On May 12, 2025, the world’s two largest economies hit pause on what had become a relentless tariff tug-of-war. After months of quiet diplomacy and behind-the-scenes haggling, the United States and China signed a trade agreement that doesn’t claim to solve all the underlying friction—but it does manage to lower the temperature, at least for now. The deal, which includes sweeping tariff rollbacks and some surprising non-tariff commitments, represents a calculated detente: temporary, tactical, and possibly transformative.

But calling this just a “trade deal” is missing the forest for the trees. It’s a window into how geopolitical rivals are trying to balance economic interdependence with strategic competition. It’s also a reminder that trade policy today is as much about supply chains and semiconductors as it is about soybeans and steel.

As with any major economic agreement, the devil is in the details—and there are many. This post breaks down what was agreed, what it signals, and what it leaves hanging in the balance.

The Official Text of the Deal

As of now, the full text of the May 12, 2025, U.S.-China trade agreement has not been officially released to the public. However, official summaries and joint statements have been provided by both governments.

• U.S. Perspective: The White House issued a Joint Statement on the U.S.-China Economic and Trade Meeting in Geneva, outlining the key points of the agreement.  [from The White House]
• Chinese Perspective: China’s State Council Information Office released a white paper titled “China’s Position on Some Issues Concerning China-US Economic and Trade Relations”, which provides insights into China’s stance and interpretations of the trade discussions.  [from State Council Information Office]

 

A Quick Overview of What Changed

The centerpiece of the deal is a mutual dialing down of tariffs. For the U.S., that means dropping a range of China tariffs from eye-watering levels of 145% down to a still-hefty-but more manageable-30% across a broad swath of imports. Meanwhile, China has lowered its own tariffs from 125% to 10% on a long list of U.S. goods.

While that sounds like a big shift—and it is—it’s worth remembering that average U.S. tariffs on Chinese goods are still hovering around 39%, compared to a pre-conflict average of 11% .  So, in many ways, this is a truce, not a peace treaty.

What makes this deal notable isn’t just the tariff relief—it’s where the exceptions lie and what they tell us about the strategic priorities of both countries.

 

What the U.S. Gave (and What It Didn’t)

Where Tariffs Fell the Hardest

Treasury Secretary Scott Bessent took a red pen to a range of tariffs that had been suffocating key consumer and industrial imports. Among the biggest beneficiaries:

• Consumer tech: Smartphones, laptops, and flat-screen TVs are back to being more affordable for American buyers. Companies like Apple, Dell, and Samsung—which rely heavily on China-based manufacturing—stand to benefit.
• Apparel and footwear: Tariff relief here directly impacts retailers and consumers alike. Think Nike, Under Armour, and major department store chains that source large volumes from China.
• Home goods and furniture: From sofas to kitchen appliances, the reduced costs will trickle down through housing-related sectors.
• Industrial machinery: American manufacturers that rely on imported components—from CNC machines to engine parts—can breathe a little easier.

Where the Line Was Drawn

But not everything got a reprieve. Some categories remain politically radioactive:

• Automobiles and auto parts: The U.S. kept the guardrails up here, wary of opening the floodgates to foreign EVs at a time when it’s trying to boost domestic production under IRA tax credits.
• Steel and aluminum: No change here. The U.S. has long treated these as national security priorities, and trade protections remain firmly in place.
• Pharmaceuticals and fentanyl precursors: With bipartisan concern over opioid-related imports, the 20% tariff on fentanyl-linked products remains intact.

These carve-outs reflect not just trade priorities but political ones—automotive jobs, national defense manufacturing, and public health crises all remain third rails in domestic politics.

 

What China Brought to the Table

China, for its part, made some meaningful moves. Lowering tariffs from 125% to 10% across multiple sectors isn’t a token gesture—it opens up valuable market access for U.S. exporters who’ve been boxed out in recent years. The biggest wins?

• Agriculture: U.S. farmers—especially soybean, corn, and wheat producers—stand to benefit. China remains a top customer, and U.S. agricultural exports have suffered under the weight of retaliatory tariffs.
• Meat and dairy: Beef, pork, and dairy goods are back on the menu in China, where shifting diets have created new demand for protein-rich imports.
• Energy exports: China has rolled back restrictions on U.S. LNG and crude oil imports—an opening that could be significant, especially as China looks to diversify energy supply lines amid global tensions.
• Consumer and industrial goods: From electronics to apparel and even certain pharmaceuticals, U.S. products are now more competitively priced in the Chinese market.
• Perhaps most notably, China agreed to drop some restrictions on U.S.-made medical equipment and diagnostic tools—a nod to the increasing importance of biotech diplomacy in the post-pandemic world.

The Unreliable Entity List

China’s UEL, introduced in 2019 by the Ministry of Commerce, targets foreign entities deemed to harm Chinese national security, interests, or companies through actions like trade restrictions or sanctions. Entities on the list face penalties such as restricted access to Chinese markets, suppliers, or investments. The list has been used as a retaliatory tool in trade disputes, particularly with the U.S.

