If you listen to President Trump, you wouldn't know that China and America are superpower rivals locked in a furious trade war. Ahead of Thursday's much-anticipated meeting in South Korea with a fragile trade truce teetering, Trump hailed Xi Jinping as a "great leader of a great country." And after the meeting, having agreed to a one-year trade deal, he told reporters:
"On a scale of 0 to 10, with 10 being the best, the meeting was a 12."
So, in this article, we will take a look at this new China-US trade deal and whether it lives up to Trump's rhetorical enthusiasm.
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A Quick Recap: The Road to the Deal
Let's start with a quick recap of where we were going into the meeting. Throughout both Trump's first term and Biden's term, the US imposed a series of tariffs on China, which took the average tariff rate up to about 20%. China responded with its own tariffs, taking the average rate on US imports up to about 20% as well.
However, things escalated dramatically on Trump's so-called liberation day on April 2nd when Trump announced sweeping tariffs on basically every country, including a 34% flat tariff on China. China retaliated by matching Trump's tariff rate, sparking a tit-for-tat trade war that climaxed with the US imposing a 145% tariff on China and China imposing a 125% tariff on the US.
China also imposed an unofficial embargo on American soybean imports, which has since become a big issue for American soybean farmers, as well as additional restrictions on certain rare earth elements. For context, rare earth elements are needed for a number of advanced technologies, and China dominates across the entire supply chain. China framed its restrictions as a symmetrical retaliation against America's export restrictions on advanced chips going into China, which began under Biden but were expanded by the Trump administration.
On May 12th, after negotiations in Geneva, the two sides agreed to a 90-day trade truce with the US reducing its flat tariff rate to 30% and China reducing its flat tariff rate to 10%. According to analysis by the Peterson Institute for International Economics, when combined with pre-existing tariffs, these flat tariffs took America's average tariff on Chinese goods to about 58% and China's average tariff on US goods to 33%.
Escalation and the "50% Rule"
After a series of bilateral discussions in London, Stockholm, and Madrid, China agreed to lift restrictions on rare earths. The US agreed to relax restrictions on chip exports, and both sides agreed to extend the so-called tariff truce. That was until earlier this month when the trade war suddenly escalated once again.
The approximate cause of this seems to have been a decision by the US Commerce Department to adopt what's become known as the "50% rule," which expands trade restrictions on certain sanctioned companies to smaller companies that are at least 50% owned by one or more of these sanctioned companies. Because quite a lot of big Chinese companies are on these sanctions lists and these big Chinese companies have stakes in lots of smaller Chinese companies, this new rule would have affected thousands of smaller Chinese companies that were never on the initial sanctions list.
Beijing reacted by announcing a slew of new export restrictions that would essentially require foreign companies to ask for Beijing's approval to export goods that contain even trace amounts of Chinese-sourced rare earth materials. It's hard to overstate quite how broad these restrictions could be. Basically, every advanced technology, including semiconductors and military jets, uses Chinese-sourced rare earths, which means that Beijing would essentially get veto rights over the entire supply chain.
China also imposed port fees for US ships docking in Chinese ports, mirroring similar fees announced by the US back in April. Trump was apparently blindsided by this and reacted by announcing a retaliatory 100% tariff from November 1st.
What's in the New "One-Year" Deal?
This meant going into Thursday's meeting that the US had imposed effectively a 58% tariff on Chinese imports with the threat of an additional 100% flat tariff rate as well as restrictions on semiconductor exports, port fees, and the so-called 50% rule. For its part, China had imposed a 33% tariff on American imports, an embargo on American soybeans, port fees, and restrictions on rare earths.
At Thursday's meeting, though, most of these restrictions were lifted or relaxed. According to various reports, the US agreed to withdraw the so-called 50% rule, suspend port fees, and essentially reduce its tariff rate by 10%. This takes the average rate down to about 48%. Trump also said that the two sides talked about relaxing semiconductor restrictions, but nothing concrete was agreed, and Trump implied that the relaxation wouldn't cover the most advanced chips.
For its part, China agreed to withdraw its rare earth restrictions, suspend port fees, and resume buying American soybeans. Trump also posted on Truth Social that China had agreed to buy "American energy," although we didn't really get any details as to what this means.
In this respect, the deal looks quite a lot like the so-called "phase 1" trade deal agreed in Trump's first term, where China essentially agreed to buy hundreds of billions of dollars worth of American soybeans and LNG, albeit with far higher tariffs this time round. China didn't actually follow through on its phase 1 commitments, but Trump might have more luck enforcing the deal this time round because it apparently has to be renewed annually.
Either way, this sort of deal suits both sides because it's a sort of tangible thing that's appreciated by both voters and the relative industries, in this case, farming and energy. While China doesn't mind because it doesn't really alter the overall balance of trade, the US will continue to run massive trade deficits while China will continue to run massive trade surpluses, allowing China to maintain its industrial dominance.
Analysis: A Scaled-Down Ambition
The only real con for China is the 47% average tariff rate is still pretty high by recent historical standards. Although it's worth noting that Chinese exports to the US have held up all right and China's overall exports have continued to grow because China's needed to redirect these exports to other regions.
Interestingly, Trump has also said that while Taiwan didn't come up, he and Xi talked about Ukraine for a long time and, "We're both going to work together to see if we can get something." This could be good news for Ukraine. China is now Russia's largest trading partner and therefore one of the few countries with serious leverage over the Kremlin.
As a final thing, while this deal does leave China worse off than the status quo—after all, a 47% tariff is still pretty massive—it's worth noting quite how scaled down Trump's China ambitions have become. At the start of his term, there was speculation about some sort of grand reordering of the global trading order, or at least some sort of challenge to more structural economic issues like China's currency manipulation. This obviously hasn't happened and Trump has instead focused on more trivial issues like soybeans and port fees.
Share Your Thoughts
What is your opinion on this new trade deal? Does it live up to the hype?
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