US stocks slid on Trump’s pharma and China tariffs narrative

·       Trump is now under pressure from US Main Street as the US economy is now facing a huge supply shock; Trump is dying for a formal talk with China

·       But China is keeping its patience without showing any urgency to talk with Trump under bullying tactics

·       It would be a long war of attrition on trade between the US and China

On Friday, May 2, 2025, Wall Street surged on the progress of US-China formal trade talks and then the expected NFP/JOB report for April, which may ensure no Trumpcession; USD surged, and UST and Gold slipped.  On Monday, May 5, 2025, Wall Street stumbled after Trump’s NBC interview, in which Trump talked about a tough but flexible Chinese tariff & trade stance, pharma tariffs within the next 2 weeks, and other rhetoric. Overall, Trump sounded more hawkish than expected and even said he has no plans to talk with Chinese President Xi. Recently, Trump’s softened tone about lowering China tariffs and avoiding hardball tactics which markets welcomed.

In early European session on Tuesday, May 6, 2025, Wall Street Futures slumped briefly along with European Futures on the concern of German political uncertainty after the first round of voting in the German Parliament. Conservative CDU leader Friedrich Merz failed to secure the parliamentary majority required to become chancellor, dealing a blow to his new coalition with the center-left Social Democrats (CSU). But after a few hours, stock indices on both sides of the Atlantic rose after Merz was elected chancellor in a second round of parliamentary voting by a very slim majority of only 9 votes.

Merz’s initial failure to secure a majority—a first in post-war Germany—highlighted political instability as he formed a coalition between his conservative CDU/CSU bloc and the center-left Social Democrats. Merz takes office with limited public support and faces a difficult landscape, including economic stagnation, the ongoing war in Ukraine, and rising U.S. tariffs. In the scenario of failure, even in 2nd round of voting, the Bundestag has 14 days to elect Merz or another candidate as chancellor with an outright majority. Overall, German political & policy credibility and certainty may be at stake.

Highlights of Trump's latest interview with NBC News on "Meet the Press," aired May 4, 2025

Tariffs and Trade Policy

Trump defended his expansive tariff program, which includes a 145% tariff on Chinese goods and a 10% universal tariff on most imports (with some paused for 90 days, except for China). He argued that tariffs will reduce the U.S. trade deficit and boost domestic manufacturing, claiming they will make the country "very rich." He downplayed concerns about rising prices due to tariffs, suggesting that Americans can make do with fewer imported goods, like dolls or pencils, and that falling energy prices (e.g., gasoline) are more significant. He falsely claimed gas prices had dropped to under $2 per gallon in some states, which does not align with current data. Trump acknowledged short-term economic "transition" challenges but insisted the long-term benefits would be "historic," urging Americans to "hang tough."

China Tariffs & Trade Negotiations

Trump claimed that China is "not doing any business with us" due to the high 145% tariffs, implying that Chinese exporters are absorbing the costs or that trade has slowed significantly: “China is now eating tariffs”. Trump reiterated that trade talks with China are ongoing, but China’s Commerce Ministry and Foreign Ministry have denied any negotiations, calling such claims "groundless." Trump expressed a mix of confidence and reassurance, stating he does not intend to "play hardball" with China and that tariffs on Chinese goods could be lowered substantially, though not to zero.

He also claimed China’s economy is suffering due to his tariffs, with factories closing, though he said he doesn’t want to harm China excessively. China has retaliated with 125% tariffs on U.S. goods, and Beijing has taken a defiant stance, promoting domestic consumption and seeking trade deals with other nations to offset losses. Trump even demanded that China must repay the US for the over $1T trade deficit and ripping off the US for decades after decades.

Economy

Trump took credit for what he called the "Trump economy," blaming any negative aspects on the "Biden economy." He claimed to have lowered costs for gasoline, groceries, and eggs, though data shows grocery inflation at 2.41% year-over-year in March 2025, the highest since August 2023. Trump dismissed concerns about stock market volatility and a potential recession, pointing to recent market gains and claiming his policies are "doing well." However, the U.S. economy shrank by 0.3% in Q1 2025, driven by a surge in imports before tariffs took effect.

