The United states and China have agreed to pause higher tariffs for 90 days. Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer said Monday, after weekend talks in Geneva with a Chinese delegation led by Vice Premier He Lifeng, that U.S. tariffs on Chinese goods would be reduced from 145% to 30%. Beijing said it would cut its blanket tariffs on American products from 125 to 10 percent. Both reductions will take effect on Wednesday.
What’s it all mean?
Depends in the longer run on whether the pause leads to a lasting agreement. I’d say the odds of a permanent cut in headline tariffs before the pause expires in the middle of August are pretty good. Better than 50/50.
But solving the detailed disagreements? much harder and much less likely. For example, there’s the U.S. demand/desire/plea that the Chinese stop suppressing the value of the yuan to keep Chinese exports artificially cheap. Beijing has declared this an issue of national sovereignty. The United States wants China to buy more U.S. products–as long as they’re not products using cutting edge technology–but exactly what? And the Trump Administration knows that China didn’t meet promises made during the first Trump Administration trade deal with China.
In the shorter run–which is all that I expect the financial markets to care about this morning–the pause is the difference between a defect trade embargo that was on the verge of shutting down all U.S.-China trade and the opening of a trading window even with substantially higher tariffs. The 30% rate is, let’s remember, still significantly higher than the 19% average tariff in 2020 as a result of the first Trump trade war.
I expect a huge surge in U.S. imports from China in the near term as companies like Best Buy and Mattel to stock up on inventory. (I’m thankful that I’m not a CEO who has to decide how much inventory to build up before the potential end of the pause in August.)
If you own any kind of seaworthy boat, you should be able to get a contract for shipping goods across the Pacific. (Expect transportation stocks to bounce today.)
Who knows what this will do to inflation and inflation expectations. I doubt that the Federal Reserve has a clue. Will the financial markets raise the odds for a July interest rate rate cut? Or figure that the increased uncertainty will keep the Fed sitting on its hands until September. (The Fed doesn’t meet in August.)
And what about companies, like Apple, that have planned to diversify their supply chains away from China? I’d assume that CEOs, seeing their potential vulnerability, will go ahead with these plans. But that’s only my speculation at this point.