Recent Development

As part of the U.S.-China trade agreement, it was reported by an independent news source (not yet widely reported) that China removed 17 U.S. firms from its UEL. This move is seen as a de-escalation in the ongoing trade tensions between the two nations, which have been marked by tit-for-tat tariffs and restrictions. These firms were added to the list since April 2, 2025, and included companies like Skydio Inc., BRINC Drones, Inc., Red Six Solutions, SYNEXXUS, Inc., Firestorm Labs, Inc., and Kratos, primarily defense-related or technology firms. [See section on Limitations and Verification below]

Specifics of the 17 U.S. Firms

These companies are primarily in defense, aerospace, or drone technology industries sensitive to U.S.-China geopolitical tensions. The other 11 firms were not explicitly named in available sources, but earlier additions to the UEL included companies like PVH and Illumina, suggesting a mix of industries may be involved.

Implications

• For U.S. Firms: The suspension restores access to Chinese markets and suppliers, critical for firms reliant on China’s supply chain or consumer base. This is particularly significant for tech and defense firms facing restrictions.
• For U.S.-China Relations: The move indicates a willingness to negotiate, potentially leading to further tariff reductions or trade agreements. However, analysts note China’s strategy of standing firm and using nontariff barriers (e.g., halting U.S. natural gas imports) suggests cautious optimism.
• Global Trade: The de-escalation could stabilize markets, as seen in stock market rallies following tariff pauses, but uncertainty remains due to the volatile U.S.-China trade dynamic. [Source: [Bloomberg]

Limitations and Verification

• Even though it has been reported by an independent , the various mainline news agencies, like Reuters, AP, Wall Street Journal and CNN haven’t reported it.
• The mainline news agencies focused on broader tariff negotiations and don’t explicitly confirm the UEL suspension, though they support the context of trade de-escalation.
• Official statements from China’s Ministry of Commerce or U.S. authorities weren’t cited by the independent source, so further verification from US Government or China’s Ministry of Commerce is needed before this I’ll buy this as a fact.

However, if this does prove to be accurate, it is yet another positive step by China to ease trade tensions.

 

More Than Tariffs: What Didn’t Make the Headlines

If the tariff cuts were the headline grabbers, the real long-term significance of the deal may lie in the quieter concessions—especially the ones that didn’t make splashy news alerts but could shape global supply chains for years to come.

China’s Strategic Exclusions and the High-Tech Firewall

Despite lowering tariffs across a broad range of American goods, China held firm in one area: advanced technology imports. That means anything tied to semiconductors, aerospace, AI, and quantum computing is still heavily regulated—if not outright blocked. Chinese regulators continue to wield a complex web of export licenses, dual-use technology rules, and regulatory red tape to manage

What’s behind this? Simple: technological self-sufficiency.

China’s tech policy isn’t just about economic competitiveness. It’s about national security and global positioning. Programs like “Made in China 2025” and the broader dual-circulation strategy have one goal: reduce dependence on foreign tech and build a resilient domestic supply chain.

This isn’t a new playbook either. For years, China has leaned on a mix of regulatory favoritism and industrial subsidies to shield homegrown players from foreign dominance—especially in strategic sectors like 5G, robotics, and biopharma.

China’s Use of Cyber Crime

And then there’s cyber. The U.S. has long accused China of an unofficial policy that could be summed up as “Rob, Replicate, Replace.”

In other words: obtain intellectual property (sometimes via cyber espionage), reverse engineer it, and then flood the market with cheaper alternatives. Cases like Su Bin and the repeated targeting of U.S. defense contractors by state-backed hackers have only added fuel to the fire.

The Case of Su Bin

Su Bin wasn’t some high-level operative or shadowy intelligence agent. He was, on paper, a businessman—operating out of a small aviation firm in Canada. But between 2008 and 2014, he quietly orchestrated one of the most damaging cyber espionage campaigns ever uncovered against the U.S. defense industry.

Working in concert with two Chinese military-affiliated hackers, Su helped identify vulnerable defense contractors—targeting firms like Boeing, which had access to highly sensitive design data. Once the targets were chosen, the hackers would infiltrate their systems and exfiltrate reams of proprietary information.

Their crown jewels? Detailed schematics and engineering data for three of the most advanced U.S. military aircraft:

• The C-17 Globemaster III, a strategic airlifter used to deploy troops and heavy cargo around the world
• The F-22 Raptor, a stealth air superiority fighter critical to U.S. air dominance
• The F-35 Joint Strike Fighter, the most expensive weapons system in Pentagon history and the backbone of future air power for the U.S. and its allies

Su Bin’s role wasn’t just logistical. He reportedly translated technical documents, assessed the strategic value of stolen data, and helped ensure it could be leveraged by Chinese aerospace firms—essentially acting as both middleman and intelligence analyst.

In 2016, Su pled guilty in U.S. federal court and was sentenced to 46 months in prison—a surprisingly light sentence, given the scope of the operation. But the damage was already done.

Shanzhai Culture:  The Copycat Economy With Real Consequences

While headlines often focus on military espionage or semiconductor theft, the imitation game isn’t confined to defense contractors. In the consumer tech world, China’s so-called “shanzhai” culture has become its own economic phenomenon—a parallel innovation track that fast-tracks product development by borrowing liberally (and often illegally) from Western designs.

