US and China to slash tariffs for 90 days after talks yielded 'substantial progress'

The trade agreement between the US and China marks a dramatic volte-face after weeks of simmering tensions. But don’t expect an equally breathtaking about turn from US consumers. Amid the uncertainty about economic growth, job cuts and inflation, it will take time for shoppers to regain their confidence. Even if they do, there are some reasons why the pain for retailers and consumer goods groups may be prolonged.

Monday’s announcement means the combined 145% US levies on most Chinese imports will decline to 30% by May 14. The new, lower rate is still unhelpful, but it’s a lot better than the threatened levy, which would have made some products, including toys and Christmas decorations, simply uneconomic to sell.

Retailers, suppliers and consumers will still have to share some pain. For Americans, that means some level of price inflation on the mostly non-food items that come from China. Take clothing, for example. At 145%, retail prices for the mid-market knitwear and coats that are typically manufactured in China may have had to increase by 20% to 30%. Price hikes should now be less.

The accord should encourage retailers to restart paused orders, or ship goods they’ve been holding in China in anticipation that a deal would be reached. Even before Monday’s announcement there were signs that trade had begun to pick up; that should mean fewer gaps on shelves this holiday season.

But the disruption will take time to work its way out of the system. Take toys. Many should have been manufactured by now. Even if production restarts immediately, Santa might not be bringing some items. The bigger risk is a tsunami of goods arriving in mid-market department stores when they’re no longer welcome; heavier-weight spring jackets and knitwear, for example, after temperatures have already risen as summer approaches.

This is exactly what happened in 2022, when supply chain snarl ups in the approach to the 2021 holiday season led to loungewear and small appliances landing six months later, when consumers had already moved on. This led to a mountain of inventory that stores were forced to discount. If the same happens now, it will test the resolve of retailers to resist markdowns.

It doesn’t help that consumers have rushed to purchase over the past few months in anticipation of higher prices. Cars were the favorite target of those seeking to beat the hikes. But Americans also shopped for home furnishings, electronics, clothing and footwear. Big, expensive, purchases like a car or sofa won’t be repeated, and may sap the funds available for other types of outlay.

When it comes to clothing, shoppers typically spend to a budget. If they’ve bought sneakers or a patchwork quilted jacket already, many won’t buy again.

Some US consumers may be reluctant to splurge for a different reason: they still feel nervous about a recession. Across the income spectrum, it’s clear that many are cutting back. The most pressed are already acting as if the worst is here: for example, reusing cooking oil one more time.

But the more affluent are feeling the pinch, too. McDonald’s Corp. said the pressure from inflation and interest rates that’s been hurting poorer Americans for the past few years was now “spilling over” into middle-income customers. On Friday, for example, Sweetgreen Inc. cut its annual guidance; clearly $16 salads are off the menu. Chief Financial Officer Mitch Reback said same-store sales were positive in March, but turned negative in April “coinciding with the tariff announcements.” He told Bloomberg News that April has traditionally been a month when the chain’s performance picks up as temperatures rise; “this is the first time we haven’t seen that lift.”

US luxury goods demand has also weakened, according to Citigroup Inc.’s monthly credit card data, turning negative in February, March and April after recovering in December and January. While the S&P 500 has bounced back from its so-called “Liberation Day” lows, we splurge on a Gucci handbag or Rolex watch when we feel wealthy and upbeat about life. After the dislocation, it will take time for any feel-good factor to return.

Meanwhile, the accord with China is only temporary, and let’s not forget that levies on other important manufacturing nations, such as Vietnam, are only paused rather than being completely off the table. An escalation of the trade war may have been averted. Not so the tariff whiplash for consumers.

Source: Bloomberg Europe

Markets Respond Strongly to U.S.–China Tariff Agreement

Surging Stock Indexes and Currency Strength Reflect Investor Relief

Analyst Reactions Show Optimism Tempered by Structural Doubts

A Temporary Pause in Conflict, Not a Final Resolution

Source: Reuters

U.S. President Donald Trump said he will push to cut prescription drug prices by 59%, but gave no further details about his plan to lower medicine costs ahead of a health-related event at the White House later on Monday.

On Sunday, Trump said he would sign an executive order to pursue what is known as "most favored nation" pricing or international reference pricing. The Republican president previously tried to implement such a program during his first term in office but was blocked by the courts.

"Drug prices to be cut by 59%" Trump wrote on Monday in capital letters on his social media platform as global pharma shares traded lower. Shares of U.S. drugmakers fell between 2% and 3% following his weekend comments before Trump's latest post Monday morning.

Trump is scheduled to hold an event at the White House with U.S. Health Secretary Robert F. Kennedy Jr. at 9:30 a.m. (1330 GMT)

Drugmakers have been expecting an order focusing on the federal Medicare health insurance program for people aged 65 and older and the disabled, according to four drug industry lobbyists who said they had been briefed by the White House.

Reuters previously reported such a policy was under consideration.

The United States pays the highest prices for prescription drugs, often nearly three times more than other developed nations. Trump has pledged to close the gap but not detailed how he will implement it.

Source: Reuters

Tariff Reductions Mark Turning Point in Prolonged Conflict

Diplomatic Language Hints at Strategic Calculations

Market Reactions Reflect Relief, But Not Euphoria

Historical Caution and Credibility Gaps Persist

Progress Without Resolution

Source: FT

China's Mounting Costs: From Export Declines to Structural Strains

The U.S. Pays a Steep Price: Agriculture, Manufacturing, and Consumers Hit

Global Fallout: The Resurgence of Regionalism and the Kindleberger Trap

A Trade War with No Victor, Only Systemic Risk

Source: Asia Times