China says U.S. violated tariff truce as trade war heats up

China's Commerce Ministry accused the U.S. of violating the May 12 trade agreement by issuing AI chip export controls, halting chip software sales, and planning to revoke Chinese student visas, escalating trade tensions despite a temporary tariff easing. The Ministry claims China fulfilled its obligations by cancelling or suspending tariffs, while the U.S. actions undermine the Geneva consensus and damage China's interests. Experts warn that further escalation could significantly impact the global economy, with potential consequences for commodity demand and supply chains, though Treasury Secretary Bessent remains confident a resolution will be reached.

Analysis

The U.S.-China trade relationship faces renewed strain as China's Commerce Ministry, on June 2, accused the Trump administration of violating the temporary May 12 trade agreement. Specific U.S. actions cited include new AI chip export control guidelines, halting the sale of chip design software to China, and plans to revoke visas for some of the over 275,000 Chinese students in the U.S. These measures, China claims, "seriously undermine the existing consensus" and "damage China's legitimate rights and interests," despite Beijing asserting it fulfilled its obligations by canceling or suspending reciprocal tariffs. This escalation follows President Trump's earlier statement that Beijing was violating the trade agreement. The May 12 deal, a 90-day truce, had involved the U.S. reducing tariffs on Chinese goods from 145% to 30% and China lowering its tariffs on U.S. goods from 125% to 10%. However, the current situation, characterized by a "strongly negative" sentiment score of -0.7 and a high market impact score of 0.75, fuels expert concerns. Arthur Kroeber of Gavekal Research noted unresolved questions and muddled U.S. trade policy objectives, while Treasury Secretary Scott Bessent expressed confidence in an eventual resolution. Economists like Carl Weinberg of High Frequency Economics warn that a complete disengagement could severely impact the global economy, potentially causing a plummet in industrial commodity demand and disrupting global supply chains.

Key Decisions for Investors

• Investors should prepare for heightened market volatility due to the escalating U.S.-China trade rhetoric and the prevailing strongly negative sentiment, which suggests increased downside risk.
• It is crucial to closely monitor upcoming developments in trade negotiations, any further restrictive U.S. actions or Chinese retaliatory measures, particularly concerning technology and student visas, and any high-level discussions between U.S. and Chinese leaders.
• A thorough review of portfolio exposure to sectors directly impacted by U.S.-China trade, such as semiconductors, AI-related industries, and companies with significant cross-border supply chains, is advisable; consider defensive positioning or hedging strategies given the high market impact potential indicated by the signals.