The term “shanzhai,” which loosely translates to “mountain fortress” or “imitation,” originally referred to counterfeit mobile phones. In the early 2000s, small manufacturers in places like Shenzhen began producing knockoff versions of brand-name phones—often copying everything from external design to user interface. These phones looked like Nokias, Samsungs, and eventually iPhones—but were sold at a fraction of the price.

And the market wasn’t small. At its peak, the shanzhai phone industry churned out hundreds of millions of units annually—many of which were exported to Southeast Asia, Africa, and South America. Some even made their way back into Western markets through gray- and black-market channels.

What started as bootleg hardware evolved into a shadow R&D system. Chinese firms would tear down the latest Western products, reverse-engineer them, swap out expensive components for cheaper alternatives, and flood the market with ultra-low-cost versions. In some cases, these copies were crude. But over time, many became functionally competitive, with impressive battery life, dual SIM slots, and localized software tweaks that appealed to regional buyers.

Eventually, some shanzhai firms graduated from imitation to legitimate competition. Companies like Xiaomi and OnePlus began with reputations for mimicking Apple and Samsung aesthetics, but have since carved out strong global identities. Even so, the culture of reverse engineering and “fast follow” product cycles remains deeply embedded in China’s tech manufacturing base.  Utilizing the Rob, Replicate, and Replace strategy, a fast follower is a company that doesn’t aim to be the first to market with a new product or idea. Instead, they study what works (and what doesn’t), copy it quickly, and launch a competitive alternative at a lower price and faster pace.

The cost to foreign innovators? Massive.

According to estimates cited by the U.S. Trade Representative, annual losses from intellectual property theft by Chinese entities fall between $225 billion and $600 billion —a staggering range that includes not just pirated movies or software, but trade secrets, proprietary algorithms, hardware schematics, and Intellectual Property.

For U.S. firms, this isn’t just a cost of doing business—it’s an existential risk. Companies investing billions in R&D now have to factor in the possibility that their innovations may be cloned and commoditized overseas before they’ve recouped their R&D and marketing costs, let alone even hit profitability.

What makes it harder is enforcement. Chinese authorities have historically shown limited willingness to crack down on domestic firms profiting from this model—especially when those firms support job creation, tech advancement, or strategic national goals.

And as China climbs the value chain—from cheap knockoffs to cutting-edge EVs, AI devices, and 5G hardware—the stakes are only growing.

For policymakers, this isn’t just a trade dispute. It’s a fundamental question of how innovation is protected—or eroded—in a global economy where digital blueprints are just a few keystrokes away from being robbed, replicated, and replaced.

 

A Surprising Twist: Fentanyl Joins the Trade Conversation

In a rare and unexpected move, China sent a senior Ministry of Public Security official to the negotiating table. That may not sound significant—until you consider the context.

Fentanyl, and the precursors used to make it, have become a flashpoint in U.S.-China relations. Many of these chemicals originate in China before being shipped to cartels in Mexico and ultimately making their way into American communities.

So when U.S. Treasury Secretary Scott Bessent noted that the “upside surprise” of the deal was China’s engagement on fentanyl, it wasn’t just diplomatic fluff—it was a real signal of potential cooperation and a symbol of China’s willingness to work with the US on a meaningful level.

While the agreement didn’t lock in a formal anti-fentanyl pact, the presence of a top Chinese law enforcement official signals a tactical willingness to collaborate. That matters.

Not just because it might help slow the deadly opioid crisis in the US—but because it shows the two nations can tie public health and economic diplomacy together in ways that open new paths for engagement.

In other words, this wasn’t just a trade agreement—it was a subtle recalibration of how the U.S. and China deal with each other across a growing number of fronts.  A very smart play by China to control the narrative of the negotiation and one our government didn’t expect.

 

Behind the Curtain: The Bigger Play in Tech Trade

Remember from earlier, China didn’t concede its hold over certain critical technologies and resources.

As the U.S. continues to tighten export controls—especially on high-end chips, AI models, and quantum hardware—China is playing defense and offense at the same time.

On the defensive side, it’s stockpiling tech talent and doubling down on domestic innovation. On the offensive? It’s leveraging control over critical materials like rare earths, gallium, and germanium to signal its ability to disrupt global supply chains when needed.

At the same time, Beijing is doubling down on its industrial goals by curbing imports in high-tech fields.

Strategic Import Curbing: China’s Silent Industrial Policy in Action

When China restricts imports in high-tech sectors like telecom, aerospace, and advanced semiconductors, it’s not just shielding its economy—it’s executing a long-term, strategic blueprint designed to reshape the global power balance in innovation.

This isn’t about tariffs on T-shirts or toys. It’s about the intentional construction of techno-sovereignty—a future in which China doesn’t just participate in global tech supply chains, but controls and defines them.

Their motives:

1. Protecting Domestic Champions (Huawei, SMIC, AVIC)

By keeping foreign competitors out—or making market access contingent on local partnerships—China ensures its national champions have room to scale without being outpaced by global incumbents.

• Huawei was already a telecom leader before U.S. sanctions, but the barriers on foreign 5G gear have helped lock in its dominance at home.
• SMIC (Semiconductor Manufacturing International Corporation), while still technologically behind TSMC and Intel, benefits from forced substitution—capturing chip orders that might otherwise go overseas.
• AVIC, China’s state-backed aerospace group, has been aggressively developing indigenous aircraft like the C919, designed as a domestic alternative to Boeing and Airbus. Limiting imports supports its ascendancy.