Public sentiment is pessimistic, with 66% of Americans expressing fear or pessimism about the economy, and 70% viewing tariffs as inflationary, according to a CNN poll. Trump argued that tariffs would encourage companies to re-shore manufacturing, creating jobs, though economists and businesses warn of higher costs, supply chain disruptions, and unfilled factory jobs.

Small Businesses and Consumer Impact:

When asked about small businesses struggling with tariff-related costs, Trump claimed "many businesses are being helped" and suggested they would thrive without needing relief. He minimized the importance of imported goods like tires or strollers, prioritizing energy costs instead. Economists and business leaders, including JPMorgan Chase CEO Jamie Dimon, have warned that tariffs could lead to a recession, with costs passed to consumers, driving inflation.

Summary

Trump’s NBC interview reveals a steadfast commitment to his tariff-driven trade strategy, despite economic warnings and public unease. His optimistic rhetoric—claiming tariffs will enrich the U.S. and force China to concede—contrasts sharply with China’s defiance and the economic data showing slowdowns, inflation risks, and market turmoil. The denial of talks by Beijing suggests a miscalculation in Trump’s approach, as China appears prepared to endure short-term pain while diversifying trade partners.

Trump’s dismissal of small business struggles and consumer price concerns may further erode public support, as polls already indicate significant skepticism. The softened tone on China was seen as a tactical retreat to stabilize markets, but without clear concessions from Beijing, the trade war risks escalating, with global implications. The claim that costs like groceries are down is misleading, given inflation data, and undermines his credibility on economic relief promises. Trump trade tariffs take U.S. imports, and exports to near Covid-level event- Haven't seen anything like this since 2020. Trump trade tariffs slump widens to 'nearly all U.S. exports,' supply chain data shows

China’s Response: China has rejected negotiation claims and positioned itself as a defender of global free trade, reaching out to Europe and Southeast Asia for new trade partnerships. Chinese state media and social media have mocked Trump, nicknaming him "The Lord of Eternal Tariffs" and portraying China as resilient. Beijing has projected defiance, with its Finance Ministry calling the U.S. tariffs a “joke” and signaling no further retaliatory tariff hikes beyond the current 125% on U.S. goods. However, China’s Commerce Ministry has expressed openness to negotiations, suggesting a dual strategy of resistance and potential diplomacy.

Chinese exporters are reportedly offering duty-paid deals to help U.S. buyers avoid the impact of high U.S. tariffs, according to a Financial Times report. These deals involve misstating the value of goods and covering import charges, tactics aimed at skirting tariffs that reach up to 145% on Chinese imports, as confirmed by the Trump administration. Chinese firms undervalue cargo or provide false descriptions to reduce the declared value of goods, thereby lowering the tariff burden. Some also offer to pay the customs duties directly, absorbing costs to maintain business with U.S. buyers.

Third-Country Routing: Another tactic, known as "origin washing," involves shipping goods through third countries like Malaysia or Vietnam to obtain certificates of origin that evade U.S. tariffs. This allows goods to be labeled as originating from these countries, avoiding the high China-specific duties.

Beyond duty-paid deals, Chinese firms are diversifying supply chains by moving production to Southeast Asia (e.g., Vietnam, Malaysia) or increasing trade with non-U.S. markets like Europe and Latin America to mitigate tariff impacts.

These practices exploit "grey areas" in trade regulations, but they carry risks of detection by U.S. Customs and Border Protection (CBP), which is enforcing stricter rules, especially after the elimination of the de minimis exemption for Chinese goods under $800 starting May 2, 2025. Malaysia has urged Chinese firms not to use it for rebadging products to dodge tariffs, indicating regional concerns about being implicated in tariff evasion. Chinese firms are outmaneuvering U.S. tariff policies, as a sign of China’s resilience or cunning in navigating trade barriers.

The duty-paid deals and origin-washing tactics reflect Chinese exporters’ adaptability in the face of punishing U.S. tariffs, exploiting loopholes to maintain market access. While these strategies may delay the economic pain for both Chinese firms and U.S. consumers, they complicate Trump’s tariff objectives, potentially leading to a “whack-a-mole” scenario where new rules target evasion tactics. The lack of confirmed U.S.-China trade talks, as denied by Beijing, further dims prospects for de-escalation, risking prolonged trade disruptions. Small U.S. businesses, already strained by tariff costs, may benefit temporarily from these deals but face uncertainty if enforcement tightens. However, there are reports of increasing ‘smuggling’ and corruption involving US customs officials.

