China Securities Co., Ltd.: What will happen with the 90-day tariff exemption?

China Securities Co., Ltd. released a research report stating that in the next 90 days, it is expected that the United States will engage in bilateral or small-scale multilateral trade talks with its trading partners, and the tariff game will enter a deep water area. During this period, there may be non-tariff behaviors such as anti-avoidance investigations, and the uncertainty of whether a wave of export rush can reappear exists. In any case, in the short term, Chinese companies may reconsider their industrial layout and slow down their investments in third countries. From February to April 2025, Trump's tariff game framework began to clarify: from the prelude (showing tariff attitudes) to escalation (targeting all countries) to deepening (bilateral games). On April 9th, the tariff rates dropped rapidly, which was quite dramatic, but this does not mean that the tariff game is over. Instead, the tariff game has entered a deep water area. The foundation of the U.S. industrial manufacturing industry is thin, and a large amount of production of essential goods highly relies on imports. The United States may find it difficult to bear the inflationary impact of a high universal tariff at once. The path of Trump's leading tariff game may be "high tariff rate slogan -> buffer time given -> observation and negotiation -> advance to the next round of negotiation". Event: At 1:19 a.m. Beijing time on April 10th, Trump announced a 90-day suspension of reciprocal tariffs, with all countries except China being subject to only a 10% tariff, while the tariff on China was raised to 125%. The main points of China Securities Co., Ltd. are as follows: 1. The exemption of reciprocal tariffs was in place, correcting the market's pessimistic expectations. On April 2nd, the Trump administration announced the comprehensive imposition of reciprocal tariffs, covering a wider range and higher rates than expected. Starting from April 5th, an additional 10% ad valorem tariff was imposed on all trading partners. Starting from April 9th, specific tariffs were imposed on about 60 countries (with large trade deficits with the United States and with more non-tariff barrier issues after a preliminary review), such as a 34% tariff on China and a 46% tariff on Vietnam. The reciprocal tariffs took effect on April 9th, but only 13 hours later, Trump announced a 90-day suspension of the reciprocal tariffs. The reciprocal tariffs took effect at 12:00 on April 9th, and 13 hours later, at 1:19 a.m. on April 10th, Trump announced the suspension of reciprocal tariffs except for China. The reciprocal tariffs that took effect on April 9th were suspended for 90 days, and the reciprocal tariff rate was adjusted to 10% (effective immediately). The tariff on China was raised to 125% (effective immediately). Trump stated that more than 75 countries have proposed negotiations with the United States on trade barriers, tariffs, currency manipulation, etc. He also stated that the condition for the suspension was that no retaliatory measures be taken against the United States. After the implementation of the tariffs on April 9th, risk assets rebounded significantly, and the market began to correct its previous overly pessimistic expectations. After Trump announced the suspension of tariffs for 90 days in the early hours of April 10th, market sentiment turned optimistic, and the U.S. stock market began a surge. The two rounds of tariffs in April led to profound impacts on global assets. Because Trump's tariff path is not transparent, the market lacks effective pricing anchors, causing global assets to switch between extreme pessimism and optimism. For the two rounds of tariffs since April, the market focused more on the tariff rates themselves and ignored the profound implications of the exemption time after each tariff rate detail. This is why after the high reciprocal tariff rate landed on April 2nd, the market overly pessimistically priced the one-time pulse of tariffs; and after most countries were exempted from reciprocal tariffs on April 9th, the market completely reversed and started optimistic pricing. The level of the tariff rates certainly affects the economic and trade relations between the two countries, but in the dynamic game process, the tariff rates can be adjusted at any time, and the real role of tariff rates is to serve as bargaining tools. This tariff game will challenge the trade rules established after World War II and interpret Trump's intention to reshape economic and trade rules. Apart from the tariff rates, another meaning can be derived from the waiting time before each tariff takes effect, or the exemption time. Before the high reciprocal tariffs were implemented on April 2nd, Trump set a one-week waiting period to observe the market and various countries' reactions. From April 2nd to 9th, global capital markets concentrated on trading a round of recession risks, with even a liquidity crisis in U.S. bonds. This feedback indicated that the far higher-than-expected tariffs would severely hit the U.S. and global economies