Trump’s China Truce on Tariffs Comes at Cost to U.S. Credibility

Zongyuan Zoe Liu is the Maurice R. Greenberg senior fellow for China studies at the Council on Foreign Relations.

The trade talks in Geneva between the United States and China yielded greater-than-expected de-escalation in the ongoing trade war, but it won’t be so easy to undo the damage this skirmish has done to U.S. trade credibility and the role of the dollar on the global stage.

The two sides agreed to a point-for-point mutual reduction in their respective tariff rates for an initial period of ninety days, bringing rates down to near the same levels that prevailed before the tit-for-tat escalation. This reduction of 115 percentage points lowers the U.S. tariff rate on Chinese imports to 30 percent and 10 percent on U.S. goods flowing the other way.

In effect, the deal extends to China the same treatment that the Trump administration already granted to other countries on April 9 when it announced a pause to the implementation of “reciprocal tariffs.” Chinese goods are still subject to the universal 10 percent tariff on all U.S. imports in addition to certain sectoral tariffs, which brings the effective tariff rate on Chinese goods to around 40 percent—still significantly higher than a year ago.

This de-escalation in the trade war has already provided relief to financial markets, which had begun to reflect concerns that a collapse in U.S.-China trade flows could cause a disruption in supply chains. This had some recalling the empty store shelves last seen in the United States during the COVID-19 pandemic. U.S. imports from China are likely to surge during the next three months as businesses and retailers stock up on Chinese goods. This stockpiling activity means greater demand for logistical services, resulting in higher container shipping costs and freight costs, which will add to inflationary pressures in the United States.

Clarifying Winners and Losers

The ninety-day tariff reprieve on Chinese goods completes the Trump administration’s walk back of its reciprocal tariff policy—the signature part of the April 2 (“Liberation Day”) announcement— but it’s too late to undo the long-term harm already caused. The dollar has weakened significantly against major currencies like the euro and the yen, which will result in less purchasing power of U.S. households and higher everyday costs.

Foreign investors in U.S. financial markets have also been burned by the precipitous decline of the dollar. At the end of last year, investors held an all-time high of $16 trillion in U.S. equities, or 18 percent of the whole stock market. Now, they will not be as eager to park their capital in the United States. This could bring higher volatility in U.S. bond and stock markets. Pervasive uncertainty is the true price of the trade concession that the Trump administration plans to extract from the rest of the world.

Chinese officials described the joint statement from the Geneva talks as “an important step to resolve differences through equal dialogue and consultation.” Although the Chinese side did not explicitly claim victory, the lack of defiant propaganda on Chinese social media suggests that Beijing views itself as the winner in this trade war round. The prohibitively high retaliatory tariffs amounted to a mutual trade embargo that lasted for thirty-nine days. The Trump administration will claim differently, but Beijing will think it is clear which side outlasted the other.

U.S. retailers and manufacturers’ just-in-time inventory management systems are great for hitting quarterly profit targets, but they are severe liabilities when fighting a trade war. A back-of-the-envelope calculation shows that it takes about thirty-four days for Chinese exports to reach U.S. consumers and the factories that use Chinese imports as industrial inputs. It takes about fifteen to twenty days for goods loaded in containers to reach the United States’  West Coast via ships from Chinese coastal ports. Once there, it then requires a week of unloading, inspection, and custom clearance, and then a second week for nationwide rail or truck distribution to reach cities on the East Coast.

Estimating a lean inventory level of about one month means that the price effects of tariffs were scheduled to become evident starting this summer. It is no exaggeration to say that the trade talks have saved summer vacation for many U.S. households.

Revealing the United States’ Achilles Heel

For China, the lesson learned is that the Trump administration isn’t willing to ignore the domestic pressure applied by American businesses. Their supply chains are still dependent on China, which means that their Achilles Heel is inventory logistics. This realization will be factored into China’s negotiation framework and economic statecraft calculations. Going forward, even if the Chinese government does not resort to additional tariffs or export controls, it could use technical and administrative measures to delay shipments destined for U.S. markets.

Beijing has shown its cards for how it plans to deal with the possible reimposition of tariffs in the future. China has spent years building up regional trade relationships with countries that can act as transshipment hubs for Chinese exports facing trade restrictions.

In April, while direct trade with the United States plunged, Chinese exports surged to Southeast Asian countries. After locally performing some minimal transformational work, the goods can be re-exported to the rest of the world, including the United States, without the penalty of China specific tariffs.

Trump administration officials can attempt to frame the trade talk as achieving the goal of “strategic decoupling.” In reality, they have lost their credibility and given China more leverage.

 Washington and Beijing have bought themselves three months to figure out what each side wants and what it must have. The natural starting place for further trade talks is to pick up where the 2020 Phase One Trade Agreement left off, which was generally agreeable to Beijing. Otherwise, the road to an updated trade agreement is uncertain. There will be unexpected geopolitical events that could cause negotiations to start and stop, and any one of them could touch off another round of escalation.

The current ninety-day pause will probably be extended as the two sides edge closer to a comprehensive deal, but a further reduction in tariff rates seems unlikely. Beijing can live with a differential rate on Chinese goods that is only 20 percent higher than the rest of the world. The Trump administration will likely shift its focus to consolidating its position within the Western trade bloc by striking deals with Europe and Japan. To get quick wins, the administration will trumpet revised frameworks with allies, but the typical trade deal of substance takes about  eighteen months to negotiate.

In the meantime, Chinese small businesses—the backbone of Chinese exports—will not halt export to wait for the two governments reach a trade deal. They will continue to expand markets and manufacture facilities overseas in places where they can sell products for higher margins and further cut costs wherever possible.

This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy.