Upcoming U.S. Treasury Secretary Scott Bessent dropped a bombshell on Monday. Leaders on a roll First, he declared an unprecedented 90-day pause in the escalating U.S.-China trade war. After deep negotiations throughout the weekend, the two countries have come to an interim ceasefire. This is a much-needed pause in a struggle that has been ongoing since early 2018. As a component of this deal, China has committed to lowering its overall tariffs on U.S. goods from a staggering 125% down to 10%. In exchange, the U.S. will reduce its tariffs on Chinese imports from 145% to 30%.
This pause comes at an incredibly important time. Ironically, both countries today are facing increased economic strains and supply chain issues, exacerbated by the ongoing trade war. Their joint decision to temporarily subdue tariffs is an encouraging sign that both governments understand how vital stability in international trade will be moving forward. This shift couldn’t be more timely considering the unpredictability of the global economy.
The Roots of the Trade Conflict
The U.S.-China trade war started in earnest in early 2018. At the time, President Donald Trump had just slapped tariffs on hundreds of billions of dollars in Chinese products, claiming that China was engaging in unfair business practices and stealing IP. This first step triggered a rapid fire response from the Chinese. In retaliation, they placed retaliatory tariffs on a wide range of American products, such as automobiles and agricultural products including soybeans.
Fearing economic escalation, both countries quickly launched a spiral of escalatory tariffs on each other. These measures not only severely disrupted their bilateral trade, but sent ripples across the entire global economy. Fast forward to January 2020, when the trade war hit a critical juncture with the signing of the U.S.-China Phase One trade agreement. This agreement pushed China to take important structural reforms and make drastic changes to its economic practices. Shortly after signing this agreement, the trade war flared up again. Both countries retaliated with their own increased tariffs, throwing American businesses and consumers into an unexpected fog of uncertainty.
Recent Developments and Economic Impacts
Secretary Bessent’s announcement is timely, indeed, as criticism continues to mount on the Biden administration’s approach to tariffs. Despite his administration’s clear anti-tariff stance, President Joe Biden has maintained many of the tariffs of his predecessor since taking office. He’s similarly been behind new levies – tariffs – with Chinese imports. This newest agreement is an example of the recent turn away from conflict towards the use of diplomacy and negotiation to overcome continued economic hardships.
After the 90-day pause announcement, the DXY jumped to a three-week high. It actually went up over 1 percent! This is partly due to investor excitement over the potential positive impact from improved trade relations. The yield on the 10-year U.S. Treasury bond jumped to 4.45%. The record high reflects increased optimism in the market about a possible economic stabilization now that the trade war has been temporarily put on hold.
This tariff reduction has implications beyond U.S.-China relations. It further saddens global supply chains that have already experienced streak from a long-lasting, ongoing trade war. Reducing tariffs lessens the burden for businesses to procure materials and goods across national borders. Because of this, consumers can benefit from lower prices.
Future Outlook and Political Ramifications
Looking ahead, the future course of U.S.-China trade relations is highly uncertain. Former President Donald Trump, meanwhile, is making no secret of his plans for a possible return to the White House in 2024. In fact, he has threatened to raise them much higher—60%—on Chinese imports himself, should he prevail. This promise has the potential to re-ignite tensions and unravel any progress made in this current lull.
As the recent agreement illustrates, it’s a complicated world of international trade policy. It further highlights the importance of a collaborative, strategic conversation between the two countries. The current extended truce presents a renewed opportunity for positive relationship building. Persistent political undercurrents could make moving any sustainable solution farther downstream a difficult and treacherous endeavor.