U.S. and China Agree To Implement Trade Framework: Markets Cautiously Optimistic

After months of strained relations and escalating trade tensions, the United States and China have announced a framework agreement aimed at implementing the Geneva consensus, building upon discussions recently held in London. Beijing hails the agreement as a significant step towards normalizing trade relations.

The agreement, pending final approval from Presidents Trump and Xi, seeks to ease restrictions on crucial exports, particularly Chinese rare earth minerals and magnets vital for high-tech manufacturing, while also addressing U.S. export controls.

The news follows intensive talks in London during June, building on the foundation laid by the Geneva agreement in May. This initial agreement paused the imposition of new tariffs for 90 days, a period that now seems to be evolving into a more structured, albeit fragile, trade relationship.

However, the immediate market reaction has been muted, with both U.S. and Chinese equity futures showing little movement. This suggests that a positive resolution was largely anticipated by markets, who have become accustomed to the ebb and flow of U.S.-China trade negotiations.

Historically, the U.S.-China trade relationship has been characterized by significant volatility, with tit-for-tat tariffs and export restrictions reaching a peak in April. The Geneva agreement marked a turning point, signalling a potential de-escalation. The London talks further reinforced this trend, aiming to normalize trade relations between the two economic giants. However, the devil, as always, is in the details.

Analysts are closely scrutinizing the specifics of the agreement, particularly the volume of rare earths that will be allowed to flow to the U.S. and the degree of freedom afforded to U.S. chip exports to China. These details will ultimately determine the performance of affected stocks and sectors. Companies involved in rare earth production, technology exports, and multinational manufacturing are expected to be most impacted, and analysts will be keenly monitoring changes in revenue projections, supply chain disruptions, and future guidance.

Despite challenges, China has affirmed its commitment to the trade deal, following a phone conversation between Presidents Trump and Xi. The agreement reportedly involves a fixed 55% tariff on Chinese imports by the U.S., a combination of existing and newly imposed tariffs. In return, China has promised to supply rare earth materials, while the U.S. will seemingly maintain export restrictions on AI chips, indicating a lack of full reciprocity.

The overall impact on markets remains uncertain. While the framework agreement signals a potential de-escalation in trade tensions, the absence of concrete details has led to cautious market responses. Perhaps the biggest response on the day has been from commodity markets, with iron ore increasing, and soon to be competing rare earths stocks declining.

The next crucial step is the formal approval of the framework by Presidents Trump and Xi, followed by detailed implementation. Markets are expected to react more significantly once concrete details are released and the agreement is enacted, especially regarding the magnitude of tariff rollbacks and export policy changes.