U.S. Treasury Secretary Scott Bessent has made several recent statements regarding the ongoing tariff dispute with China, emphasizing the unsustainability of the current trade barriers and the need for de-escalation.

Unsustainability of Current Tariffs

Bessent has consistently described the high tariffs—145% on Chinese goods by the U.S. and 125% on U.S. goods by China—as unsustainable, likening them to a mutual "embargo." He stated on April 22, 2025, at a JPMorgan Chase investor summit in Washington, D.C., that "no one thinks the current status quo is sustainable," predicting a de-escalation in the "very near future."

On April 23, 2025, he reiterated to reporters that both sides recognize the tariffs’ untenable nature, suggesting that a reduction in these rates is necessary before meaningful trade negotiations can begin. He emphasized that President Trump would not unilaterally lower tariffs, indicating a mutual de-escalation is required.

China’s Economic Vulnerability

Bessent has argued that China is in a weaker position due to its trade surplus with the U.S., exporting five times more to the U.S. than it imports. On April 8, 2025, he called China’s retaliatory tariff escalation a “big mistake,” stating, “We export one-fifth to them of what they export to us. So that is a losing hand for them.”

On May 1, 2025, he highlighted China’s economic struggles, noting poor GDP numbers and potential job losses of 5 to 10 million, suggesting that China’s slowing economy makes it more likely to seek a deal. He described China’s economy as “the most unbalanced, imbalanced economy in the history of the world,” urging a rebalance toward domestic consumption. He termed China’s economy as dependent on subsidized exports, which is not an ideal model.

Prospects for a Trade Deal

Bessent expressed optimism about reaching a “big deal” with China, suggesting that a mutual rebalancing of the U.S. toward manufacturing, China toward consumption, could be mutually beneficial. On May 1, he told Fox Business that such a deal would involve holding China to prior trade agreements and reducing unfair trade barriers.

On April 27, 2025, he told ABC News’s This Week that there is a “path” to an agreement, based on interactions with Chinese counterparts during IMF meetings in Washington, though these discussions focused on financial stability rather than tariffs directly. He acknowledged that negotiations with China would be a “slog” and could take 2-3 years, but he believes the high tariff levels are pressuring China to negotiate.

No Confirmed High-Level Trade Talks with China

Bessent has clarified that no formal tariff negotiations have started with China. On April 27, he cast doubt on Trump’s claim of direct talks with Chinese President Xi Jinping, stating he was unaware of any such call. This aligns with China’s denials of ongoing trade talks, with its Commerce Ministry and Foreign Ministry calling U.S. claims of negotiations “groundless” and “fake news” in late April 2025.

China’s Escalation as a Strategic Misstep

Bessent framed China’s tariff hikes as a strategic error, arguing on April 9, 2025, that they reveal China as the “bad actor” in global trade. He suggested Trump’s strategy may have “goaded” China into overreacting, strengthening the U.S. negotiating position. He emphasized that those countries that did not retaliate against U.S. tariffs, unlike China, are better positioned for favorable trade deals.

Broader Trade Strategy

Bessent has highlighted progress with other trading partners, stating on April 28, 2025, that 17 of 18 key partners (excluding China) are in active negotiations, with potential deals imminent, such as with India. He expects 80-90% of these deals to be finalized by year-end, reducing tariffs and non-tariff barriers. He described tariffs as a “melting ice cube,” intended to generate revenue and bring manufacturing back to the U.S. while eventually declining as new industries develop.

As noted in the Financial Times, Chinese exporters are using duty-paid deals, undervaluing goods, and routing shipments through third countries like Malaysia and Vietnam to dodge the 145% U.S. tariffs. These tactics aim to maintain market access despite the high duties, which often exceed profit margins. Bessent’s comments about China’s economic strain and the unsustainability of tariffs suggest that these evasion tactics may be a response to the pressure he describes. By absorbing costs or rerouting goods, Chinese firms are attempting to mitigate the impact of tariffs, which Bessent argues are forcing China toward negotiation. However, he has not directly addressed these specific evasion strategies.

