Trade tensions between the U.S. and China have been at heightened levels for a year and half now, with the U.S. having fired the first blow by imposing tariffs on imports of Chinese goods. China followed up with retaliatory measures, and ever since, investors have remained nervous about what the next escalation might be and whether the two sides would ever find room to compromise.

Yet more recently, the relationship between China and the U.S. has improved. A phase 1 trade deal helped break the ice and set the stage for further negotiations. China has now followed up with an additional concession that investors are seeing as another positive step on the path toward more normalized trade relations with the U.S., and many believe that more moves could come in the future. Below, we'll look more closely at exactly what China did and what it means for both nations as well as stock investors.

Skyline of a city and Asian temple along the waterfront.

Image source: Getty Images.

What the Chinese Ministry of Finance said

China's Ministry of Finance announced today that it would cut by half the incremental rates on some of the additional tariffs the country started imposing on U.S. goods in September 2019. The move will take effect as of Feb. 14.

One confusing element of the tariff cut is that it only applies to the increases made in September. For many goods, there was already an existing tariff in place that got pushed higher by China's action in September. Therefore, although the incremental increases got cut in half, the final total tariffs in many cases saw smaller overall reductions, as you can see below.

Some of the specific tariff cuts include the following:

  • A drop from 5% to 2.5% for tariffs on U.S. crude oil.
  • A rollback from 30% to 27.5% on soybean tariffs, which prior to the September increase had been at 25%.
  • A cut on total tariffs on pork from 60% to 55%.
  • A reduction from 35% to 30% on beef tariffs.

According to Chinese news sources, an official at the Finance Ministry said that it had made the decision to reduce tariffs based on the U.S. announcement on Jan. 16 that in turn reduced 15% tariffs on $120 billion in Chinese goods by half. The official cited an intent to ease trade tensions as the motivation for the latest Chinese move, and he predicted that future cuts would depend on whether the two countries could keep cooperating going forward.

Why investors are hopeful

China's latest move keeps up the momentum after the well-received phase 1 agreement. It also follows up on China's agreement to suspend the tariffs it had intended to impose back in December.

In addition, the agreement got a good reception from investors in both countries. For Chinese stocks , the Shanghai Composite was up nearly 2%, although some of that gain might also have been tied to continuing efforts to fight the coronavirus outbreak. U.S. stock index futures moved higher in pre-market trading Thursday morning following the announcement, and markets opened slightly higher even after yesterday's big move upward.

That said, it's important not to overstate the size of the reductions. In many ways, China's move looks like a probing play to see whether the U.S. decides to follow suit more quickly to remove more tariffs. Such a strategy could end up working to the benefit of both countries, but investors have seen many times before that U.S. trade policy sometimes shifts back and forth on a dime as negotiators appear to explore different tactics.

Nevertheless, investors took China's move as a sign of goodwill, and that's positive for the markets. Now, it'll be interesting to see what comes next between the two nations and whether they'll keep moving forward or face a setback in the near future.