and create financial market risks. Since the announcement of reciprocal tariffs on April 2nd, many countries have responded in a timely manner, such as clear countermeasures (China), cancellation of tariffs on the U.S. (Vietnam), or seeking dialogue and negotiation (South Korea, Japan, etc.). The responses of different countries are starkly different. Although specific tariff rates were announced on April 2nd, they were not immediately implemented, essentially giving global markets and countries an appropriate reaction time. At that time, the global market urgently priced in a round of major recession, essentially overpricing the tariff rate far beyond expectations, but ignoring that reciprocal tariffs were not immediately implemented, indicating that there was still room for maneuver before implementation. Looking back, the market on April 2nd overly pessimistically priced the tariffs because it ignored the 7-day waiting period for international political games. After the reciprocal tariffs took effect on April 9th, a 10% tariff was levied during the exemption period (90 days), but attention should also be paid to the operations outside of Trump's tariffs in the next 90 days. According to Trump, the next 90 days will involve one-on-one negotiations, the establishment of bilateral or small-scale multilateral trade agreements, and the progress and final results of the negotiations.Depends on whether each country can meet the US requirements.On April 7, Stephen Moore, chairman of the White House Economic Advisory Committee, pointed out the 5 requirements that countries must meet in order to avoid being subjected to tariffs: 1. Other countries must not retaliate against the U.S. "equal tariff" measures; 2. Countries can stop so-called unfair and harmful trade practices by opening their markets and purchasing more goods from the U.S.; 3. Increase defense spending and make purchases from the U.S.; 4. Increase investments in the U.S.; 5. Countries are required to provide funds directly to the U.S. Department of the Treasury to help maintain the operation of global public goods. Considering the strict nature of the above requirements, it is expected that negotiations between countries and the U.S. may encounter obstacles. During this time, countries may compromise with the U.S. or respond by strengthening bilateral and multilateral trade negotiations with other trading partners, joining regional trade organizations or agreements, to secure more favorable trade conditions. Similar to the pricing on April 2nd, if the market overly focuses on the tariff exemption rate announced by the U.S. on April 9th being significantly lower than expected (only 10%), the market may still overlook the potential twists and turns in the tariff game in the next 90 days and the possible changes in tariffs after 90 days. Therefore, the market needs to rationally and objectively evaluate this round of tariff games initiated by the U.S., as the future path is not smooth. Why is the U.S. adopting a 90-day exemption instead of an immediate implementation of tariffs? The current tariff game initiated by Trump aims to reshape existing global trade rules. Therefore, Trump has allocated time to evaluate external reactions at each step of the tariff process, while also creating a time window for the game. After the announcement of the equal tariffs on April 2nd, U.S. stocks plummeted and market sentiment was extremely pessimistic. Trump's use of a 90-day exemption helped temporarily soothe market sentiment. In addition to the "observe-game" strategy, the reason Trump did not immediately implement the high tariffs announced on April 2nd is that the U.S. industrial structure cannot withstand a sudden shock of global supply contraction. The 90-day exemption serves as an effective measure to buffer the economy: to avoid short-term supply chain disruption and inflation spiraling out of control. Imposing high tariffs in one go would cause cross-border logistics paralysis. For example, on February 1st, Trump cancelled the "de minimis" tariff exemption for goods valued below $800. However, due to the sudden policy implementation, a large number of packages were stuck in customs. Trump then reinstated the previously cancelled de minimis tariff exemption on February 7th. The 90-day exemption period allows companies to adjust their logistics routes, such as diverting to Vietnam, Mexico, etc., to avoid port congestion and supply chain shock. Imposing high tariffs at once would cause a sharp increase in domestic product prices, exacerbating inflationary pressure. U.S. buyers would not immediately find new suppliers with similar quality and lower prices, causing a shock to the U.S. retail market. Based on estimates, the retail inventory in the U.S. in March is only sufficient for two months (until May this year), meaning that if the high tariffs announced on April 2nd were immediately implemented, the U.S. would face a shock to the retail market and price disruptions. The foundation of the U.S. industrial manufacturing sector is relatively weak, and a large amount of production as well as essential goods are