America and China call a truce, again

On 4 November Washington and Beijing surprised markets once again with a broad trade de-escalation, rolling back punitive tariffs and suspending retaliatory export controls. The US cut its contentious 'fentanyl-linked' border tariffs to 10 per cent. In return China paused its rare earth export bans.

From Geneva to Busan

The road here was rough. After the 'Liberation Day' tariffs of April, American duties on Chinese goods briefly reached 145 per cent, until a truce struck in Geneva in May cut them back and was later extended to 10 November. On 9 October Beijing widened its rare earth controls to reach foreign products containing even small amounts of Chinese material, and the White House answered with a threat of an extra 100 per cent tariff. Donald Trump and Xi Jinping then met in Busan on 30 October, and the terms now published turn that handshake into commitments on paper. The fentanyl levy, imposed at 10 per cent in February and doubled in March, is back where it started.

Both sides were tired

Each side needed the deal. The White House faced rising inflation at home and acute shortages of the permanent magnets used in defence and car manufacturing. Beijing was dealing with shrinking exports and record capital outflows. The truce brings immediate relief to container shipping lines and to manufacturers whose supply chains cross the border.

The magnet problem explains the American climbdown. China refines most of the world's rare earths and makes most of its permanent magnets, so a licensing office in Beijing works as a valve on factories everywhere else. When licences slowed after April, carmakers in America, Europe and Japan warned that assembly lines could stop. A one-year pause lets buyers rebuild stocks, and few of them will run those stocks down again in a hurry.

Washington gave ground on technology too. It suspended for a year a rule issued at the end of September that extended its export blacklist to companies at least half-owned by firms already on the list. Beijing's October controls were widely read as a reply to that rule, so shelving both removes the latest round of escalation while leaving the older layers of restriction untouched.

Who gains from the pause

Importers of Chinese goods gain first, because they pay the duty at the border and a 10-point cut lowers their landed costs at once. American soybean farmers, shut out of their largest export market through the harvest, get a buyer back, since Beijing has agreed to resume purchases. Both countries are also suspending the port fees they had slapped on each other's ships in October, which helps the container lines twice over. The losers are would-be rivals to Chinese rare earth supply. The Pentagon's July deal with MP Materials, which guaranteed a floor price for its output, and the premiums charged by non-Chinese producers all rested on scarcity, and cheaper Chinese material weakens the commercial case for new mines elsewhere.

Soybeans on paper

The soybean promise comes with a caveat. Brazil harvested a record crop this year and supplied most of China's imports while American cargoes were shut out, and private Chinese crushers buy on price. State buyers such as Sinograin and COFCO can meet a political commitment, but ordinary demand will return only if American beans are competitive after freight. Farmers who store their crop in the hope of higher prices are therefore betting on Beijing's purchasing agencies rather than on the market.

Yuan up, yields down

Currency and government bond markets rallied hard on the news. The offshore yuan strengthened, and US Treasury yields fell as the immediate threat of tariff-driven stagflation receded. Beijing has used its daily fixing to keep the currency steady through the dispute, and a firmer yuan helps it argue that it seeks no export advantage from devaluation. For bond investors the sums are simpler: lower tariffs mean a smaller one-off jump in import prices, which leaves the Federal Reserve, which cut rates again on 29 October, more room to keep easing.

That cut took the Fed's target range to 3.75-4 per cent, and the central bank will stop shrinking its balance sheet from 1 December. Import prices matter to the next decision because goods inflation, pushed up by tariffs through the summer, is the main reason several officials resisted easing. A tariff cut that feeds into shop prices by the spring would weaken their argument, though not in time for December.

Truces have short lives

History counsels caution. A 90-day truce agreed over dinner in Buenos Aires in December 2018 collapsed the following May, when Washington raised tariffs on $200 billion of Chinese goods. By August 2019 the yuan had weakened past 7 to the dollar and the US Treasury had labelled China a currency manipulator. The Phase One deal signed in January 2020 promised large Chinese purchases of American goods, and China fell well short of them. Both episodes opened with relief rallies much like this one.

This agreement also suspends rather than repeals. The export-control pause runs for a year, American restrictions on advanced chip sales remain in place, and the Section 301 tariffs from Mr Trump's first term are untouched. The legal footing of the fentanyl duty is shaky as well, since the Supreme Court hears arguments on 5 November over whether the emergency-powers law used to levy it permits tariffs at all. A ruling against the administration would strip Washington of the bargaining chip it has just spent.

The proof will arrive in monthly customs figures: Chinese exports of rare earth magnets, soybean shipments to China and the yuan's daily fixing will show whether both sides are delivering. For Treasuries the next test is the Fed's December meeting, where a cut is no longer taken for granted after the chairman's caution last week. The 4 November truce shows that brinkmanship eventually gives way to supply-chain reality. It is a tactical peace and may not hold, but for the next few quarters it gives corporate earnings some welcome breathing room.