This is classic import substitution industrialization, but tailored for the digital age: protect, scale, iterate—and eventually export.

2. Mitigating Surveillance and IP Risk

There’s a defensive logic too. By curbing reliance on foreign tech, China reduces its exposure to:

• Embedded surveillance tools in imported software or hardware
• Backdoors in networking equipment from U.S. or allied firms
• Forced transparency via trade regulations or foreign audits

The Edward Snowden revelations, ongoing cyber skirmishes, and escalating data localization debates have all convinced Beijing that control over digital infrastructure is national security. If data is the new oil, China doesn’t want its pipelines built in California.

Limiting imports in sectors where data, code, or algorithms are embedded is a way to firewall against foreign surveillance while giving domestic alternatives space to grow.

3. Creating Long-Term Leverage in Trade Talks

This is the quiet genius of China’s strategy: by restricting key tech imports today, Beijing is manufacturing future leverage.

• It gives China the power to say, “We don’t need your chips anymore,” in the next round of negotiations.
• It keeps market access as a negotiating chip, to be offered selectively in return for concessions on tariffs, export controls, or investment rules.
• It allows China to use access to its vast internal market as a carrot for foreign firms—but only if they play by local rules, such as technology transfers or joint ventures.

In this sense, import curbs aren’t purely protectionist—they’re geopolitical leverage tools in a longer game where market access becomes a bargaining asset, not a default condition.

The subtext here? The U.S. and China aren’t just trading goods. They’re trading blows in a high-stakes chess match over who controls the technologies that shape the future.  The key question is, can the US keep up or even surpass them in this game?  That remains to be seen but if the tariff gamble works, we certainly have a chance to.

 

Critical Minerals and Quiet Concessions: The Real Game Changer?

Another overlooked but impactful part of the deal was China’s decision to suspend certain export restrictions on critical minerals—specifically gallium, germanium, high performance magnets, and rare earth elements. These aren’t headline-grabbing commodities, but in tech and defense manufacturing, they’re essential.

Gallium is a core ingredient in semiconductors and radar systems. Germanium plays a key role in fiber optics and solar panels. Rare earth elements are used in everything from EV motors to missile guidance systems. In short, these materials are the nuts and bolts of modern tech—and China controls over 70% of global output.

But let’s drill down on one particularly crucial application: magnets.

Magnets: The Unsung Heroes of the EV Revolution

In the world of electric vehicles, neodymium-iron-boron (NdFeB) magnets are indispensable. These high-strength, permanent magnets are used in the electric motors that drive modern EVs, enabling more power in a smaller, lighter package.

Companies like Tesla rely heavily on these rare earth magnets for their high-efficiency traction motors. Without them, EVs would be bulkier, less efficient, and more expensive.

While Tesla has made headlines for experimenting with rare-earth-free motors, most of the EV industry—including GM, Toyota, and BYD—remains deeply reliant on magnetized rare earths, especially neodymium, dysprosium, and terbium.

And here’s the rub: China controls over 90% of global rare earth magnet production.

So when China imposed new export licensing requirements on rare earths in 2023—framed as a “national security measure”—it sent shockwaves through the EV supply chain. Automakers scrambled to secure long-term contracts. Defense contractors voiced alarm. And rare earth prices spiked.

That’s what makes this recent concession so significant: in suspending its export controls on rare earth magnets, China isn’t just unblocking supply—it’s easing geopolitical pressure on industries that can’t pivot quickly.

For the U.S., this move reduces near-term risk in two highly strategic areas:

1. Clean tech scale-up (EVs, wind turbines, and batteries)
2. Military modernization (advanced aircraft, smart munitions, and naval systems)

But it’s likely a strategic lever, temporarily released to keep negotiations moving. But make no mistake: this lever can be pulled again if talks falter.

The U.S., for its part, viewed this concession as a trust-building step, especially as Western governments accelerate efforts to build alternative mineral supply chains through domestic mining and partnerships in Latin America and Africa.

China’s message here is subtle, but clear: minerals are the new oil, and whoever controls the faucet, controls the pressure in global trade talks.

 

The Framework for What Comes Next: From Ceasefire to Structure

If there’s one element of this deal that could outlast the tariff headlines, it’s the framework it establishes for continued economic dialogue.

This wasn’t just a transactional document. It created an institutional setup for ongoing negotiations, aimed at deeper structural issues discussed earlier.

Although no specifics are available yet, below are potentially some key components to the agreement based upon previous trade agreements.

Potential Key Components of a New Framework

1. Bilateral Oversight Committee (BOC)

The centerpiece of this structure could be the creation of a Bilateral Oversight Committee, made up of senior trade and economic officials from both sides. This group would meet quarterly—alternating between Washington and Beijing—with emergency convening powers if tensions escalate. The responsibilities of the BOC include:

• Monitoring compliance with agreed tariff schedules and non-tariff commitments.
• Investigating alleged violations or delays in implementation.
• Coordinating sector-specific subcommittees, such as those focused on agriculture, pharmaceuticals, energy, or high-tech exports.
• Providing advance notice of proposed regulatory changes that could affect bilateral trade.

