The bank views the truce as a “positive near-term catalyst for risk assets,” particularly for sectors with high exposure to cross-border supply chains, such as consumer electronics and technology. The reprieve also supports its base case that the US will avoid recession this year.
The tariff dispute escalated rapidly over the past three months. In February, Washington imposed 10% duties on Chinese goods linked to fentanyl trafficking. Tariffs were raised to 20% in March and then spiked dramatically in April after the US declared “Liberation Day” with a 34% reciprocal tariff. China responded in kind, prompting further hikes by the US to 104%, 125% and finally 145% by 11 April.
The 12 May agreement resets the landscape considerably, even if only temporarily.
While markets welcomed the rollback — evidenced by higher Treasury yields, a stronger dollar and a broad equity rally — the report cautions that the détente may not last beyond the 90-day window if talks stall.
See also: Central banks embrace gold and geopolitical hedging amid uncertain global outlook: UBS
The Geneva deal does not include any rollback of the fentanyl tariffs or restrictions on China’s rare earth exports. However, the US said China has committed to suspending or removing other non-tariff countermeasures.
A new negotiation channel led by US Treasury Secretary Scott Bessent and China’s vice premier He Lifeng has been established, signalling a more structured attempt to resolve longstanding trade issues.
BoS sees the return to a 10% baseline as a pattern emerging in other trade dialogues. A similar outcome was seen in US-UK talks earlier this month. This suggests that the Trump administration’s steep reciprocal tariffs are being used more as negotiating tools than permanent measures.
See also: Capital Group turns attention to global value plays
The implication is that future trade agreements could follow a similar structure: defaulting to a 10% tariff level while more detailed negotiations are under way.
The BoS research team emphasises that the latest move eases recession and earnings risks “at the margin” and could serve as a tailwind for valuations in trade-sensitive sectors. But it also highlights the potential for renewed volatility if talks collapse ahead of the US elections.
Previous attempts to resolve US-China trade issues have repeatedly stumbled over enforcement, intellectual property and industrial subsidies. These deeper structural issues are not addressed in the Geneva statement, meaning that the path to a comprehensive agreement remains uncertain.
The US Trade Representative also noted that further Chinese action on fentanyl could lead to another reduction in tariffs. Yet, the political sensitivity of the issue, particularly in the US domestic context, could complicate progress.
For now, however, the truce is a relief to markets after months of escalating tensions—and a signal that both sides are willing to step back from the brink, at least temporarily.
Implications of de-escalation
The BoS research team expects three implications from the latest agreement between US and China.
- Reduced recession and earnings risks
The tariff rollback lowers tail risks for the US economy and improves the outlook for corporate earnings. BoS maintains its base case that the US will avoid recession and unwind most of the unsustainable tariffs imposed in recent months. "After the announcement, the US 10-year Treasury yield moved higher, US equities rallied, and the US dollar strengthened, in-line with what one will expect to see with firmer US growth expectations," says the BoS research team, adding that the Fed will take a "wait-and-see" approach and cut rates only once this year. - Emerging 10% tariff framework
The shift back to a 10% baseline mirrors a similar deal reached with the UK earlier this month. This suggests a broader policy approach — using extreme tariffs as leverage in negotiations, then reverting to a default rate while talks progress. - Market tailwinds, particularly in exposed sectors
The speed and scale of the rollback is expected to lift valuations in consumer and technology sectors, which had been hit hardest by trade frictions. The positive momentum may continue if further easing measures are announced. In addition, although the US has kept the 20% fentanyl tariff in place, it indicated that discussions are ongoing on this issue and further Chinese concessions in this area would result in a further reduction in US-China tariffs.
