Trade war ceasefire
After extensive discussions in Geneva over the weekend, the US and China have agreed on a significant temporary rollback of tariffs. Both countries will suspend most of the duties imposed since the “liberation date” on April 2nd and will reduce US tariffs on Chinese goods from approximately 145% to 30%. Similarly, China’s retaliatory taxes will drop to 10%, adjusting from the baseline Trump tariff applied to imports from other nations earlier this year.
In a joint statement, both sides announced that they would have 90 days to negotiate a more comprehensive resolution. This agreement offers a meaningful respite for the global market, leading to sharp increases in stock prices and the dollar. Investors are optimistic that the Federal Reserve may now reassess interest rate cuts, with the market anticipating nearly 10 basis points of easing; July rate cuts now seem less likely.
Bank of America reports that the effective tariff rates on all imports have decreased significantly—from over 20% to about 12%. Their analysis indicates that this could lower the Core PCE inflation rate by as much as 28 basis points, offering a slight boost to GDP. However, the remedies do come with costs, as about $300 billion in tariff revenue, equating to roughly 1% of GDP, won’t be immediately compensated.
Economic nationalists express concerns
While many investors may be celebrating, there are critics across the political spectrum who argue that the deal represents a tactical retreat for the US. They feel the US is giving up leverage in exchange for vague commitments.
Economist Alan Tonelson has remarked that it appears the Trump administration has continuously backed down. Even with an average 30% tariff, he believes the US has returned to a pre-negotiation status quo. He questions, “What did China concede in return?” with the agreement seemingly reverting to a three-month extension before the “liberation day” without substantial progress.
Tonelson also highlights the absence of non-tariff barriers in China, wherein issues like value-added tax rebates and state-driven policies remain unaddressed. He warns that relying on a 30% tariff to achieve trade goals is unrealistic.
Wall Street reacts
Concerns extend beyond economic nationalists. The Wall Street Journal commented that the tariff rollback represents an unexpected reversal, with analysts suggesting that the US hasn’t received significant concessions from China. Capital Economics’ Mark Williams noted that “China has sidestepped Trump’s threats.”
Bloomberg took it further, declaring the outcome was undoubtedly what China desired, as the discussions in Geneva favored their position. Notably, it was Treasury Secretary Scott Bescent leading the US negotiations, rather than Trump himself, which seemed to align with China’s preferences.
Interestingly, Trump hasn’t publicly announced the deal on social media, and there’s no evidence he has communicated directly with Xi Jinping. Instead, he has focused on the financial benefits from reduced tariffs and lowering prescription drug prices.
Strategic pause, not defeat
These developments suggest that China’s trade narrative is not concluded. The White House maintains that this is merely the start of a new phase in trade discussions, not a final agreement. The negotiation framework initiated by Bescent could still allow for stricter measures down the line. His role as a “good cop” might be a tactic to strengthen Trump’s position and readiness to reimpose tariffs if China fails to make substantial concessions.
Ultimately, Trump is aware that his legacy will hinge on his success in reshaping international trade rules in favor of the US. His first term set the stage, while his second term aims to rewrite those rules. This 90-day suspension could provide the necessary time to enhance negotiating leverage—not just with Beijing but also with voters and businesses.
Timing may play a politically advantageous role too. The tariff suspension aligns with initiatives aimed at generating new tax cuts and fostering economic growth, potentially revitalizing the US economy in the near future. A stronger domestic economy would bolster Trump’s negotiating power in forthcoming discussions, attracting more manufacturers and investments back to the US, irrespective of China’s offerings.
As Tonelson pointed out, “We can’t dismiss the possibility of a return to China’s stringent trade policies.” Following this ceasefire, if robust growth and a firm negotiating stance are maintained, coupled with a willingness to reinstate tariffs if required, this day’s rollback might be viewed not as a setback but rather a strategic pause.