These tactics could undermine Bessent’s assertion that tariffs will force China to the table, as they allow Chinese goods to continue entering the U.S. at lower effective costs. U.S. Customs and Border Protection’s stricter enforcement, including the end of the de minimis exemption for Chinese goods under $800, may counter these efforts, aligning with Bessent’s view that China’s position is weakening.

Bessent’s comments have driven market movements, with stocks soaring after de-escalation hints but paring gains when he clarified no unilateral tariff cuts would occur. China’s denials of talks and its exemptions for certain U.S. goods (e.g., pharmaceuticals) suggest a strategy of selective concessions while maintaining a hard line against perceived U.S. “extortion.” Beijing’s Commerce Ministry is reportedly evaluating a U.S. offer for talks but warns against coercion.

Bessent’s comments reflect a calculated strategy to pressure China into trade negotiations by leveraging high tariffs while acknowledging their economic toll on both sides. His optimism about a “big deal” contrasts with China’s public denials and its exporters’ efforts to dodge tariffs through duty-paid deals and origin washing. These evasion tactics, not directly addressed by Bessent, could delay the economic pain he expects to drive China to the table, potentially prolonging the trade standoff.

Trump and Bessent’s assertion that China’s economy is crumbling may be overstated, given China’s diversification of trade partners and domestic consumption push, as seen in its charm offensive with Europe and Southeast Asia. The lack of confirmed high-level talks, as Bessent admitted, underscores a communication gap that could hinder de-escalation. Meanwhile, his focus on deals with other nations like India suggests a broader strategy to isolate China economically, though success depends on enforcement against tariff evasion and China’s willingness to negotiate under pressure.

On May 6, 2025, U.S. Treasury Secretary Scott Bessent testified before the House Oversight Committee and faced pointed questions from Rep. Mark Pocan (D-Wis.) about who bears the cost of the Trump administration’s tariffs, particularly the 145% tariffs on Chinese goods. Bessent fumbled but was eventually forced in the face of brutal grilling to accept the inevitable truth that it’s importers and ultimately the American public/consumers. The epic exchange highlighted the contentious debate over the economic impact of these tariffs amid the U.S.-China trade dispute and Chinese firms’ tactics to evade duties.

Question on Tariff Costs: Rep. Pocan pressed Bessent on who pays the tariffs, seeking clarity on whether American consumers, importers, or foreign exporters bear the burden. Bessent responded, “It’s a very complicated question. History shows it’s a complicated mix of factors.” This vague answer drew criticism for sidestepping a direct acknowledgment that tariffs are typically paid by U.S. importers, who may pass costs to consumers through higher prices.

The tariffs in question include 145% duties on Chinese imports, retaliated by China’s 125% tariffs on U.S. goods. Bessent reiterated his stance that these high tariff levels are unsustainable, echoing his April remarks that they resemble a mutual “embargo” and require de-escalation. He noted no formal negotiations with China have begun, but trade deals with other major partners could be announced “as early as this week.”

Bessent’s response was evasive, suggesting he avoided admitting that tariffs act as a “direct tax” on American importers and, by extension, consumers. Rep. Pocan’s questioning aimed to underscore concerns that tariffs contribute to inflation, with polls showing 70% of Americans viewing them as price-increasing.

Strategic Uncertainty

Bessent defended the administration’s approach, stating that “strategic uncertainty” is part of tariff negotiations, a tactic to keep trading partners guessing about final tariff levels. He argued this leverages pressure on countries like China, whose economy he claims is weakening, with job losses estimated at 5-10 million. But the latest data shows China's Labor Day holiday domestic trips up 6.4% year on year.

Economists warn that tariffs, primarily paid by U.S. importers, lead to higher consumer prices, with grocery inflation at 2.41% year-over-year in March 2025. Bessent’s reluctance to clarify this in Congress may reflect a political strategy to avoid undermining Trump’s narrative that tariffs enrich the U.S. and hurt China. Bessent’s testimony on May 6 reveals the delicate balancing act of defending Trump’s aggressive tariff policy while acknowledging its economic strain, as seen in his “complicated mix” response to Pocan’s grilling. His evasiveness likely stems from the administration’s need to maintain leverage in negotiations and avoid admitting that American consumers face higher costs, a politically sensitive point given public fears of inflation and recession (66% of Americans are pessimistic about the economy).

