in nearly four years, is fostering optimism about potential investments and innovative solutions emerging from the network. Industry experts now suggest that as Ethereum’s technological capabilities improve, it could lead to a revitalized wave of developments, attracting additional inflows from both retail and institutional investors.

As traders and enthusiasts continue to follow the unfolding story, the latest surge offers a glimpse into Ethereum’s transformative potential. All eyes remain on the network as it leverages heightened confidence and technical prowess to lead the crypto market into its next phase of growth.

Source: CryptoEconomy

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Bond

Economic

The cost of insuring exposure to U.S. government debt has climbed noticeably over the past month and remains stubbornly high, as jittery investors brace for a looming U.S. borrowing-limit political debate as well as overall policy uncertainty.

Spreads on U.S. credit default swaps (CDS) - market-based gauges of the risk of a sovereign default - widened to their highest since the debt ceiling crisis of 2023 in recent weeks. The size of the market and trading volumes have also increased recently, Barclays said in a note this week, in a sign that a product generally considered to be niche is garnering more investor attention.

While years ago buying protection for a U.S. default was an unpopular trade, things have changed recently because of policy uncertainty in Washington, said Greg Peters, co-chief investment officer of PGIM Fixed Income. "Now, with the debt ceiling and everything else going on, no one wants to be short that option," he said.

U.S. sovereign CDS spreads have increased not just for short-dated maturities but across the curve, with one-year and five-year spreads at their highest since May 2023, when the U.S. was on the verge of a default because of political brinkmanship over the debt ceiling.

On Friday, those spreads stood at 60 basis points and 56 basis points, respectively - a touch lower than in recent weeks but still significantly higher than in March, S&P Global Market Intelligence data showed.

The rise in the protection costs has gained momentum after April 2, when U.S. President Donald Trump announced sweeping tariffs, which in the following days sparked a sharp selloff in the Treasury market, the bedrock of the global financial system.

"What you've seen since April 2 is a real rise in that risk premium," said Peters.

After days of heavy selling, Treasuries rallied after Trump announced a 90-day tariff pause for most U.S. trading partners, a move likely prompted by the tariff-fueled selloff. Benchmark 10-year yields were last at 4.36%, about 20 basis points lower than the high they touched on April 11, the day tariffs were paused.

Still, another key measure of risk embedded in Treasury bonds, which captures the premium investors charge for policy uncertainty, has remained elevated in recent weeks, according to New York Fed data.

The U.S. government reached its statutory borrowing limit in January and began employing "extraordinary measures" to keep it from breaching the cap and risking a potential default.

Barclays analysts said in a note this week the so-called X-date, when the government will no longer be able to pay all its obligations, will likely fall in late August or early September, but that an economic slowdown could put pressure on the Treasury's cash position and pull that date forward.

Treasury Secretary Scott Bessent said earlier this week that the department was "at the warning track" in terms of exhausting remaining borrowing capacity under the federal debt ceiling, but vowed that the government would not default on its obligations.

Investors held about $3.9 billion worth of active credit insurance contracts on U.S. government debt as of May 2, Barclays said, citing data from the Depository Trust and Clearing Corporation, a financial market infrastructure company, up from $2.9 billion at the beginning of the year.

Over the past three months, credit insurance on U.S. government debt has been the 12th most-traded single-name CDS contract globally, with weekly trading averaging over $625 million, said Barclays.