In a surprising turn, the U.S. and China have reached a preliminary trade agreement, agreeing to sharply reduce tariffs for 90 days. At the same time, a new U.S.–U.K. trade deal has further fueled optimism, signaling that broader negotiations with other countries could follow. These developments align closely with “Scenario 2” outlined in our earlier reports—where de-escalation takes center stage.
With markets reacting positively, the focus now shifts to what comes next: What should we watch for in future trade talks? And what do these agreements signal for global trade dynamics, especially for countries outside the U.S., China, and U.K.? This week’s WEFC analysis dives into the key takeaways.
US & China Find Ground in Tariff War - Has the Rubicon Been Crossed?
1. U.S.–China and U.S.–UK Trade Deals Signal a Shift Toward De-escalation
The U.S. has reached preliminary trade deals with both China and the UK, signaling a major pivot from the aggressive tariff policies seen in early 2025. With China, both sides agreed to a 90-day window of tariff relief, capping duties at 30% before potential hikes resume. The U.S. also canceled two executive orders that would have drastically increased tariffs. This comes as inflationary pressure in the U.S. and deflation risks in China create a mutual incentive to stabilize trade. Meanwhile, the U.S.–UK deal includes key tariff reductions—0% on steel and aluminum and a 10% cap on 100,000 car imports. However, it excludes pharmaceuticals and film, both significant trade sectors, indicating it’s only an initial framework. These deals aim to temper economic uncertainty and reflect a broader trend of easing global protectionism amid slowing growth.
2. Tariff Uncertainty Influences U.S. Monetary Policy and Economic Outlook
The Federal Reserve has maintained interest rates at 4.25–4.5% while signaling increased caution due to tariff-driven risks. Chairman Powell emphasized a “wait-and-see” strategy, highlighting how tariffs have added layers of economic uncertainty. While unemployment remains low and inflation is only slightly above 2%, the Fed flagged potential threats to both price stability and labor markets. Additionally, liquidity pressures are rising as the Fed reduces its balance sheet and the Treasury’s debt ceiling constraints limit bond issuance. An end to quantitative tightening and possible rate cuts in the second half of 2025 could follow, depending on how tariff talks unfold. The central bank's restraint reflects its concern that acting prematurely could destabilize markets. Overall, tariffs are now a major variable shaping the Fed’s near-term decisions, highlighting how trade policy is directly influencing monetary strategy.
3. Taiwan Dollar Surge Driven by Trade Optimism and U.S. Currency Policy
The Taiwan dollar (TWD) has emerged as one of the top-performing currencies in Asia, appreciating over 10% in early May. This surge is attributed to multiple factors: Taiwan’s central bank eased foreign exchange intervention to avoid being labeled a currency manipulator by the U.S.; progress in U.S.–Taiwan trade negotiations boosted investor sentiment; and speculation about coordinated dollar-weakening policies (a so-called “Mar-a-Lago Accord”) also lifted Asian currencies. Strong Q1 economic data from Taiwan—5.37% GDP growth and a 20.1% export rise—reinforced the currency’s strength. However, analysts caution that the rally may be short-lived, with slowing global demand and high comparison bases posing risks in the second half of the year. The TWD’s performance showcases how geopolitical trade developments and central bank strategies can intersect to influence forex markets, especially when tied to broader U.S. policy shifts.
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