Where does China stand following the trade war truce?

The trade agreement signed between China and the US on May 12, 2025 marks a notable de-escalation in the ongoing bilateral trade tensions. While the deal has generally been interpreted as a turning point, it may be more accurately characterized as a truce, which was needed to mitigate the huge economic costs embedded in the high tariffs.Under the terms of the agreement, tariffs imposed by the US on Chinese goods were reduced from the additional 145% to 30% for a 90-day period, while China’s tariffs on US goods were cut from 125% to 10%. China will also consider easing some non-tariff barriers, including the restrictions on critical raw materials. This rollback beats previous market expectations and reflects the mutual recognition of the economic toll imposed in the very high trade tariffs imposed until now.To assess the potential implications of the truce on China, three scenarios were modeled based on different tariff outcomes during the 90-day period (Table 1 on next page), adopting the same methodology as in our earlier analysis. In the optimistic case, partial tariff removal would lead to a 20% decline in Chinese exports to the US, translating into a GDP contraction of 0.7% and employment losses between 1.5 and 2.5 million jobs. In a neutral scenario, where existing tariffs remain in place while negotiations continue, the projected export drop of 50% would reduce GDP by 1.6% and result in job losses of 4 to 6 million. A pessimistic outcome, where the trade war resumes in full, would lead to an 80% fall in exports, a 2.5% GDP contraction, and employment impacts ranging from 6 to 9 million jobs. The differences highlight the importance of the current tariff war truce.From the US perspective, the decision to de-escalate reflects concerns over the inflationary effects of tariffs and supply chain disruptions. Maintaining elevated tariffs has proven increasingly difficult amid concerns about price pressures and supply constraints. Thus, Trump administration has reassessed its approach, opting for a less costly strategy that still supports long-term diversification of supply chains and strategic autonomy but implemented in a more paced way. It also allows for potentially further reshoring and partnerships with third countries.For China, this deal reduces the pressure on manufacturing employment and on overcapacity. Some concessions, such as Fentanyl control, will be needed to exchange for lower tariffs, but they will fall short of the earlier expectation that the Trump Administration tried to fully contain China. In other words, China will have more space than originally expected to continue pursuing its long-term objectives such as promoting technology independence.In conclusion, while the May 12 agreement offers short-term relief, it does not resolve the underlying structural frictions. Rather, it allows both sides to recalibrate their strategies in the ongoing strategic competition while mitigating the short-term costs (potential stagflation for the US and deflation and job losses for China). The US will continue to make efforts to contain China, whereas China will pursue greater technology self-sufficiency and global influence. In short, markets should remain braced for volatility.