Unadorned Notes: May 10-15, 2025
U.S., China Reach Tariff Truce; U.S. Seeks Targeted China Decoupling; U.S. Rescinds AI Export Rule; Inflation Slows Amid Tariff Pause; Small Business Optimism Declines Again
U.S. Politics, Policies, and Geopolitics
U.S., China Reach Tariff Truce: The United States and China agreed to a 90-day reduction in reciprocal tariffs, lowering duties on key imports to 10% and suspending recent retaliatory measures. The deal, announced after high-level talks in Geneva, aims to stabilize economic relations and establish a framework for ongoing negotiations on trade and investment. Chinese officials confirmed the removal of export controls on rare earth elements and other critical materials, signaling improved cooperation in strategic sectors. Despite the progress, both governments acknowledged the temporary nature of the agreement and the potential for renewed tensions if talks stall. Markets responded positively, with U.S. equities rising and investors optimistic about reduced trade uncertainty.1
U.S. Seeks Targeted China Decoupling: Following high-level talks in Geneva, Treasury Secretary Scott Bessent clarified that the U.S. does not aim for a complete economic decoupling from China but supports selective decoupling in strategic sectors. The recent agreement reduces reciprocal tariffs—U.S. duties dropping from 145% to 30% and China’s from 125% to 10%—for a 90-day period while broader negotiations continue. Industry-specific tariffs on steel, aluminum, autos, pharmaceuticals, and semiconductors will remain, reflecting national security priorities. The U.S. also maintains a 20% tariff related to China’s alleged role in the fentanyl supply chain. Both countries agreed to establish a formal consultation mechanism for ongoing trade discussions, with future meetings anticipated to address non-tariff barriers and market access for U.S. firms.2
QZ’s Comment: The next thing to watch for is not rhetoric, but rather, an actual restructuring of capital market rules to make China exposure a premium-priced risk, not a default allocation.
U.S. Rescinds AI Export Rule: The U.S. Department of Commerce has withdrawn a Biden-era regulation that would have limited AI chip exports to over 100 countries without federal approval. The rescinded rule faced strong opposition from U.S. chipmakers and international allies, who argued it would hinder innovation and strain diplomatic relations. The initial framework sought to address national security concerns but risked alienating partners and driving demand toward competitors like China. Commerce officials stated the Trump administration plans to introduce a new policy focusing on cooperation with trusted nations while maintaining controls on adversaries. The European Commission welcomed the reversal, emphasizing Europe’s role as a strategic ally and not a security threat.3
GOP Divided Over SALT Cap: The U.S. House is debating a major tax and spending bill that seeks to extend Trump-era tax cuts while introducing new provisions such as expanded SALT deductions and Medicaid reforms. A key point of contention is the proposed $30,000 SALT deduction cap, which moderate Republicans from high-tax states argue is insufficient, while conservatives warn that further increases would benefit wealthy taxpayers and jeopardize broader support for the bill. With a narrow GOP majority, Speaker Mike Johnson faces pressure to reconcile demands from both factions before a targeted Memorial Day vote. The legislation includes efforts to offset tax cut extensions with $1.5 trillion in spending reductions, including cuts to Medicaid and clean-energy incentives. Intra-party tensions highlight broader ideological divides over fiscal policy, with lawmakers balancing district-specific interests against national budget constraints.4
Trump Revives Drug Pricing Plan: President Donald Trump signed an executive order to implement a “most-favored nation” pricing policy that would tie U.S. prescription drug costs to prices in other developed countries. The policy directs federal agencies to negotiate lower prices with pharmaceutical companies and, if unsuccessful, to propose regulatory enforcement within 30 days. Trump claimed the move could reduce drug prices by 30% to 80%, while aiming to cut out intermediaries such as pharmacy benefit managers. The pharmaceutical industry strongly opposes the measure, warning it could harm investment in U.S. drug development and lead to increased reliance on foreign supply chains. Legal challenges are expected, as a similar effort during Trump’s first term was struck down by a federal court for bypassing proper rulemaking procedures.5
