Navigating the Trade Truce

The United States and China on May 12 announced a 90-day pause in their trade war. The truce allows both sides to lower their tariffs, remove Chinese export controls on critical minerals, and launch a new mechanism to rebalance trade and economics. The results of the weekend talks in Switzerland and the precipitous drop in US tariffs from 145% (to 30%) and Chinese tariffs from 125% (to 10%) were good news, and the mood music for future talks between the United States and China remains positive. But the announcement is only the end of the beginning, and much work remains to achieve structural changes in the US-China economic relationship. 

Like the US-UK Economic Prosperity Deal (EPD), struck only a few days ago, this agreement is more about de-escalating the tariff wars, buying time for technical teams to negotiate, and allowing US President Donald Trump to claim momentum and traction with his strategy. The tariffs were at unsustainable levels, creating sudden, dramatic shifts in supply chains that caused panic in the financial markets, as well as with retailers and consumers in the United States and factories in China. 

Lowering the US tariff rate is an improvement—it is now at levels that can be absorbed by larger retailers and their suppliers. However, many small US companies will still see the tariffs as too high. They may lose sales due to consumers’ inability to pay higher prices for their goods, and become uncompetitive in international markets. 

US importers of Chinese goods may also await the negotiations on fentanyl, referenced in the agreement, to see if the 20% fentanyl tariffs may be lifted in the short term. The current, complex calculations around tariffs combined with shifting US customs rules will continue to paralyze business decisions and shifts in supply chains. 

Finally, nothing about this deal is durable or certain. Tariffs can be snapped back if talks do not go as planned. The predictable global rulebook on trade has been thrown out in favor of bilateral deals. Though who they benefit is, at this stage at least, hard to determine. 

The US-UK EPD and the US-China deal illustrate a few facts that will remain points for future negotiations. 

• Negotiations for other countries may focus on the sectoral, Section 232 tariffs on strategic goods, including steel/iron, autos, pharmaceuticals, and semiconductors. Adaptations to current or future tariffs on these imports will require trading partners have laws and processes to  protect and secure supply chains based on adoption of US notions of economic security. Rules such as investment security measures, export controls, and ICT vendor security will be reviewed for compatibility with US rules. Meanwhile, blanket ten percent tariffs remain fixed for this round of negotiations.
• The definition of “ally” will be transactional, based on what concessions a country has offered to the United States as well as how aligned countries are with the president’s agenda on national and economic security.
• The use of tariffs to achieve a reordering of the international trading system, akin to the 1971 Nixon shock for currencies, continues. In 1971, the dramatic decision to de-link the dollar from a fixed gold exchange helped move the world to a new monetary standard, but the first and secondary impacts lasted a decade.
• Deals will not be as durable as the previous, congressionally endorsed agreements of the past, creating more volatility and variability over time. Enforcement will be negotiated on a case-by-case basis. Agility and resilience will continue to be critical for investors and traders.

President Trump’s asymmetric use of tariffs and US market power to rebalance global trade is bold and will play out over the coming months and years. The international trading system has significant structural issues given global imbalances and export-led development models. Countries that had been comfortable with the status quo are having to recalibrate their strategies and adjust to this new, less certain world. The US actions are as unpredictable and challenging as an ocean storm, but they create an opportunity to shape a future that improves how we navigate the next 80 years.

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