Stock markets surged Tuesday after U.S. trade authorities scaled back plans to put another 10 per cent tariff on Chinese goods starting next month, and have decided to temporarily exclude things like computers, game consoles, some toys and clothes from the punitive measure.
The United States Trade Representative (USTR) said it has removed a number of items from the list of products that will be subject to a 10 per cent tariff as of Sept. 1, while delaying the implementation of the tariff on others.
The list of products that will see the tariff delayed includes "computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing," coming from China and bound for the United States.
Instead of facing a levy as of next month, the tariff on those items won't be implemented until mid-December. Not all technology products got the reprieve, however. Smart watches, fitness trackers, smart speakers, Bluetooth headphones and other portable devices will be hit as planned.
Investors took the decision as a sign of progress in trade negotiations, since a December implementation gives the two sides more than enough time to hammer out a wide-ranging trade deal to finally put their issues aside once and for all.
Paul Gardner, partner and portfolio manager at Avenue Investment Management, said the market views the softer tariff plan as a major concession on Trump's part.
"There's almost a feeling that the U.S. administration blinked," he said. "They didn't go with their threats."
He also said timing the tariffs on toys and electronics to not be implemented for another few months is clearly designed to allow shoppers to not feel the higher prices until after the key holiday shopping season in December.
"He probably got a lot of pressure from Senate and Congress and he wanted to delay that until after Christmas," Gardner said.
The tariffs have been overhanging the world's economy since Aug. 1 when U.S. President Donald Trump tweeted he wanted to put another 10 per cent tariff on another $300 billion US worth of Chinese imports. Previous tariffs were very targeted on some sectors, but the latest tariff move would have hiked prices on a wide variety of cheap consumer goods that U.S. shoppers buy from China en masse.
In addition to the tariff delay on some items, the USTR says other products will be completely exempt "based on health, safety, national security and other factors."
Stock markets cheered the development, with the Dow Jones Industrial Average jumping 500 points or almost two per cent from Monday's close.
The broader S&P 500 was up by roughly the same amount in percentage terms, while the tech-heavy Nasdaq fared even better, up 185 points or 2.35 per cent to 8,050. That's largely because huge technology companies like Apple, Amazon, Microsoft and Google stand to benefit from not having tariffs on imported technology products.
David Madden, market analyst at CMC Markets, said the market rally makes sense, given that "the easing up of hostilities between the U.S. and China has been a welcome change to the doom and gloom of the past few days."
Investors are taking the move as a sign of optimism for negotiations, but there may be far more self-serving factors at play.
Karl Schamotta, market strategist at Cambridge Global Payments, says the move is clearly designed "to alleviate pressure on American consumers as they head into a critical holiday-punctuated election season."
"Although clearly taken with the aim of furthering political objectives, the decision to postpone additional tariffs on China will be encouraging news for global markets — but may be too little, too late."
Mike Loewengart, vice-president of investment strategy at E*Trade Financial in New York, said that while the tariff news on Tuesday is a positive, it could also be a sign of a long road ahead.
"All indications are that China is gearing up for a protracted dispute while expectations in the U.S. are for a much quicker resolution."