While not yet written, the structure mirrors dispute resolution bodies used in the WTO and earlier frameworks like the U.S.–Mexico NAFTA review panels.

2. Working Groups

Beneath the Bilateral Oversight Committee, the framework could create five issue-specific working groups:

	Working Group                                Focus Area
Technology & Innovation		Export controls, AI, chips, quantum computing, data governance
Agriculture & Food Security		Market access, SPS (sanitary/phytosanitary) regulations, food import safety
Pharmaceuticals & Public Health		Supply chain transparency, fentanyl precursors, joint regulatory reviews
Energy & Climate Trade		LNG exports, clean tech cooperation, carbon border adjustments
Intellectual Property & Industrial Policy		IP enforcement, forced tech transfers, SOE subsidies

Each group would be empowered to make technical recommendations to the BOC and hold regular private consultations with industry representatives. For example, the Technology Working Group could facilitate limited dialogue on the scope of AI export restrictions and how to prevent military accidents—essential in light of ongoing export bans on NVIDIA GPUs and ASML’s lithography tools.

 

3. Early-Warning Mechanism

One novel feature might be a proposed Early-Warning Mechanism (EWM)—an alert system designed to flag trade disruptions or aggressive policy changes before they spiral into retaliation. This is especially critical in areas prone to friction, like semiconductor export controls or national security tariffs.

Key inputs to this type of system could include:

• Customs delay reports (e.g., container detentions or hold-ups at ports)
• Sudden regulatory changes affecting foreign firms (e.g., cybersecurity audits or unexpected inspections)
• Market access restrictions based on national security designations (such as the U.S. Entity List or China’s Unreliable Entities List)
• Volatility in trade-related commodities (rare earths, energy, etc.)

Think of this as a real-time data-sharing hotline to reduce ambiguity and give each side a chance to de-escalate.

Why This Matters Structurally

Historically, U.S.–China trade talks have been episodic—intense bursts of negotiation followed by long periods of stagnation or unilateral action. The 2020 “Phase One” agreement lacked a robust enforcement or monitoring mechanism. As a result, when China missed its purchase targets by over 40%, the U.S. had no structured pathway to resolve the dispute short of restarting a tariff escalation cycle.

In contrast, any successful framework should build a permanent structure by creating consistent forums and standardized agendas for addressing disputes, which in turn should reduce reliance on personal diplomacy or crisis-level intervention.

Implications for Business and Markets

Predictability (Even if Fragile)

For multinational corporations—especially those managing cross-border supply chains—this type of framework offers a measure of regulatory foresight. For example:

• U.S. agri-exporters can better time production cycles if they’re assured of market access for a full quarter.
• Semiconductor firms can prepare risk models if there’s advance notice of export restrictions.
• Pharmaceutical companies get clarity on inspection protocols, easing cross-border compliance burdens.

Policy Certainty for Investors

Markets react not just to fundamentals, but to policy signals. The existence of an oversight body, with scheduled meetings and published agendas, would add an element of policy certainty. It reduces the likelihood of:

• Sudden tariff snapbacks
• Capital flight due to regulatory uncertainty
• Investment freezes in sectors vulnerable to trade shocks

Expectations matter. And with institutionalized dialogue, firms can begin pricing in continuity of government regulation over trade, rather than abrupt confrontations with trading partners.

 

Inflation, Markets, and the Economic Domino Effect

The ink had barely dried on the agreement before financial markets reacted. In the hours following the announcement

• The S&P 500 climbed 3.3%
• The Dow Jones rose 2.8%
• The Nasdaq jumped a full 4.4%

Investors had been bracing for prolonged uncertainty. What they got instead was clarity—however short-term it might be—and they responded accordingly. Capital rotated back into equities, especially in sectors tied to global trade and manufacturing.`

But this wasn’t just a “stocks go up” story. It was also a moment of reflection on inflationary dynamics.

Why? Because we have been told by Federal Reserve Chairman Powell that trade tariffs aren’t just taxes on foreign goods—they’re often passed directly onto consumers and producers, causing inflation. And with inflation already a sore point in both countries, tariff relief could act as mental relief to those who believe the Fed is correct.

But, here’s the nuance: while the Consumer Price Index (CPI) has remained relatively tame, we won’t really know until we see the Producer Price Index (PPI).  The PPI is a leader as inflation in industrial inputs hits them first and they then eventually pass those along to the consumer.  If we see that inflation is rising at the producer level, it could mean that consumers will see it next – unless this easing of tariffs after only a few weeks is enough to keep producer inflation under control – there is no way to know for sure what will happen since we are in uncharted territory.

[UPDATE:  I’ve been working on this article since the news broke on Monday of the agreement.  When I wrote the above paragraph, the PPI had not been released.  This morning, we got the PPI, and it showed a negative 0.5% drop in inflation at the producer level.  The BLS also revised the previous month downward by 0.1%.   It all sounds great, but it was impacted significantly by declining margins.  What does that mean? Instead of passing along the cost increases of tariffs, corporations were eating the cost instead of raising prices.  That is not a long-term strategy as corporate CEO’s have shareholders to appease and lower earnings due to declining margins are not something they would tolerate for more than a couple of months.  So, even though the PPI went down, it went down for a reason to question whether tariffs are inflationary or not.  It will take a couple more months of data to know for sure.]

