The U.S. and China announced a steep reduction in bilateral tariffs and a 90-day pause on reciprocal tariffs from May 14. This tariff climbdown improves our macroeconomic outlook, considering the direct effects of lower bilateral tariffs on the world's two largest economies, reduced policy uncertainty, more buoyant asset prices, and some reopening of markets.

S&P Global Ratings is not updating its growth forecasts at this juncture, considering the unpredictability of policy developments, particularly out of the U.S., and our upcoming quarterly forecasting round.

We believe that the global trade environment will continue to weigh on credit conditions and our rating outlook, but tail risks have eased somewhat. The possible impact continues to be uneven across sectors and countries.

What did the U.S.-China agreement entail?

From the U.S. side, all of the escalating tariffs on China that were added after April 2 have been removed, as well as the 34% reciprocal tariff. What remains are the 10% baseline tariff applied to all U.S. trading partners, the 20% fentanyl-related tariffs that were imposed in February and March, and those tariffs already in place at the start of the year (some continuations of the first Trump administration and some added during the Biden era).

We calculate that, as a result, the effective U.S. tariff on Chinese imports will now be a little above 40%, while the overall effective U.S. tariff rate fell from 24% to 14% (see chart 1). The latter includes 10% for other trading partners, 40% for China, and 25% on some additional strategic carveouts.

Chart 1

China also lowered most of its tariffs on the U.S. We calculate that these measures bring the effective tariff rate on China's imports from U.S. exports to around 25%. Specifically, China suspended all but 10% of its post-April 2 retaliatory tariffs. It is also suspending non-tariff countermeasures, such as bans on exports of critical minerals.

Stock markets and the U.S. dollar reacted positively and swiftly, reflecting de-risking and a brighter macro outlook. Markets now expect central banks in developed economies to cut interest rates less this year (by 50 basis points for the Federal Reserve and 25 basis points for the ECB), bringing their view closer to our own forecasts.

Some Macro Forward Guidance

In terms of specific guidance, recent U.S.-China tariff developments are likely to move our next round of GDP growth forecasts closer to our March 27 numbers, rather than our May 1 numbers (see chart 2 and table 1 in Appendix).

Chart 2

Below we provide updated narratives for the U.S. and China.

For Europe, the narrative remains broadly unchanged from our previous publication. Trade negotiations between the EU and the U.S. are ongoing. The deal signed with the U.K. primarily concerns cars, steel, and aluminum, and imposes a blanket tariff of 10% on all goods, which aligns closely with our current baseline assumptions.

For the Asia-Pacific region, a stronger China growth trajectory will be positive for most countries, with the magnitudes depending on the trade linkages.

For emerging markets, the picture is mixed. The change for the larger, more domestic-driven economies will be minimal, while for the more open, trade-dependent economies we would expect positive growth spillovers from the U.S. and China.

U.S.

The recent U.S.-China tariff reductions are macro positive, but U.S. imports still face tariffs that are six times higher than 2024 levels. Where the tariff level settles after the 90-day pause remains uncertain.

Nevertheless, the Trump administration's move to de-escalate (and perceived willingness to quickly negotiate a deal with other trading partners as well) should help to limit the economic damage. The new status quo in terms of overall average effective tariff rate isn't too far from our baseline assumption in our March forecast.

Still, it will not undo the near-term inflation impact already in the pipeline. We expect the current tariff rate will push up core inflation in the second half of the year to 3%-3.5%. We continue to judge that the Fed will ease 50 basis points in the fourth quarter of this year. Markets have also recalibrated their expectations to now price in two cuts of 25 basis points over the rest of 2025, but that is about half of the loosening priced in a month ago.

China

For China, the mutual tariff reduction is a relief for exporters and the economy generally. After the significant downward revision of our growth outlook for China during our recent update, the more benign tariff outlook should bring the growth outlook closer to our March forecast of 4.1% growth in 2025 and 3.8% in 2026.

Better growth prospects in China are also likely to translate into somewhat stronger growth in the rest of Asia-Pacific. And the now more likely continuation of many types of Chinese exports to the U.S. should mitigate concerns in the region over the redirection of shipments and the associated downward pressure on prices.

Relief Is Only Temporary

In our view, the U.S.-China tariff de-escalation brings only temporary relief:

• First, the recent U.S.-China agreement is for a 90-day pause. After that period lapses, and absent an agreement, tariffs are likely to go up again, perhaps sharply.
• Second, the U.S. has secured only two bilateral trade deals so far (China and the U.K.), and a template for scaling these agreements has yet to appear, although the minimum tariff appears to be the 10% flat rate.
• Third, the objectives of U.S. tariff policy remain uncertain. There are more targets than instruments (one), and it is not clear whether the objective is to reduce the U.S. trade imbalance, move manufacturing to the U.S., increase purchases of U.S. exports such as natural gas, lower immigration or drug flows, or raise defense spending.

Until these issues are resolved, we think any relief from tariff agreements will be short-lived.

The Implications For Credit Conditions

Trade activities are unlikely to resume pre-April 2 (or earlier) levels for some businesses. The residual tariff levels between the two large trade blocs remain significant at 40%-50% for most U.S. goods.

Even with the recent 90-day reprieve and lower tariff rates on imports from China, we believe there could still be negative implications for U.S. consumer and retail sectors given their global supply chain exposure and a weakening consumer environment. In the consumer products sector, durable and discretionary goods such as furniture, home appliances, leisure products, and apparel are most exposed to China. Retailers with the most tariff exposure are those with higher proportions of private-label offerings or products directly sourced from suppliers.