Trump Secures $600B Saudi Deal: President Donald Trump finalized a $600 billion investment agreement with Saudi Arabia during his visit to Riyadh, marking a significant expansion of U.S.-Saudi economic and defense ties. The deal includes a $142 billion arms package, infrastructure collaborations, and major commitments to artificial intelligence, aerospace, and energy development. U.S. companies such as Nvidia, Amazon, and Boeing announced partnerships with Saudi entities, including the establishment of AI infrastructure and a new defense technology fund. While many investment details remain undisclosed, the agreement is being promoted by the White House as ushering in a “new golden era” of bilateral cooperation. Analysts view the deal as strategically aimed at strengthening U.S. influence in the Middle East and countering growing Chinese engagement in the region.6
Trump Pursues Gulf Strategic Deals: President Donald Trump’s Middle East trip began in Saudi Arabia, where signaled an end to U.S. sanctions on Syria, citing regional stabilization goals. The visit included talks on military cooperation, AI, and energy, as well as efforts to encourage Saudi-Israeli normalization despite ongoing conflict in Gaza. Trump warned Iran over its nuclear ambitions and attempted to rally Gulf states around a U.S.-led security and economic framework, including future arms sales and foreign investment initiatives. His support for Syria’s new leadership, formerly tied to extremist groups, drew criticism from lawmakers concerned about security risks and legal overreach. The trip concludes with stops in Qatar and the U.A.E., where discussions center on defense cooperation and long-term investment pledges totaling over $1 trillion.7
Rafale Downed in India-Pak Clash: India acknowledged combat losses after reports emerged that a Chinese-made Pakistani J-10C fighter jet shot down a French-built Rafale aircraft during recent hostilities. Pakistan claims to have downed five Indian jets, including three Rafales, though India’s military has not confirmed specific aircraft losses. The incident contributed to a sharp decline in shares of Dassault Aviation, with global defense analysts scrutinizing the Rafale’s battlefield performance. The clash followed India’s Operation Sindoor, a missile strike in response to alleged terrorist attacks, prompting a brief U.S.-brokered ceasefire that quickly unraveled amid renewed violence. Talks between India and Pakistan are scheduled as tensions over Kashmir and military escalation persist.8
QZ’s Comment: Both J-10C and Dassault Rafale are 4.5-gen platforms, not 5th-gen or SOTA by current U.S. or Chinese top-tier standards. That said, this is part of a broader trend where China is moving up the military-industrial value chain. The U.S. must now counter not just the platforms, but the narrative that Chinese systems are good enough and cheaper.
Economics, Finance, and Business
Inflation Slows Amid Tariff Pause: The U.S. Consumer Price Index (CPI) rose 2.3% year-over-year in April 2025, the lowest rate since early 2021 and below expectations, signaling moderating inflation. On a monthly basis, CPI increased 0.2%, with housing and energy driving most of the gains, while grocery prices slightly declined. Core CPI, which excludes food and energy, rose 2.8%, aligning with the Federal Reserve’s inflation target. Economists warn that tariff-related price increases may appear later in the year, particularly in goods like electronics and vehicles, as recent trade policy changes have not yet filtered into consumer prices. The Federal Reserve maintained its benchmark rate, citing uncertainty around trade dynamics and inflation, with potential rate cuts later in 2025 depending on economic conditions.9
U.S. April Budget Surplus Surges: The U.S. government recorded a $258 billion budget surplus in April 2025, up 23% from the previous year, driven by strong tax receipts and record-high customs duties. Customs revenue reached $16 billion for the month, reflecting elevated tariffs on Chinese imports and broader trade measures, though future collections may decline under a new 90-day tariff easing agreement. Individual non-withheld tax payments rose 16% to $460 billion, while total receipts for the month reached $850 billion, offset by a similar rise in individual refunds. Despite April’s surplus, the cumulative deficit for the first seven months of fiscal year 2025 rose to $1.049 trillion, a 23% year-over-year increase. The rise in federal outlays was fueled by increased spending on Medicare, Medicaid, Social Security, and interest on the national debt, with total expenditures reaching $4.159 trillion.10
