As the U.S. and China continue to send mixed signals about the progress of their trade talks, economists at Morgan Stanley project that both nations will begin negotiations and slowly decrease tariffs on Chinese imports to 60% by the end of Q2.

What Happened: Despite the anticipated discussions, tariffs are not expected to revert to their pre-January 25 levels. More in-depth talks in the second half of the year could further lower tariffs on Chinese imports to 34% by the end of 2025, indicating the abolition of the 20% fentanyl-related tariff.

"We believe that both the US and China will want a comprehensive deal, but that given the multiple issues involved, the discussions are likely to be complex and will take time to complete," stated Morgan Stanley, reported The SCMP.

Due to the ongoing disruption in the economic cycle, Morgan Stanley anticipates that growth will continue to decline. The firm warned in its note, “Unless tariff-related uncertainty is resolved quickly, the path ahead could be towards a sharp, synchronous slowdown.”

China’s economic growth in the second quarter is currently projected to fall below 4.5%, a slowdown from the 5.4% expansion recorded in the first quarter, according to Robin Xing, Morgan Stanley’s chief China economist.

Although China is anticipated to introduce another stimulus package of  1-1.5 trillion yuan (nearly $137.5 billion) in the latter half of the year, Morgan Stanley cautions that it will fall short of fully countering the growth shock caused by tariffs.

Meanwhile, Nomura cautioned if China were to lose 50% of its exports to the U.S., it could face a direct GDP reduction of approximately 1.1% in the short term.

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Why It Matters: To date, Washington has implemented tariffs amounting to 145% on Chinese imports, pushing the overall effective tariff rate to around 156%. In retaliation, Beijing has increased its tariffs on U.S. goods to 125%, adding to earlier duties already in place.

The ongoing tariff war has had significant repercussions on various sectors. For instance, Chinese airlines and Boeing have been adversely affected by U.S.-imposed tariffs. Despite this, there are differing opinions on the potential economic impact.

CNBC’s Jim Cramer dismisses recession fears, arguing that strong employment trends could prevent an economic downturn. However, JPMorgan has predicted that the tariff war could lead to agreements between the U.S, and its trade partners, along with a significant rise in tax rates.

Invesco QQQ Trust, Series 1 ( QQQ ) declined 7.4%, while the SPDR S&P 500 ETF lost 5.78% on a year-to-date basis, amid tariff uncertainties.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.