Trade talks get bumpier, but China's dark-horse status will hold firm

Business Times

2 days ago

ON MAY 12, both China and the United States took a major step forward by slashing tariffs. The US announced a sweeping cut from 145 per cent to 30 per cent on Chinese imports. The figure includes a 10 per cent 'reciprocal' tariff and 20 per cent tied to fentanyl concerns.
China responded in kind, slashing duties on US goods from 125 per cent to 10 per cent, and temporarily halting non-tariff measures that were previously imposed on US entities under its unreliable-entity list and export-control list.
Talks between the US and China continued on May 22, with both sides signalling a willingness to continue dialogue. That was a positive gesture that markets welcomed. It seems that the risk of escalating tariffs is easing between the two major superpowers, and markets are starting to breathe a little easier.
Tariff de-risking only a temporary reprieve
While recent breakthroughs have dominated headlines, the prospect of further tariff reductions appears limited in the near term. The 'reciprocal' US tariff has already been reduced to 10 per cent, a threshold previously accepted by US President Donald Trump in negotiations with allies such as the United Kingdom, and now seemingly established as a de facto floor.
On the other side, China remains steadfast on the fentanyl issue. Beijing has pushed back on Washington's framing, stating the issue as a domestic challenge for the US rather than a bilateral concern. With Beijing unwilling to soften its stance on fentanyl-related claims, the current combined tariff rate of 30 per cent could prove sticky.
The risk of a renewed tariff escalation remains on the table. Trump's erratic history on trade policy serves as a reminder of how quickly detente can unravel. In 2018, a similar pause gave way to an abrupt US reversal, prompting over 18 months of trade tensions before the 'Phase One' agreement was eventually signed in January 2020. In that light, today's 'thaw' should be seen as fragile, not final.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Sign Up
Sign Up
Looking ahead, the pace of negotiations is expected to slow. Buoyed by its perceived success in this latest round, Beijing appears more confident in its hardline approach. Washington, meanwhile, has yet to make progress on reducing the trade deficit. The misalignment in strategic goals, coupled with Trump's simultaneous trade talks with other nations, suggests that any substantial progress will take time.
Given this dynamic, tariff levels are likely to hold near the 30 per cent mark – or potentially edge higher. Full-scale decoupling remains less likely, as future tariff measures are expected to be more targeted, focusing on strategic sectors such as semiconductors and aluminium, rather than broad-based increases.
China's growth risks remain contained
China's economy has already felt the sting of triple-digit US tariffs in April. The official NBS Manufacturing purchasing managers' index slipped to 49 in April – the fastest contraction in 16 months – as sentiment deteriorated across both domestic and external-facing industries.
In response, Beijing has activated its macroeconomic toolkit to shore up liquidity amid ongoing trade pressures. Ahead of recent tariff talks, the People's Bank of China (PBOC) cut the required reserve ratio by 50 basis points (bps) and trimmed the seven-day reverse repo rate by 10 bps to 1.4 per cent.
The easing momentum continued on May 20, with PBOC lowering both the one-year and five-year loan prime rates by 10 bps, signalling a push to stimulate consumer and corporate borrowing. These consecutive moves underscore Beijing's commitment to supporting domestic growth against the backdrop of external challenges.
Meanwhile, efforts to pivot trade flows are starting to bear fruit. April's trade data showed exports rising a robust 8.1 per cent year on year – well ahead of market expectations of 1.9 per cent. While shipments to the US fell sharply by 21 per cent, this was offset by strong export growth to Asean (+20.8 per cent), Taiwan (+15.5 per cent) and Japan (+7.8 per cent).
Tariffs remain a structural headwind, but China appears increasingly equipped to cushion their impact. With US tariffs now scaled back to 30 per cent, the estimated drag on China's GDP in 2025 is forecast to narrow to just 0.3 percentage points, a marked improvement from the previously projected 1 percentage point hit under the former 145 per cent tariff level. This more manageable burden better positions China to achieve its target of around 5 per cent GDP growth for the year.
Domestic-focused tech leaders better insulated
In a macro environment where tariffs remain elevated at 30 per cent – with the potential to climb further – Chinese companies with a domestic orientation appear better positioned to navigate trade-related headwinds. On average, constituents of the MSCI China Index derive just 15 per cent of their revenue from international markets, well below the levels seen in MSCI emerging markets ex-China (29 per cent) and MSCI Japan (47 per cent).
Technology heavyweights such as Alibaba, JD.com, and Tencent exemplify this resilience, with overseas revenue exposure of 10 per cent or less. This limited external dependence provides a natural buffer against geopolitical and trade shocks.
These firms have also delivered strong results in the first quarter of 2025, buoyed by a recovery in consumer demand and strong momentum in artificial intelligence (AI)-related product revenues. The earnings rebound has driven notable sector outperformance, with consumer discretionary and communication services posting the highest positive earnings surprises at 9.3 and 6.9 per cent, respectively.
China's economy continues to draw support from diversified trade flows and timely policy stimulus aimed at anchoring growth. A renewed emphasis on domestic consumption and advancements in AI are also injecting fresh momentum into the country's technology sector, positioning leading firms for resilience amid ongoing global trade uncertainty.
While the path of tariff negotiations is likely to remain uneven – with the possibility of renewed escalation – we maintain the view that China remains well-positioned to outperform. Against a cautious global backdrop, it stands as a potential dark horse in the 2025 investment landscape.
The writer is a research analyst with the research and portfolio management team of FSMOne.com, the B2C division of iFast Financial, the Singapore subsidiary of iFast Corp.