Investing.com -- The latest U.S.-China trade deal marked a significant de-escalation in tariff tensions, leading to a positive price reaction in risk assets.
The agreement, which the broker Wolfe Research calls a “dovish surprise,” exceeded expectations and shifted the narrative away from crisis mode.
Wolfe notes that markets were right to respond with euphoria, as the deal “was a huge source of direct tariff relief” and showed that President Trump “is more willing to reverse course on his tariff agenda than seemed to be the case 6 weeks ago.”
“This de-escalation takes us out of the acute crisis / "empty shelves" phase of the US-China trade war for now, and back into a world of linear costs and headwinds,” said Tobin Marcus, head of U.S. policy and politics at Wolfe.
Despite the short-term relief, Marcus warns the tariff landscape remains volatile. The effective U.S. tariff rate on Chinese goods still stands near 40%, roughly four times higher than pre-Trump 2.0 levels.
Globally, tariffs amount to a $339 billion annual tax hike, with long-term projections reaching $2.3 trillion over ten years. Marcus cautions that the drag on growth from current tariff levels is “close to 2x the stimulus we expect from the tax bill later this summer.”’
“And these tariffs will still add significant upward pressure on inflation over the medium term, pushing out rate cuts,” he added.
Sectoral and bilateral risks also remain. Tariffs on semiconductors and pharmaceuticals could become meaningful depending on their structure. And while there’s a chance for further cuts based on progress with China on fentanyl, President Trump has also signaled the possibility of tariff hikes elsewhere.
Wolfe flags that reciprocal tariffs paused at 10% could “rise again on many countries…within weeks through take-it-or-leave it offers.”
With 1,347 days left in Trump’s term, Wolfe advises investors to prepare for more swings. “We’re 113 days into Trump 2.0, with 1347 to go—there will be plenty more ups and downs on tariffs,” the note concludes.