Meanwhile, the tariff situation remains uncertain for other Asia-Pacific economies (outside China), which face the brunt of the April 2 announcement. These include Vietnam, Taiwan, Japan, and Korea.  Although some negotiation seems underway, the progress and eventual outcome are still unclear.

Business and consumer confidence

The confidence hit needs time to recover. The U.S. imposition of trade tariffs on its trading partners, particularly with major countries/economies, has hurt business confidence.

And even in the case of the trade deals announced between the U.S. and China and the U.S. and the U.K., uncertainty remains around the details and their implementation. While the de-escalation underlines a pullback of heavy trade levies, the drag on capital expenditure and longer-term investments could linger. In the short term, we anticipate businesses will remain cautious with expansion and labor needs. For households, the propensity to consume may remain subdued.

Potential changes to U.S. tax policies and deregulation could also be impactful.

Financing conditions

Financing conditions would be the most immediate beneficiary of a sustained de-escalation. The return of investment appetite for risky assets may alleviate immediate pressure on issuers, especially the lower-rated ones. Earlier, their access to and cost of funding were most directly affected by rising trade tensions.

With two 90-day tariff pauses now in effect, market reactions have been positive. Most equity markets--following steep declines after April 2--are now largely in positive territory for 2025. The S&P 500 index is still down 0.3%, but it has gained over 18% from its 2025 low on April 8. Overall volatility has fallen as well, with both the VIX and VSTOXX indices falling below 20 for the first time since March 27.

Within fixed income, corporate bond spreads have also fallen quickly in recent days. U.S. and European speculative-grade spreads are now back to their late-March levels (see chart 3). Some of this is being driven by rising benchmark yields: 10-year U.S. Treasury yields finished May 13 at 4.5% after closing at the end of April at 4.17%.

Previous fears of rising Treasury yields as a consequence of the growing unreliability of the U.S. global trade system are giving way to optimism for improved growth. And other major government bonds have also seen increased yields since April, albeit to a lesser extent than Treasuries. Still, 10-year Treasury yields remain below where they began the year, for now (see chart 4).

Chart 3

Chart 4

U.S. dollar weakness and volatility in Asia-Pacific currencies

U.S. dollar weakness, despite recent improvement, could affect some credits. Among major currencies, the U.S. dollar is still down between 3% and over 7% against major foreign exchange pairings this year, and most have seen very modest weakening relative to the U.S. dollar since last week. Most of the dollar's relative decline has also occurred after the prior 90-day pause in global tariffs by the U.S. on April 9.

The weakness observed in the U.S. dollar is underlining some fundamental shifts in its perceived safe-haven asset status.  This had resulted in higher volatility across Asia-Pacific currencies--most noteworthy, the Taiwanese dollar (NTD) and Japanese yen (JPY). In the case of the NTD, the appreciation exposes institutional investors with significant unhedged U.S. dollar investments to foreign exchange losses. This will eat into profits and, eventually, capital strength.

Meanwhile, the weaker dollar could have an outsized impact on exporters (particularly for commodities) as revenues and profits (in domestic currency terms) decline. Their export competitiveness also takes a hit.

Manufacturing and supply chains

Chinese manufacturers continue to redirect exports as they seek to reduce reliance on the U.S. market. This could entail a huge influx of Chinese goods into non-U.S. markets, particularly Asia-Pacific. Consequently, the headwinds could compound for domestic producers (which are in direct competition with these exports). In an extreme situation, their business model could be challenged.

The resumption by China of critical minerals exports will bring some relief. China's decision to resume exports of some heavy rare earth metals (neodymium, dysprosium, terbium, and praseodymium) is important for the auto sector, which remains exposed to drags from tariffs (lower vehicle sales and production). In particular, electric vehicle producers that rely on these key inputs in the production of electric motors, sensors, and other components could feel some relief.

Reshoring and rejigging supply chains remain key long-term considerations for credit. We expect the shifts in supply chains, triggered by the April 2 tariff announcements, will continue to take place, underlining the Trump administration's focus on America First policy. Similarly, the need for Chinese businesses to diversify revenue and export channels to outside the U.S. will persist. For businesses, the need to reshore operations back to the U.S. will entail higher capital expenditure and more spending.

Rating Actions Linked To Increased Tariffs Are Limited, So Far

The partial reprieve may prove temporary, and so could trade tensions' contained rating impact. To date, rating actions linked directly to increased tariffs and related uncertainties have been limited. As of May 2, we have taken 11 rating actions (including upgrades, downgrades, outlook revisions, and CreditWatch placements) (see "Global Tariff Tracker: Rating Actions As Of May 2, 2025.").

The overall pace of upgrades and downgrades in May has been somewhat balanced (12 upgrades to 15 downgrades), even with the upgrade-to-downgrade ratio reflecting deterioration over the past few weeks. Rating actions will likely accelerate if the recent de-escalation in trade tensions is not sustained.

We plan to provide a full credit update at the global and regional levels in our next Credit Conditions round, scheduled for late June.

Appendix

Table 1

Related Research

• Global Tariff Tracker: Rating Actions As Of May 2, 2025

• NT$ Appreciation Puts Spotlight On Taiwan Life Insurers' Forex Risk Management, May 8, 2025
• Taiwan Tech Brief: Margins Could Weaken Under A Persistently Strong Exchange Rate, May 14, 2025