A US-China Trade Deal Would Show Desire for Gradual Strategic De-risking, Not Abrupt Decoupling

Global markets rallied on October 26 following news that the United States and China have reached a “preliminary consensus” on several key issues. This development sets the stage for Presidents Trump and Xi to meet on October 30 in Korea, on the sidelines of the APEC leaders’ summit. Although a formal agreement has not yet been announced, both sides are clearly working to de-escalate trade tensions that intensified in early October. At that time, China threatened to impose rare earth export restrictions, while the United States responded with threats of 100% tariffs on Chinese exports. With the previous pause in reciprocal tariffs set to expire on November 10, negotiations appeared to be at risk of breaking down.

However, it now seems likely that China will roll back restrictions on rare earth exports and resume imports of US soybeans. In turn, the United States is expected to refrain from imposing additional tariffs and may even roll back the 20% fentanyl-related tariff currently applied to Chinese goods. Both countries also seem prepared to reverse punitive levies on shipping and port fees that were scheduled to take effect in early November.

If implemented, this framework would be a clear positive for the global economy in the short run. The compromise on rare earths is particularly important, as China controls an estimated 80%–90% of rare earth refining output. These materials are critical to a wide range of high-tech industries, including semiconductors, electric vehicles, and defense.

Yet in some ways the proposed compromise was inevitable, considering the economic and political realities facing both sides. Although rare earths provide China with significant economic leverage, its economy remains heavily dependent on exports, especially amid ongoing weakness in the property sector and subdued household consumption. China’s threats to restrict rare earth exports may have backfired, prompting the United States and Europe to consider countermeasures.

From the US perspective, the threat of 100% tariffs was also unsustainable, due to the potential disruption to supply chains, upward pressure on inflation, and negative impact on economic growth. Additionally, agricultural exports remain a political vulnerability for any US administration. Since neither side can afford an abrupt decoupling without incurring substantial economic consequences, a gradual de-risking—focused on reducing strategic dependencies—appears to be the most likely path forward.

This gradual process of strategic de-risking was highlighted last week in a memo outlining the focus of China’s upcoming five-year plan, which reaffirmed the country’s priority to achieve technological self-sufficiency. The recent flare-up in trade tensions was partly sparked by the United States expanding its entity list and tightening technology export restrictions, prompting China to play its rare earth card as its primary form of retaliation. With China’s ongoing reliance on US technology, a de-escalation of trade tensions is necessary to buy time for China to achieve its goals.

The United States, along with Europe and Japan, is also working to reduce its dependence on China. Over the weekend, the United States announced rare earth deals with several Southeast Asian countries, following a similar partnership with Australia the previous week. The Trump administration has also prioritized the development of advanced manufacturing capabilities within the United States. However, despite the flurry of announcements, it will take years for these projects to become fully operational.

Meanwhile, the Trump administration is also seeking China’s cooperation on broader geopolitical issues, particularly in applying pressure on Russia to help end the conflict in Ukraine. Although the United States and China will continue to compete for influence in South America, Asia, and Africa, this rivalry does not preclude cooperation when their interests align. A short-term trade détente can exist with ongoing geopolitical competition. Recent episodes of US-China trade tensions—both in 2017 and again in 2025—demonstrate that neither side is willing or able to pursue an abrupt economic decoupling. As a result, investors should expect periodic flare-ups in trade tensions, but these are likely to remain manageable over time.

Importantly, markets appear to recognize the limited risk of a major breakdown in US-China relations, which explains the muted reaction to the recent flare-up in trade tensions. Global equities continued to climb, reaching new highs, with a roughly 1% gain on October 27. While markets have responded positively to the latest news, the potential for further US-China trade–related gains following a formal agreement may be limited—unless there is a significant rollback in tariffs—since much of the optimism is already priced in. Although there is some risk of disappointment when Presidents Trump and Xi meet on October 30, it is unlikely that either side will walk back the progress made over the weekend.

Looking ahead, markets are likely to shift their focus away from US-China tensions and concentrate on corporate earnings and the health of the US labor market. Earnings have continued to surprise to the upside, but labor market indicators are showing increasing signs of strain. As a result, we expect the US Federal Reserve to cut rates by 25 basis points on October 29, to support the economy. While the combination of easing trade tensions and accommodative monetary policy provides a constructive backdrop for risk assets, we remain concerned that equity markets may be overshooting, especially given the subdued global economic growth backdrop in 2026. In this environment, investors should remain disciplined and rebalance portfolios back to policy targets, despite continued equity strength.