Highlights of US Treasury Secretary Bessent’s recent comments:

·       Trump will make America more appealing for investors like you.

·       The IRS spent $450 mln on paper processing this year; we aim to cut this below $20 mln by the end of Trump's second term through automation.

·       Trump's economic agenda is already bearing fruit.

·       We're currently negotiating with 17/18 key trade partners; we have not engaged with China as of yet.

·       I can see a substantial reduction in tariffs on US goods

·       Many trading partners have approached us with very good offers

·       Perhaps as early as this week, we will be announcing trade deals with some of the US's biggest trade partners

·       Up to $50 bln in taxpayer money is wasted on IRS modernization

·       Nothing in the data indicates that the US is in a recession

·       I expect Q1 GDP data to be revised upwards

·       I expect tax collections to be robust going forward, and AI is going to enhance collections.

·       Bessent asked on Treasury debt limit X date: The X-date estimate will be forthcoming; we are on the warning track for reaching the debt ceiling.

·       The US government will never default; we will raise the debt ceiling

·       We will not use gimmicks to get around the debt ceiling

·       Strategic uncertainty is part of negotiations over tariffs

·       Bessent asked who pays tariffs: It's a complicated mix of factors

·       A central bank's digital currency is a sign of weakness. I would not be in favor of the Fed issuing digital currency

·       We are trying to control the absolute level of debt and grow GDP

·       I agree with Yellen that the debt-to-GDP ratio is what matters

·       It is hard to know when the market would rebel against US debt

·       China's outbound investment scrutiny is an important new tool

·       Any outbound investment legislation should be flexible

Commerce Secretary, Howard Lutnick:

·       President Trump hasn’t just changed the way we think about trade; he’s also changed how our trading partners approach it.

·       We’re about to see some amazing trade deals for America, negotiated in record time.

Highlights of Trump’s comments:

·       I look forward to meeting the new Prime Minister of Canada, Mark Carney. I very much want to work with him, but cannot understand one simple TRUTH — Why is America subsidizing Canada by 200 Billion Dollars a year, in addition to giving them FREE Military Protection, and many other things? We don’t need their Cars, we don’t need their Energy, we don’t need their Lumber, we don’t need ANYTHING they have, other than their friendship, which hopefully we will always maintain. They, on the other hand, need EVERYTHING from us! The Prime Minister will be arriving shortly, and that will be, most likely, my only question of consequence.

·       Trump on Carney: We have a lot of things in common

·       Big announcement before Monday trip departure-but it may not be about trade

·       Good news, Houthis announced they do not want to fight. We will stop the bombing of the Houthis effective immediately. We will take their word that they won't be blowing up ships.

·       USMCA is very effective. People have to follow USMCA

·       We will possibly start to renegotiate USMCA

·       Positive announcement on Thursday, Friday or Monday before we leave

·       The announcement to be as big as it gets

·       Trump on USMCA: Transitional step

·       Trump and Carney talk to the press: Canada chose a very talented person

·       I don't know if it's necessary to renegotiate USMCA anymore

·       We will be friends with Canada

·       Trump asked on concessions: I want friendship with Canada

·       Trump on Canada as 51st state: It takes two to tango

·       Won't discuss 51st state unless someone wants to discuss

·       The United States has an abundance of energy

·       We want to protect our automobile business

·       Trump on China: They want to meet

·       China's doing no business right now

·       By not trading with China, we're losing nothing

·       China wants to negotiate and we will meet at the right time

·       Chinese big ships are turning back in the Pacific Ocean-it requires 10 miles to move around

·       China's economy suffering from a lack of US trade

·       US Deficit with China Turning Due to Tariffs

·       China’s economy is collapsing, but I am sorry—I don’t want to see that; it saddens me.

