In a move that provided the world with some much-needed respite, President Donald Trump has reached a temporary agreement with China to reduce tariffs for the next 90 days. However, the air remains thick with uncertainty, and concerns linger that the trade war may have already inflicted some damage.
After discussions in Switzerland, the Trump administration consented to reducing its 145% tariffs on Chinese imports to 30%. Simultaneously, China agreed to cut its retaliatory tariffs on U.S. goods from 125% to 10%, providing a window for further negotiations. Trump hailed this de-escalation as a triumph and indicated plans to speak with Chinese President Xi Jinping about preserving the economic ties between the worldโs two largest economies.
However, tariffs remain elevated compared to when Trump assumed office, and the unpredictable nature of White House decisions has left CEOs, investors, and consumers cautious, potentially deterring risk-taking activities. Trump appears committed to maintaining tariffs, as he stated that the global economy cannot revert to its status on January 19, 2025, before he took office. The president and his aides have asserted that a minimum 10% tariff will apply to most imports, despite fluctuations.
This 10% has served as Trumpโs baseline for negotiations, introduced following an abrupt announcement on April 2 that unsettled financial markets. It also features in recent agreements with the United Kingdom. The newly instituted 30% tariff on Chinese goods incorporates 20% linked to Chinaโs involvement with fentanyl, with the remaining 10% applied generally.
Trump has suggested possible exclusions, yet sector-specific tariffs on autos, steel, and aluminum remain, and he has indicated potential import taxes on pharmaceuticals. He instructed House Speaker Mike Johnson and Senate Majority Leader John Thune to factor tariff revenues into funding planned income tax cuts.
Amidst this, optimism emerges as both nations seem to be aligning closer to reality. Taisu Zhang, a Yale University law and economic history professor, opines that the chaos served to recalibrate expectations on both sidesโeach initially misjudging the otherโs economic and political resilience. Both countries appear to be converging on goals that could benefit them mutually: increased consumption in China and boosted manufacturing in the U.S.
The stock market has reacted favorably, with the S&P 500 rising by 3.3% following the announcement, seeming to confirm the wisdom in lowering tariffs for fostering diplomatic progress. Yet, concerns about potential supply chain disruptions persist. The initial high tariffs could have reduced shipments from China, risking empty store shelves in the U.S., akin to shortages experienced during the COVID-19 pandemic. Now, with a temporary reduction in tariffs, a rapid influx of goods might strain logistics and drive up shipping costs.
The situation promises a โbullwhip effect,โ warns Michael Starr of Zencargo, leading to surplus supplies on the U.S. market as companies rush shipments within the 90-day period. This frenzy seeks to capitalize on the lower tariffs ahead of potential future hikes.
Despite the short-term promising aspects of the agreement, uncertainty continues to shroud the future of U.S.-China trade relations. University of Michigan economist Justin Wolfers cautions that a mere reduction from high tariffs is not a complete solution. The past four months under Trumpโs administration have seen unpredictable policies, from high import taxes to international territorial threats.
Businesses have started adapting to the initial 145% tariffs, potentially delaying changes until thereโs a clearer policy framework. Even with a strong job market that has withstood external economic pressures, like rate hikes under President Joe Biden, the 30% tariffs still present hardships. They pose a substantial cost to businesses and consumers, possibly stalling company growth and hiring.
Kevin Rinz from the Washington Center for Equitable Growth suggests that firms may manage the 30% tariff temporarily, yet uncertainty about future rates could stifle business operations and induce market paralysis. Rinzโs analysis, based on Trumpโs rationale of long-term national gains from short-term tariff pains, foresees a slowdown in hiring reminiscent of a recession.