highly dependent on imports. Considering Trump's tariff strategy in this round, a general trend can be discerned: the U.S. may find it difficult to impose broad and high tariffs at once. One possible trajectory of the future tariff game could be "high tariff rate slogan -> allocation of buffer time -> observation and negotiation -> formulation of the next tariff details." It is important to emphasize that while focusing on tariff rates, equal attention should be given to the process of the game itself. How to view future global export competition and capital market performance? Undoubtedly, the next 90 days will be a key time frame for the international game of tariffs, with the general direction being that the U.S. will gradually engage in bilateral or small-scale multilateral negotiations. Within this 90-day period, global production demand will face three scenarios: Scenario one: In the second quarter, China's exports to non-U.S. economies may accelerate, leading to export competition. Currently, the U.S. has increased tariffs on Chinese goods to 125%, while tariffs on goods from other countries have only been raised to 10%. Such a significant disparity in tariff rates will cause the U.S. to increase imports from other countries. Even in 2025, China's share of imports in the U.S. remains high at 11%, and alternatives to Chinese products cannot be found in the short term, leading to an increase in imports from other non-U.S. countries. Therefore, in the second quarter, China's exports to non-U.S. economies may accelerate. Scenario two: In response to Chinese products reaching the U.S. through third countries, the U.S. may frequently conduct anti-avoidance investigations, potentially obstructing the global pace of export competition. In 1988, the U.S. established four forms of avoidance under the Comprehensive Trade and Competition Act Section 1321: "Import Assembly", "Third Country Assembly", "Product Minor Changes", and "Postproduction Development". As early as 2024, the U.S. imposed anti-avoidance tariffs on Chinese photovoltaic products passing through Thailand, Cambodia, Vietnam, and Malaysia; and on Chinese steel and aluminum passing through Mexico. If in the next 90 days, the game intensifies, it is not ruled out that third-party countries exporting Chinese products could face anti-avoidance investigations, potentially putting pressure on export competition. Scenario three: In the short term, Chinese companies may slow down investments in third countries and reconsider their industrial layout. Since the tariff rates imposed by the U.S. on various countries are uncertain and subject to change in the next 90 days, companies are more likely to adopt a wait-and-see approach in the tariff negotiation progress rather than hastily expand overseas production capacity. Following the resolution of the tariff game, Chinese companies will readjust their industrial layout. Countries or regions with lower tariff games underway may offer more advantageous investment opportunities. This round of tariff games is evolving from a comprehensive upgrade to a more nuanced strategic game. The key to the subsequent global asset reshuffle lies in whether the U.S. can withstand the domestic inflationary pressures brought about by high tariffs. Once all countries face a 10% tariff, U.S. import prices will rise. Although there will be exchange rate effects, the magnitude of the increase may be lower than 10%, but it will still have a significant impact on U.S. inflation. After the deep impact of tariffs on the U.S. economy unfolds, the U.S. may enter a phase of discussing inflationary pressures. Chinese assets, on the other hand, are experiencing a downward shift in overall pricing expectations, weakening demand, and policy expectations within the game. In the medium to long term, the Chinese economy is stabilizing domestic demand under pressure from external demand. Risk warning: The sustainability of China's consumption recovery remains uncertain. Since the beginning of this year, consumer spending has started to pick up, but the recovery phase is still fragile.The market is limited, with the future likely to continue trading at low levels. Whether it can continue to gradually increase towards normalization, we still need to monitor closely. If consumption continues to be weak, the momentum of economic recovery will be limited.There is still uncertainty about whether the CHINAPROPERTIES industry can continue to improve. This round of real estate downturn has lasted for a long time, with a brief warming trend currently appearing, but many indicators are still showing negative growth. Whether the warming trend can be maintained in the future still needs to be observed. The impact of the tightening monetary policy in Europe and the United States may exceed expectations, dragging down global economic growth and the performance of CKH HOLDINGS assets. Geopolitical conflicts still pose uncertainty, disrupting the global economic growth outlook and market risk preferences. Global tariff policies have uncertainty, tariffs may drag down global economic growth, affecting asset price performance.