Tariffs as Deflationary not Inflationary – An Alternate View

Economists at the Federal Reserve Bank of Minneapolis, notably Javier Bianchi and Louphou Coulibaly, have explored the nuanced effects of tariffs on the economy. Their research suggests that while tariffs can lead to higher import prices, the broader economic impact may be deflationary due to demand destruction.

In their working paper, Bianchi and Coulibaly argue that tariffs can reduce aggregate demand by increasing costs for businesses and consumers, leading to decreased spending and investment. This contraction in demand can offset the initial inflationary pressure from higher import prices, potentially resulting in a net deflationary effect.

Further, their analysis indicates that the optimal monetary policy response to tariffs may involve easing rather than tightening. By lowering interest rates, central banks can counteract the negative demand effects of tariffs, supporting economic activity even if it allows for a temporary rise in inflation.

This perspective challenges the conventional view held by Fed Chair Powell that tariffs are inherently inflationary and that monetary policy should respond by tightening. Instead, it emphasizes the importance of considering the broader economic context and the potential for tariffs to suppress demand, leading to deflationary pressures.

With the release of the CPI showing falling inflation, they could potentially be right – or it could just be a coincidence and the PPI will tell a different story.

 

A Look Back at the “Phase One” Trade Deal—and Why This One’s Different

To understand what makes this deal different, it’s worth looking back at the Trump-era “Phase One” trade agreement from 2020.

That deal focused on:

• China purchasing an additional $200 billion in U.S. goods and services
• Commitments around intellectual property and forced tech transfers
• Minimal structural reform

The results? Mixed at best. By the end of 2021, China had fulfilled few of its required purchases and many of the structural changes were half-hearted or ignored altogether.

More importantly, the tariffs never went away. They simply froze in place, a reminder that a shallow deal can’t fix deep rifts.

This time, the tone is different. The deal may be short-term (just 90 days for now), but it’s built around a more pragmatic approach: bite-sized wins with a runway for deeper reform.  Will it work out?  There are lots of reasons to believe it will and they are matched by lots of reasons to believe it won’t.  Only time (and the negotiating skills of Treasury Secretary Bessent) will tell.

 

The Trade Deal’s Limitations: A Pause Button, Not a Reset

For all its promise, the U.S.-China trade agreement signed in May 2025 doesn’t pretend to be a silver bullet. In fact, its 90-day window tells you everything you need to know: this isn’t a structural shift; it’s a pause button—a way to step back from the brink, take a breath, and try to reimagine a future that isn’t locked into zero-sum logic.

But that doesn’t mean the issues went away. Here are the deal’s biggest blind spots and likely the most difficult to negotiate a settlement, as noted above:

1. High Tariffs Still Loom

Even after the tariff cuts, are higher than before this started. That means many importers—especially in sectors like steel, autos, and pharmaceuticals—are still operating under elevated cost structures.

2. No Real Movement on Intellectual Property Theft or Forced Tech Transfers

Yes, there’s a negotiation framework. But there are no enforceable commitments (yet) to protect U.S. intellectual property or eliminate forced technology transfers —issues that have been front and center for American firms doing business in China for over a decade.

For many companies, this is the elephant in the room. It’s hard to commit capital to a country where proprietary tech could be reverse-engineered or regulatory pressure used to compel “voluntary” sharing.

3. Industrial Subsidies and SOEs Go Unchecked

One of the thorniest issues—China’s state-owned enterprise model and heavy industrial subsidies were not addressed

This omission isn’t surprising. Asking China to walk back its industrial strategy is like asking the U.S. to nationalize its Fortune 500. These are deeply embedded economic philosophies, and bridging that divide will take more time.

 

Supply Chains Still on Shaky Ground

If the last few years have taught global companies anything, it’s this: supply chains built solely on efficiency aren’t resilient.

Just-in-Time Inventory: Lean and Vulnerable

For decades, Just-in-Time (JIT) inventory was gospel in U.S. industrial strategy. Popularized by Toyota and embraced by American manufacturers in the 1980s and 90s, JIT aimed to minimize inventory costs by syncing production with real-time demand. Instead of stockpiling parts or materials, companies received them “just in time” to be used—cutting storage costs, waste, and working capital needs.

On paper, it was brilliant: leaner operations, faster cash cycles, and improved efficiency.

But in practice? JIT created brittle supply chains—highly efficient, but highly sensitive to disruption.

During the COVID-19 pandemic, and later amid trade conflicts, port closures, chip shortages, and war in Ukraine, the flaws of JIT were exposed. When one supplier faltered—whether in Wuhan or Rotterdam—entire assembly lines came to a halt. What had once been a model of optimization became a case study for fragile supply chains.

That’s why today’s supply chain conversations have shifted. Companies are no longer optimizing purely for cost—they’re building resilience into their models:

• Holding “just-in-case” inventory
• Adding secondary or domestic suppliers
• Investing in digital visibility tools
• Rebuilding regional warehousing infrastructure

JIT isn’t dead—but it’s no longer dominant. In a world where geopolitical risk, shipping delays, and regulatory friction are routine, resilient supply is the new competitive advantage.