·       Announcement over next few days not necessarily on trade

·       Canada's PM Carney: Canada not for sale, won't be for sale "ever"

·       Canada's PM Carney: Some things about USMCA will have to change

·       Canada's PM Carney: USMCA is the basis for broader negotiation

·       Trump in response to Carney saying Canada is not for sale: Time will tell

·       Trump on about Canada becoming part of the US: I say never say never

·       Trump on trade deals: We're not chaotic, we're flexible

·       Trump on timing of deals: We don't have to sign deals

·       Trump: In some cases, we'll sign some trade deals

·       Trump on trade: Will present a number

·       We'll put down some numbers. Country open for biz

·       Nations don't have to sign the deals

·       Stop asking how many deals we're signing

·       We will sign some deals, and will also put down the price

·       Trump on trade deals: We are not looking to hurt countries

·       We will possibly start to renegotiate USMCA

·       Think of the US as a super luxury store, a store that has the goods

·       USMCA is fine, it's there it's good

·       USMCA is a good deal for everybody

·       We don't do much business with Canada, they do a lot with us from our standpoint.

·       Trump on investments hitting economic data: Hitting right now.

·       Carney couldn't say anything to change the tariffs

·       We don't want cars from Canada. At some point, it won't make economic sense for Canada to build those cars

·       There is no reason for the US to subsidize Canada

·       Trump referring to Canada: This is a very friendly conversation

·       We protect Canada militarily and we always will

Conclusions: 

China is in a better position of strength to win this long war of attrition on trade; the US has to reset completely to compete with mighty China. Trump may soon scale back unusually high tariffs of 145% on Chinese goods to avert a potential imminent supply shock for the US economy; there are no easy alternatives to replace Chinese goods in terms of scale, efficiency, and costs for at least the next few years. Trump also has to ensure tariff policy stability by the next few days rather than constant flip-flops as US retailers, and MSMEs need to place advance orders for coming festival season sales by May to big exporters like China.

Trump and Bessent’s constant trade & tariff talks and flip-flops indicate that the Trump admin is now under huge public and media pressure to act soon as the US economy is facing a severe supply shock, which can result in a significantly higher cost of living. If the US companies/importers can’t raise prices amid Trump's threat and increasing autocratic behavior, their financial health will deteriorate. Various influential Republican leaders are now openly criticizing Trump’s bellicose tariffs and other policies, which may affect the mid-term US election next year (November 26). Trump is set to lose his trifecta by Jan’27. Some Republican leaders and also most of the Democrats are now trying to take back Tariffs power from Trump to the US Congress for policy stability.

Market Impact

On Tuesday, May 6, 2025, Wall Street slips on fading signs of imminent US-China formal trade talks and Trump’s hardball stance with China and also Canada. But stocks also spiked briefly as Bessent said trade deals coming as soon as this week, tease 'substantial reduction' in tariffs. The S&P 500 slipped nearly 0.8%, the Nasdaq 100 lost 0.9%, and the Dow dropped almost 400 points.

On Tuesday, Wall Street was boosted by utilities, and energy, while dragged by healthcare, consumer discretionary, industrials, real estate, materials, techs, financials, communication services and consumer staples. Dow Jones (DJ-30) was dragged by Merck, United Health, Sherwin, Honeywell, 3M, GS, JPM, American Express, Walmart, Amazon and Caterpillar, while boosted by Verizon, McDonald’s, P&G, Travelers, Walt Disney, Chevron and Coca-Cola.

Healthcare stocks were under pressure on Trump’s threat of pharma tariffs by May. Tech stocks weakened, with Meta and Tesla sliding on disappointing European sales. Palantir Technologies sank 12% after delivering results that fell short of investor expectations, while Ford surged even after cautioning that tariffs could cut its 2025 earnings by about $2.5 billion, which is better than the market expectations.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 41400) now has to sustain over 41800 for a further rally towards 42000/42500-43000/43500, and even 44600-45200 in the coming days; otherwise sustaining below 41700, DJ-30 may again fall to 41000/40600-4010039900 and 39700/38600-38000/37700-37300/37000 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20800 for a further rally to 21100/21400-21700/22000 and 22400-22600 in the coming days; otherwise, sustaining below 20750/20600-20500/20400, NQ-100 may again fall to 20000/19600-19400/19200 and 19100/18800-18600/18000-17600/16400 and 16200-15800 in the coming days.

Also, technically Gold (CMP: 3240) has to sustain over 3300 for any recovery to 3325/3375* and 3400/3425-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3290-3275, Gold may again fall to 3255/3225-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.