Risks remains of U.S.-China trade truce breakdown, Capital Economics says

Capital Economics analysts warn that the recently signed U.S.-China trade agreement, limited in scope and failing to address underlying frictions, remains precarious and faces a critical test next week. The expiration of a 90-day reciprocal tariff pause could prompt the U.S. to impose new duties on rerouted Chinese goods or leverage deals with nations like the UK and Vietnam to indirectly target Beijing, potentially through supply chain caps or transshipment tariffs. This scenario presents China with a dilemma: accept these pressures or risk further trade disruption and strained international ties through countermeasures.

Analysis

Despite a recently signed U.S.-China framework trade agreement, analysis from Capital Economics indicates significant underlying fragility and a material risk of collapse. The pact is described as limited in scope, failing to address the fundamental sources of economic friction, leaving bilateral ties more strained than at the start of 2025. A critical test for the truce's durability is expected next Wednesday, when a 90-day pause on U.S. 'reciprocal' tariffs expires. The U.S. may leverage this expiration to indirectly pressure Beijing, potentially through new preliminary trade deals with other nations. For instance, a deal with the United Kingdom includes provisions to cap China's role in key supply chains, while an agreement with Vietnam imposes a 40% tariff on transshipments originating from China. Capital Economics flags the risk that the U.S. could introduce new duties on rerouted Chinese goods, a move that would be difficult to enforce but could still provoke countermeasures from Beijing, placing Chinese authorities in a dilemma between acquiescence and retaliation that could derail the entire truce.

Key Decisions for Investors

• Investors should closely monitor the upcoming expiration of the U.S. 'reciprocal' tariff pause next Wednesday, as any new U.S. actions targeting rerouted goods or indirect supply chains could trigger significant market volatility.
• It is prudent to assess portfolio exposure to companies reliant on complex global supply chains, particularly those using Vietnam for transshipment from China, as they face heightened risk from potential new tariffs and disruptions.
• Given the precarious nature of the trade truce and the potential for renewed escalation, investors should consider hedging against increased geopolitical risk or trimming positions in sectors highly sensitive to U.S.-China trade relations until there is greater clarity.