This deal might provide short-term breathing room, but the underlying strategic imperative remains: de-risking in the face of China’s leverage.

The Rise of “China + 1”

The phrase on every global supply chain strategist’s whiteboard these days is “China + 1” – a diversification strategy where companies keep one foot in China while building out production in markets like:

• Vietnam – Rising as a go-to destination for electronics and apparel
• India – Tapping its scale for smartphone and pharmaceutical production
• Mexico – Nearshoring for U.S. companies under the USMCA framework
• Malaysia, Thailand, Indonesia – Sector-specific strengths in semiconductors, automotive parts, and textiles

This isn’t just about trade policy anymore. It’s about resilience, visibility, and geopolitical flexibility in corporate operations.

 

Strategic Decoupling Is Already Underway

Despite the conciliatory tone of this agreement, the broader trend of U.S.-China strategic decoupling is well underway—and in some sectors, irreversible.

Technology

The U.S. continues to impose export restrictions on advanced semiconductors, quantum tools, and AI chips. Companies like SMIC and Huawei are essentially blacklisted from key Western tech components.

China has responded with billions in state subsidies to build a self-reliant semiconductor industry. But without access to cutting-edge tools from firms like ASML and design software from U.S. vendors, progress has limits.

Defense and Security

Both nations are drawing bright red lines around dual-use technologies—those that can be used for both commercial and military purposes. The U.S. has expanded its Entity List; China now maintains its own “unreliable entities list” and has tightened controls on strategic minerals.

Digital Governance

Even digital infrastructure is splitting. The U.S. favors open data flows and private-sector innovation. China is pushing for data localization and cyber sovereignty, where the state controls the digital ecosystem.

The result? Companies operating globally must now navigate two increasingly incompatible tech environments. For some, it’s becoming a matter of picking sides.

Political Landmines on Both Sides of the Pacific

If economics were the only driver, this agreement might have a longer shelf life. But in both Washington and Beijing, politics remain the wildcard—and someone is always plotting to get ahead.

In the U.S.: China Policy as a Bipartisan Litmus Test

It’s not often you find agreement across the aisle in Congress, but being “tough on China” is one of the few political stances that transcends party lines. This means any future extension or softening of the trade deal could face a backlash—especially if it’s seen as compromising on jobs, national security, or human rights.

For the administration, navigating this environment means threading a tight needle:

• Appeasing business leaders who want stability and access to Chinese markets
• Calming voters concerned about trade deficits and factory closures
• Fending off hard-liner critics who view any deal as “appeasement”

And if inflation ticks up again or a key manufacturing sector crashes? Expect renewed calls for tariffs, investigations, or even new legislative restrictions on outbound investment into China.

In China: Domestic Challenges Mount

Beijing isn’t negotiating from a position of unshakable strength. Beneath its assertive posture on the global stage, China is grappling with a complex mix of internal pressures that make compromise more palatable—if only behind closed doors.

Sluggish Economic Growth

China’s post-pandemic rebound has fallen short of expectations. GDP growth slowed to around 4.5% in 2024, far below the blistering 6–8% rates that once defined its rise. The IMF and World Bank have both revised future growth projections downward, citing weak domestic consumption, tepid export performance, and structural inefficiencies.

What’s driving the slowdown?

• An aging population
• Diminishing returns from infrastructure investment
• Consumer reluctance amid housing and employment anxiety

In short, China is now facing the economic realities of a mature economy—without the political flexibility often needed to address them.

Youth Unemployment Crisis

Official figures put urban youth unemployment at over 20% in 2023, though some estimates suggest the real number may be higher. Graduates from China’s expanding university system are struggling to find jobs that match their training, especially in tech and white-collar sectors.

In response, the government has:

• Pressured tech firms to hire more young workers
• Promoted “low-lying” jobs and rural relocation
• Suppressed unemployment data releases to manage public perception

This dynamic creates social volatility and undermines the long-term consumer base needed to support domestic demand.

Ongoing Real Estate Instability

The real estate sector—once the backbone of Chinese household wealth and GDP—remains deeply unstable. Major developers like Evergrande and Country Garden have defaulted or skirted collapse, dragging down confidence in property markets.

Housing sales and prices continue to decline in Tier 2 and Tier 3 cities, with unsold inventory piling up and local governments stretched thin. This isn’t just a real estate problem—it’s a financial system risk, as property collateral underpins much of the country’s banking activity.

Efforts to revive the sector through subsidies and looser credit have had limited traction, as consumers remain wary of “ghost cities” and unfinished projects.

An Increasingly Wary Private Sector

Perhaps most significantly, China’s private entrepreneurs—the very engine of its innovation and export strength—are increasingly cautious.

Years of regulatory crackdowns on tech giants, education firms, and financial services have chilled investor sentiment. High-profile takedowns (like Jack Ma’s near-disappearance) sent a clear message: economic success must not outshine political loyalty.

Foreign direct investment into China dropped sharply in 2023 and early 2024, and domestic capital formation is slowing as firms adopt a “wait-and-see” posture.

