What to watch: Deals, deals, deals!

Effective for 90 days (until 12 August), the US will reduce its effective import tariff rate on China from 103% to 39% – but this is still higher than the 13% rate before President Trump’s second term and the highest rate applied on any trade partner. Its global rate declines from 21% to 12%. In response, China will cut its tariffs on US goods from nearly 140% to 24%. The agreement suggests ongoing negotiations to redefine future trade relations. However, the threat of back-and-forth or increases looms during and after the pause, with the US tariff on China potentially rising to 52% if no further agreements are reached. For the US economy, battling soaring household inflation expectations, plummeting consumer confidence and stalled corporate investments, the truce eases significant pressures, with inflation now expected to peak at 3.5%, down from the previous forecast of 4.3%. US GDP growth is expected to be revised up from 0.8% to 1.3% - 1.5% for 2025. On the other side, China faces up to USD108bn in export losses, though it is likely to compensate by rerouting 75% of this through Asian ports and diverting 25% to other markets, with Europe expected to absorb USD12bn. With deals also signed with the UK and Gulf countries, markets have reversed part of the "divest-US trade" seen in April, adding upside risks to our capital market forecasts.

The UK’s goods trade deficit has increased steadily over the past two decades (-8% of GDP since Brexit in 2021), hit by the double whammy of growing trade imbalances with the EU and real exchange rate appreciation. Against this backdrop, the recent trade deal with the US offers some reprieve. While the +10pp rate hike remains for most UK goods, the tariff on cars will reduce to 10% from 27.5% (for the first 100,000 cars sent to the US), and on steel & aluminum to 0% from 25%. But the UK will still have to pay a hefty price for access to the US market: we estimate the US trade-weighted tariff rate on UK imports will be lowered from 9.1% to 6.1% – still much higher than 1% pre-Trump administration – leading to export losses of USD3bn (GBP2.3bn). On the other hand, US goods will have greater access to the UK market as the White House managed to extract several concessions on exports of aircrafts, industrial and consumer goods and agricultural products, which should generate modest export gains of USD0.7bn annually for the US.