Last week, the US and China held their first trade talks in Geneva, after US President Donald Trump on April 2 announced sweeping “reciprocal” tariffs on most US trading partners. The countries issued a joint statement after the meeting stating that both sides would temporarily reduce tariff rates by 115 percent to ease trade tensions and allow three months to resolve their differences.
Under the agreement, US tariffs on Chinese imports would be reduced from 145 percent to 30 percent, while Beijing would lower its levies on US imports from 125 percent to 10 percent. The two sides also agreed to establish a long-term consultation mechanism to promote communication on economic and trade issues. The results caught most people by surprise, as few expected the US and China to agree on tariff reductions so quickly and by so much.
Before the deal, the extremely high tariffs the US and China imposed on each other nearly constituted a trade embargo, severely harming global economic activity. The US and China accounted for nearly 40 percent of the world’s economic activity last year, if their commodity trade, service trade, consumption, investment and government spending are all taken into account, IMF data showed. Therefore, when 40 percent of global economic activity is paused due to a tariff war, the impact is enormous.
While trade issues remain — including port fees, fentanyl-related tariffs and sector-specific tariffs — the temporary reduction of levies effectively avoids the acute risk of supply chain disruptions and significantly lowers the re-escalation of trade tensions between the world’s two largest economies.
With the temporary truce, Chinese exporters are expected to resume front-loading of production and shipments to the US in the 90-day window, which would provide a near-term boost to China’s economy and benefit related industries. However, the main issue with China’s economy is that its consumer deflation is persisting, indicating that Beijing’s stimulus policies introduced in September last year have largely been short-lived and generated a negligible effect on the real economy.
For the US, people might no longer worry about an immediate economic hard landing along with rising prices as supply chain bottlenecks are eased, but concerns persist of a future slowdown after the completion of front-loading shipments. Experts also expect rising inflation in the medium to long term, as China still has irreplaceable production capacity in some industries and if no deal is reached after the 90-day period lapses.
For other US trading partners, the outcome of the US-China trade talks and a major deal accomplished between Washington and London would act as a guide for their negotiations with the White House, as the cases suggest that the Trump administration is looking for quick-win deals rather than prolonged standoffs. Although countries would speed up negotiations with the US in the weeks ahead, considering that US trade policy is still full of uncertainty, they would also have to expect necessary adjustments in unavoidable cases, be it tariff rate differentials, currency exchange rates or other nontariff trade barriers.
While Trump’s aggressive tariff moves triggered turmoil in financial markets, his halting of most “reciprocal” tariffs on global trading partners for 90 days reflects the weight of the market turbulence, leaving room for negotiations. Therefore, the US and China each taking a step back in tariff discussions last week represents a way forward for other trade talks and would have some positive implications for the macroeconomy. The problem is that the relief could prove temporary and potential trade talks might last longer than expected, given the unpredictability of Trump’s policy stance.
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