What the US-China trade agreement means for markets

The temporary lifting of triple-digit trade levies between China and the U.S. while trade talks get under way removes the threat of an immediate stagflationary hit to the economy. This is very good news.

It goes much further than investors thought possible—not least because on Friday President Trump suggested an 80% tariff “seems right." The current deal reduces the extra tariffs on China to 30%, made up of the base of 10% that will be matched by China, plus a 20% duty meant to make China do more to combat fentanyl.

But an even better reason for such a big bounce—3.1% on S&P futures and a 3.8% drop in the gold price as I write—is that it looks like Treasury Secretary Scott Bessent is now in control of trade policy. Put simply, the grown-ups are in the room.

I wrote on Friday that the stock-market rally of the past month wasn’t all that it seemed, because it was flattered by the plunge in the value of the dollar. One way to see that was to measure the S&P 500 in terms of how much it is worth in gold rather than in dollars.

Monday morning’s rally changed things. The dollar rallied and gold fell sharply, reflecting restored confidence in the U.S. The S&P 500 now buys as much gold as it did before the April 2 “Liberation Day" when Trump shocked investors with his “reciprocal" tariffs.

Don’t get your hopes too high. Tariffs are unlikely to go back to pre-Trump levels. Bessent advocates tariffs as a tool to extract concessions from other countries, especially China. But he doesn’t want simply the quick wins that Trump trumpeted when he imposed and then dropped tariffs on Mexico and Canada at the start of his term.

Instead, Bessent is after deep reform of China’s economy, turning it from a mercantilist exporter into a consumer, and so leading to more balanced trade. This will, to put it mildly, be hard, even if the Communist Party agreed to it. But if it worked—and if other exporter-focused countries such as Germany did the same—it would lead to the best trading outcome, where the U.S. trade deficit is reduced not because imports plunge, but because exports rise.

China has been talking about increasing consumption as a share of GDP for years, with little progress. Germany has done little to boost private consumption, but the new chancellor will increase government spending on both the military and infrastructure, which should help in the short run.

If they stop running permanent trade surpluses, the U.S. might be able to stop running a permanent trade deficit, or at least run a smaller deficit. The flip side of foreigners consuming more is they send less of their savings to the U.S., so Americans will need to save more, either directly or via a smaller fiscal deficit.

Some in the administration, including Trump himself, have pushed tariffs for different reasons: To raise revenue to finance income tax cuts and to recompense the U.S. for providing the global public goods of its military and the dollar’s reserve status. Others in Congress want to use tariffs to limit the development of China as a strategic rival.

At the very least, it is much better for markets that the U.S. uses tariffs to pry open foreign markets than to impose them simply because Trump is a self-declared tariff guy. Investors should keep their fingers crossed that Bessent remains in the driving seat.

Write to James Mackintosh at james.mackintosh@wsj.com