Meanwhile, private companies are struggling to secure financing compared to their state-owned counterparts—another sign that risk appetite is down and trust in the policy environment is fraying.

Taken together, these internal headwinds make Beijing’s calculus more complex. While Chinese leaders continue to project strength abroad, they’re operating under tightening economic constraints at home—which subtly shifts their incentives at the negotiating table.

 

Black Swans and Geopolitical Wildcards

Then there are the unpredictable, high-impact events that have the potential to derail the entire negotiation process, if not the global economy.  These include:

• Tensions over Taiwan: A flare-up here would almost certainly collapse diplomatic talks overnight.
• South China Sea incidents: Naval confrontations or maritime disputes could inflame nationalist sentiment and shut down trade progress.
• Third-party events: Conflicts in Ukraine, instability in North Korea, or even proxy cyberattacks could force both sides to pivot inward.
• Blame games and conspiracy triggers: As trust erodes, even unverified events—like an assassination attempt, cyberattack, or espionage accusation—could be used to justify walking away from the table.

Analyses from think tanks like the Brookings Institution and the Center for Strategic and International Studies (CSIS) describe the bilateral relationship as stabilized yet precarious, with underlying tensions that could escalate under certain dramatic circumstances, like Black Swan events

The Market’s Mood: Risk-On, But Fragile

Investors love certainty—or at least the illusion of it. The announcement of the trade agreement triggered a swift and broad “risk-on” rally, with institutional capital flowing back into equities, especially:

• Export-heavy tech firms
• Industrial manufacturers
• Consumer brands with China exposure

Hedge funds that had been sitting on the sidelines jumped in, reducing hedges and rotating into undervalued sectors. This was less about fundamentals and more about sentiment shift and the desire to not under-perform the broader market.

But here’s the thing: market rallies built on geopolitics are notoriously fragile. They depend on momentum, optimism, and trust in follow-through—all of which can unravel with a single headline or speech from Chairman Powell.

Historical precedent is instructive here. After the 2020 Phase One deal, equities surged—only to stall when China missed its purchase targets and the U.S. pivoted back to confrontation.

The current rally could follow a similar path if:

• Negotiations stall after the 90-day window
• Another round of tariffs gets threatened
• New export controls emerge on either side

For now, the market has bought into the hope story. But the risk remains: if this turns out to be a sugar high, the correction could be just as sharp as the rally.

What the Next 90 Days Could Look Like: Three Possible Paths

A change in the 60/35/5 Scenario

For readers of the prior blog post, you might recall that I gave you three scenarios for the economy based on the chances of the tariff strategy working out.  I had given a 60% chance of no recession, a 35% chance of a recession, and a 5% chance of a Black Swan event that would lead to a deep recession.   With the news of the China trade deal, I am a bit more hopeful and have increased the chance of no recession accordingly.

The New Scenario

With the ink barely dry and political nerves still frayed, the next three months will determine whether this deal is in fact a launchpad or a temporary reprieve leading to a letdown.

Here’s how the three recession scenarios might play out:

1. The “Stable Progress” Scenario (70% chance of no recession)

In this most likely path, both sides treat the current agreement as a foundation, not a finish line. Negotiators dig into thornier issues—IP, subsidies, tech flows—without torching the gains made. The oversight mechanism begins operating, and we see modest but visible progress.  Tariff relief is extended or even expanded.

Other nations also cut trade deals. Businesses begin cautiously reinvesting in China supply lines—but with one hand on the eject button, just in case. The economy strengthens with markets returning to all-time highs in due course but with volatility along the way.

2. The “Breakdown and Reversion” Scenario (25% chance of a recession)

Talks stall. Either side accuses the other of acting in bad faith. Fentanyl diplomacy falters, or tech tensions flare. New tariffs are threatened and then implemented. Supply chains seize up again. Market optimism gives way to defensiveness.  Trade deals with other nations are slow to materialize and some never get implemented.

Companies accelerate China+1 plans. Multinationals tighten capital budgets. Inflation flares, especially if commodity supply gets squeezed again.

3. The “Black Swan” Scenario (5% chance of a deep recession)

A major geopolitical or domestic shock—military, cyber, economic—causes one or both countries to walk away. Taiwan crisis. Cyberattack on critical infrastructure. Escalation over disputed territory. An election surprise. Anything that jolts the current détente off its rails.

In this outcome, markets correct sharply. Risk assets bleed. Gold, treasuries, and the dollar rally as investors seek shelter. Confidence in diplomacy collapses.

Investment Strategy

In the last couple of blog posts, I detailed our investment strategy – we used the market correction to reposition portfolios for the future.  We got everyone into a fully invested allocation – using the cash we had generated to invest in the single most important macroeconomic influence on the future of the stock market:  the expansion of data centers that will coincide with the spread of Artificial Intelligence.  You can read about those here and here.  Everything is in place for our clients to profit immensely as the growth of AI unfolds and encompasses more industries than we can imagine at the moment, I encourage you to read those posts if you haven’t.

Final Thoughts: A Deal That Buys Time, Not Certainty

The May 12 deal signals there is space for diplomacy but highlights that trade is now conditional and fragile. Resilience, not just growth, is the new competitive edge.