Trump’s tariff pause focuses trade war on China, markets bounce

By Joe Cash, Andrea Shalal and Sudip Kar-Gupta

BEIJING/WASHINGTON/BRUSSELS (Reuters) - U.S. President Donald Trump’s sudden decision to pause most of the hefty duties he had just imposed on dozens of countries brought relief to battered global markets and anxious European leaders, even as he ratcheted up a trade war with China.

Trump’s turnabout, which came less than 24 hours after steep new tariffs kicked in on most trading partners, followed the most intense episode of financial market volatility since the early days of the COVID-19 pandemic.

U.S. stock indexes shot higher on the news, and the relief continued into Asian and European trading on Thursday.

Before Trump’s U-turn, the upheaval had erased trillions of dollars from stock markets and led to an unsettling surge in U.S. government bond yields that appeared to catch the U.S. president’s attention.

While some European leaders welcomed Trump’s latest move and said they hoped for constructive negotiations, China rejected what it called threats and blackmail from Washington.

Trump kept the pressure on China, the world’s No. 2 economy and second-biggest provider of U.S. imports with an increase of tariffs on Chinese imports to 125% from the 104% level that kicked in on Wednesday.

He also signed an executive order aimed at reducing China’s grip on the global shipping industry and at reviving U.S. shipbuilding.

TRADE WAR

China will "follow through to the end" if the U.S. insists on its own way, Commerce Ministry spokesperson He Yongqian told a regular press briefing. China’s door was open to dialogue, but this must be based on mutual respect, the ministry said.

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Beijing may again respond in kind after imposing 84% tariffs on U.S. imports on Wednesday to match Trump’s earlier tariff salvo.

"We don’t back down," Mao Ning, a Foreign Ministry spokesperson, posted earlier on X on Thursday, sharing a video of a defiant speech by late Chinese leader Mao Zedong from 1953 during its war with the United States on the Korean peninsula.

The Korean War ended in a stalemate later that year.

Trump, who claims the tariffs aim to fix U.S. trade imbalances, said a resolution with China on trade is also possible. But officials have said they will prioritize talks with other countries as Vietnam, Japan, South Korea and others line up to try and strike a bargain.   

Goldman Sachs revised down its forecasts for China’s GDP growth to 4% in 2025, from previous projections of 4.5%, citing the negative effects of tariffs. China’s yuan hit its lowest against the dollar on Thursday since the global financial crisis.

In Europe, euro zone government bond yields jumped, spreads tightened, and markets scaled back their bets on European Central Bank rate cuts after Trump’s latest announcement.European shares surged.

Trump’s move was an important step towards stabilising the global economy, European Commission President Ursula von der Leyen said.

"Clear, predictable conditions are essential for trade and supply chains to function," she said in a statement on X.

Elsewhere, India was among countries that said it wants to move quickly on a trade deal with the United States.

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UNCERTAINTY

Despite the reprieve, some central bankers and analysts remained cautious.

European Central Bank policymaker Francois Villeroy de Galhau, speaking of the pause in the tariff hike, said it was "less bad news" than before.

But uncertainty remained and that was a threat to trust and growth, he stressed, speaking to France Inter radio.

After stressing his plans wouldn’t change, Trump later indicated that the near-panic in markets that had unfolded since his April 2 announcements had factored into his thinking.

"You have to be flexible," he told reporters.

SOME TARIFFS STAY ON

Trump’s reversal on the tariffs imposed on other countries is also not absolute. A 10% blanket duty on almost all U.S. imports will remain in effect, the White House said. The announcement also does not appear to affect duties on autos, steel and aluminium that are already in place.

The pause also does not apply to duties paid by Canada and Mexico, because their goods are still subject to 25% fentanyl-related tariffs if they do not comply with the U.S.-Mexico-Canada trade agreement’s rules of origin.

U.S. CONSUMERS

Some economists have warned that ultimately U.S. consumers are likely to bear the brunt of the trade war, facing higher prices on everything from sportswear to wine.

Weaker U.S. consumer confidence was already having an impact on spending on items such as sneakers, even before the full impact of the tariffs kicks in.

Since Trump’s January inauguration, shoe sales in stores are down by 9.5% from the same period last year, according to a weekly sales survey by industry association Footwear Distributors and Retailers of America. Their members include Nike (NYSE:NKE), Adidas (OTC:ADDYY), Skechers, and Walmart (NYSE:WMT).

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Meanwhile, tech giant Apple (NASDAQ:AAPL) chartered cargo flights to ferry 600 tons of iPhones, or as many as 1.5 million, to the United States from India, in an effort to beat Trump’s tariffs, sources told Reuters.

In Europe as well, the impact is being felt.

Volkswagen (ETR:VOWG_p)’s first-quarter earnings fell far short of market expectations, plunging about 40%, as Europe’s biggest carmaker factored in costs including U.S. tariffs.

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