US and China cut tariff rates

The US and China have agreed to substantially lower the tariffs both sides have imposed on goods trade for 90 days. For the US, it will cut the tariff rate on Chinese imports to 30% from 145% while China will reduce its own tariff on US goods to 10% from 125%. The agreement follows direct talks between representatives of both countries that took place over May 10-11.

Both China and the US agreed to establish a consultation mechanism to allow further negotiation on trade issues and while not eliminating all tariffs, which appears to be China’s goal, it has helped to shift market sentiment on trade and the global economy to a much more positive footing. US equity futures have jumped higher in response to the news of the tariff delay while European and Asian markets have also been pushed higher. Bonds and gold have been selling off as investors shed haven assets and position for further risk-on moves.

While the economies of the Middle East aren’t directly connected to the US-China deal, there are several passthroughs we are monitoring:

1. As an immediate impact of the US-China cooling of trade hostilities, the outlook for oil prices has improved provided the trade deal sticks, although fundamentals still suggest prices can’t rally too much in 2025. Brent futures have added more than 3% in response to the US-China announcement, trading close to USD 66/b.
2. A stronger dollar and stronger pegged currencies, such as the UAE dirham or Saudi riyal, mean that any inflation sparked by more expensive imports from countries whose currencies have appreciated recently should be manageable.
3. For the trade dependent economy of the UAE, an easing in global trade tensions is a positive as it can allow firms to deepen trading routes, making use of the country’s logistics infrastructure and networks. An alternative scenario where firms needed to establish new supply chains or reorient existing ones would still likely have taken advantage of the UAE’s logistics offering but with some frictions as new relationships were established.

Impact on our market and regional forecasts:

1. The bounce in oil prices will be welcome for regional fiscal and external balances for oil exporters but we still expect oil prices to drift lower this year as supply additions overwhelm demand growth. We maintain our current expectation for oil prices unchanged.
2. Regional growth is largely being driven by domestic spending on projects in the UAE and Saudi Arabia. Improvements in the global trading environment will be welcomed by local firms feeding into PMI indicators but will likely have a limited impact on the local economies.

The US is still carrying out trade negotiations with multiple trading partners ahead of the expiry of its 90-day pause on elevated tariff rates in early July. The US has managed an initial deal with the UK, though maintained a baseline 10% tariff, and this suspension of the elevated China duties. The establishment of a China-US trade negotiation mechanism should help to alleviate some uncertainty around the trajectory for future talks and the prospect of making the reduction in tariff rates permanent.

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