Jobless Claims Hold Steady: U.S. initial jobless claims remained unchanged at a seasonally adjusted 229,000 for the week ending May 10, 2025, consistent with a low-layoff trend observed in 2025. Despite stable claims, economic uncertainty stemming from ongoing tariff policies has led companies to delay hiring and withdraw financial forecasts. Continuing claims, seen as a proxy for hiring activity, rose to 1.881 million, while the median unemployment duration increased to 10.4 weeks in April. Small business job openings fell to their lowest level since January 2021, according to the National Federation of Independent Business. Economists have slightly lowered their unemployment projections for 2025 following a temporary U.S.-China tariff truce, with Goldman Sachs now forecasting a year-end rate of 4.5%.11
Small Business Optimism Declines Again: U.S. small-business confidence fell in April 2025 for the fourth consecutive month, with the National Federation of Independent Business Optimism Index declining to 95.8, below its long-term average. The share of business owners reporting unfilled job openings dropped to 34%, the lowest level since January 2021, signaling a cooling labor market. Employers remained cautious about hiring amid trade policy uncertainty and weakening demand, despite continued low layoff levels. Inflation concerns have eased, but taxes and labor quality remain key challenges for small firms. The decline in job openings and reduced expectations for improved business conditions contributed most to the overall sentiment drop.12
Retail Sales Slow Amid Tariffs: U.S. retail sales rose just 0.1% in April 2025, a sharp deceleration from March’s 1.7% gain, as consumer demand weakened following the expiration of front-loaded purchases ahead of tariffs. Core retail sales, which exclude volatile components, declined 0.2%, suggesting downside risks to second-quarter GDP growth after a contraction in the first quarter. A separate report showed producer prices fell 0.5%, led by declines in services such as airfares and hotel accommodations, with margins for retailers and wholesalers shrinking 1.6%. Despite a 90-day U.S.-China tariff truce, businesses remain cautious, pulling financial guidance amid continued policy uncertainty and inflationary pressure from sector-specific tariffs. Economists expect subdued growth and forecast the Federal Reserve may resume interest rate cuts later in 2025, as supply shocks and tariff effects persist.13
China Shifts Trade Amid Tariffs: China’s exports rose 8.1% year-over-year in April 2025, despite a 21% drop in shipments to the U.S., as trade flows increasingly shift toward Southeast Asia and the European Union. Exports to ASEAN countries surged 20.8%, with Malaysia and Vietnam emerging as key alternative markets, while EU-bound exports reached $90 billion. However, China’s imports from the EU declined 16.5%, and the unresolved Comprehensive Agreement on Investment (CAI) continues to strain relations. Domestically, China’s manufacturing sector showed signs of contraction, with its official PMI falling to 49.0, amid slowing demand, high youth unemployment, and regional financial stress. Supply chains are under pressure as Chinese firms reroute goods through third countries to avoid U.S. tariffs, causing increased freight rates and shipping disruptions despite lower trade volumes.14
Markets Rally on Tariff Pause: U.S. equity markets surged following a surprise de-escalation in trade tensions with China, with the Dow Jones Industrial Average rising over 1,100 points and the Nasdaq entering a bull market. The S&P 500 climbed 3.3%, driven by gains in technology, defense, and logistics stocks, while the dollar rebounded and Treasury yields stabilized around 4.38%. A 90-day reduction in tariffs—from 125% to 10%—helped ease investor fears, though the pause remains temporary and uncertainty persists. Analysts remain cautious, noting long-term disruptions to supply chains and persistent volatility due to fluctuating trade policy. The tariff development coincided with renewed legislative efforts to extend 2017 tax cuts, compounding investor uncertainty over the broader economic outlook.15
Meta Delays AI Model Release: Meta Platforms has delayed the launch of its flagship AI model, “Behemoth”, amid internal doubts about its readiness and performance gains over previous versions. Initially scheduled for release in April 2025, the launch has been postponed to fall or later due to training difficulties and underwhelming internal test results. The delay has triggered concerns among engineers and executives, with frustration reportedly directed at the team behind Llama 4, and potential management changes under consideration. Meta has publicly claimed Behemoth outperforms rival models, though the current version reportedly fails to meet internal benchmarks and public expectations. The setback reflects broader challenges across the AI sector, where companies including OpenAI and Anthropic are also facing delays in releasing next-generation models.16