What next as China and the US pull back from the brink 

Last month, we came close to imposing a de facto trade embargo between the United States and China. Reciprocal tariffs on goods from both countries stood well in excess of 100%, threatening to severely disrupt US$582 billion of trade in goods. 

Container shipping volumes between the two largest economies in the world plummeted. Goods shortages and empty shelves loomed on the horizon. US businesses began to assess whether they had to close down or fire workers.

Then on May 10, US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer traveled to Geneva in Switzerland, to meet with Chinese President Xi Jinping’s economic policy czar, Vice-Premier He Lifeng. 

They struck a truce, at least temporarily. That is a good thing. 

After hours of closed-door negotiations, Washington and Beijing agreed to pause steep reciprocal tariffs for 90 days. They lowered the American tariff rate on most Chinese imports to 30%, and dropped Chinese tariffs on US exports to 10%. 

Trade deal

Yet, the tariff truce falls well short of a bona fide trade deal, although the stage is now potentially set for serious negotiations on a broader and longer-term agreement. What it will look like remains to be seen. 

Recently, President Donald Trump wrote on Truth Social that he wanted to see “an opening up of China to American business.” 

For decades, Washington worked with Beijing to open its market by adopting a series of policy reforms. This involved a shift from a one-sided economic strategy driven largely by export-led growth policies to a consumer-demand-led model. 

These efforts had only modest success. The alternative approach is to replicate what Trump did in his first term in the Oval Office, which is to negotiate an accord that is more of a purchase-and-sales agreement than a true trade deal. 

The Phase One agreement Trump in 2020 committed China to buy an additional $200 billion of exports from the US above 2017 baseline levels.

Beijing also agreed to open select financial services sectors, improve intellectual property rights enforcement, and refrain from currency manipulation and forced technology transfer. These were commitments China had already largely made in previous negotiations. 

How did the Phase One deal work? According to Chad Bown at the Peterson Institute for International Economics, Beijing ended up meeting just over half of its total purchase commitments or 58% of what it had agreed to buy. 

Economic model

The Covid-19 pandemic certainly played a role, but even as China’s economy bounced back, its overall imports of covered goods did not hit the target levels. 

Much has changed in the Beijing-Washington relationship since Trump last held office, but the structural dynamics of our economic and trading relationship have endured. China, of course, still tops the list for the largest single deficit with the United States. 

According to the Office of the US Trade Representative, the US goods deficit with China totaled $295.4 billion in 2024. Beijing remains committed, perhaps more than ever, to its mercantilist, export-driven economic model.

That is backed by a continued industrial policy program in the semiconductor and clean energy sectors, among others. 

If Trump opts to pursue a Phase Two style agreement, it would be advantageous this time – given his reindustrialization policy – to put greater focus on manufactured products. A good start would be to press China to fulfill the commitments under the Phase One deal. 

Trump does not seem to place as much value on services, which employ 80% of American workers and which now pay more on average than manufacturing jobs. But there remains the issue of how he might apply the principle of reciprocity to services.

Specifically, whether American firms should be able to operate in China the way Chinese firms operate in the United States. 

As for tariffs, the deal announced with the United Kingdom – a country with whom the US does not have a yawning bilateral goods deficit – appears to indicate that the Trump administration is determined to establish a 10% tariff as the new worldwide baseline. 

Backing down

That is about a fourfold increase in the average level of duties which existed prior to him taking office in January. But it has largely been accepted – by markets, commentators and even the corporate sector – with a sigh of relief.  

It is fascinating to see how effective Trump is in setting out a maximalist position in imposing reciprocal tariffs as high as 48% on countries such as Laos and 145% on China. Then securing a significant achievement by backing down to a level that has not been seen in 80 years. 

At 10%, the question remains whether the White House will be successful in achieving its objectives, including raising revenue and reindustrializing the US economy. 

A 10% tariff is likely to reduce but not eliminate imports and, therefore, could raise customs revenue, though too little to pay for making the Trump tax cuts permanent or substitute for the federal income tax, as some have suggested. 

But a 10% duty, with the uncertainty about whether it is permanent or subject to change, is probably not sufficient to compel companies to make the investments necessary to move their production or supply chains to the United States, even if that were cost-competitive. 

Trump seemed to recognize this when he distinguished between the baseline tariffs and higher duties on strategic sectors. As he told reporters at a press conference on the pharmaceutical drug pricing: 

[The 90-day pause] doesn’t include tariffs on cars, steel, aluminum, things such as that, or tariffs that may be imposed on pharmaceuticals, because we want to bring the pharmaceutical businesses back to the United States. 

In other words, if the Trump administration is to pursue “strategic decoupling” and encourage production of strategic goods in the United States, it might well require duties in critical sectors at a substantially higher level. 

Specific sectors

Settling on 10% might, therefore, be the worst of all worlds – from the perspective of Trump’s objectives. It could be too low to raise substantial revenue, too high to avoid pushing up prices, but not high enough to reindustrialize the US. 

He has conditioned the markets, the business community, and our trading partners – not to mention Congress – to accept a new unilateral blanket tariff on exports to the United States, with some variations for specific sectors and specific countries. 

A 10% tariff on most of the world, and a 30% on China, could well be the new normal. As tariffs have proven to be quite sticky and difficult to lift once imposed, this might well prove to be one of Trump’s most enduring, if less than fully successful achievements.

Michael Froman is president of the Council on Foreign Relations.

This edited article was published by the Council on Foreign Relations under a Creative Commons license. Read the original here. 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy of China Factor.