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Surprise U.S.-China Trade Deal Gives Global Economy a Reprieve

Tariff reductions are bigger than expected and Bessent says ‘neither side wants to decouple’

The U.S. and China have agreed on substantial tariff cuts following a weekend of trade talks in Geneva, slashing levies imposed on each other down to 10%. Photo: Fabrice Coffrini/AFP via Getty Images

Key Points

US and China agree to de-escalate trade war, unwinding most tariffs imposed since April. Both countries will lower reciprocal tariffs to 10% for 90 days to allow trade talks. Other tariffs remain, including 20% levy related to fentanyl; US seeks lasting trade deal.

A few days ago, it would have seemed almost impossible. But on Monday, to the surprise of global investors and everyday businesses fearing a trade war, the U.S. and China agreed to a truce. 

The world’s two biggest economies unwound for now most of the tariffs they had imposed on each other since April in a tit-for-tat battle that was threatening to stoke U.S. inflationcrash China’s export engine and upend the global economy

Stock markets in the U.S. and elsewhere surged on the news. The dollar and bond yields rose, reflecting expectations of faster U.S. growth as trade tensions recede.

Investors and analysts said the outcome was much better for the global economy than they had expected on Saturday when U.S. and Chinese negotiators started two days of intensive talks at the Geneva residence of the Swiss ambassador to the United Nations. 

The U.S. agreed to lower the base level of tariffs on most Chinese goods to 30%, from 145%, while China said it would cut its levies on U.S. products to 10% from 125%. The 30% rate imposed by the U.S. includes a levy related to China’s alleged role in the fentanyl crisis plaguing the U.S., an issue in the weekend’s talks. 

The U.S. tariff on many Chinese products will be higher than 30%. U.S. duties on steel, aluminum and autos remain in place, as do some earlier tariffs on certain Chinese goods imposed during President Trump’s first term in office and that of former President Joe Biden

Washington and Beijing agreed to keep the new tariff levels in place for 90 days, with the goal of working toward a broader deal on trade in further talks. 

China said it would cancel or suspend some nontariff trade measures it had imposed to hit back at the U.S., potentially including easing export restrictions on critical minerals used in batteries and other high-tech applications. 

Speaking at a news conference in Geneva, Treasury Secretary Scott Bessent said the U.S. was seeking “a long-lasting and durable trade deal” with China. He said a clear break between the two economies wasn’t desirable and “neither side wants to decouple.”

Bessent said the U.S. still had grave concerns about its unbalanced trading relationship with China. He cited issues such as China’s management of its currency and its subsidies for manufacturing, which Washington believes are a major factor driving factory-job losses in the U.S. Those and other issues will be discussed in talks over the next 90 days, he said. 

The outcome forestalls for now what was shaping up to be a destructive clash between the world’s two biggest economies, with potential ripple effects across the globe. 

Retailers in the U.S. were warning of empty shelves if they couldn’t get Chinese products, and some small businesses were worried they would go under without easy access to China’s vast factory floor. Economists warned higher prices and shortages risked reigniting inflation. 

For China, an unrestrained trade clash with the U.S. would threaten millions of jobs tied to serving U.S. consumers and potentially worsen trade tensions with other countries wary of a surge in Chinese imports. China was also worried about losing access to some U.S. products it still needs, such as Boeing planes, aircraft parts and certain chips

 

Stacks of glassine envelopes used to package fentanyl.
Glassine envelopes used to package fentanyl. Photo: Mark Schiefelbein/Associated Press

 

Prices for goods leaving Chinese factories have been falling for more than two years as production outstrips demand—a deflationary trend that would only get worse if trade barriers rose further. 

Dan Ives, an analyst at Wedbush Securities, said the scale of the tariff reduction was “a dream scenario.” Trump had suggested just days ago that an 80% tariff on Chinese goods “seems right.” 

“The tariff pause offers a reprieve from what had begun to resemble a bilateral trade embargo,” said Robin Xing, chief China economist at Morgan Stanley in Hong Kong. He said a surge in trade between the U.S. and China was likely during the 90-day window as both sides rush to take advantage of the lower tariffs, a repeat of frontloading that occurred earlier in the year. 

Bessent said the two sides agreed to a framework to keep talks progressing, which he said should help avoid any future tit-for-tat escalation of the kind that followed Trump’s April 2 tariff announcement. At the time, Trump imposed an additional 34% tariff on China as part of his global tariff plan affecting most U.S. trading partners, and the figure kept rising as Beijing and Washington traded rounds of retaliation.  

Though the sides didn’t come to agreement over the fentanyl tariffs, the U.S. made clear in private meetings its views on the importance of combating the deadly drug. Trump has accused China of playing a role in the illicit fentanyl trade, something Beijing denies. 

In a private meeting on Saturday, Bessent picked up a bit of sugar out of a dish on the table and told Chinese officials that the amount he was holding could kill a person if it were fentanyl, said a person with direct knowledge of the exchange. Bessent picked up a little more sugar and said that amount could kill people across Geneva. Then he picked up more and said that much could kill people across Switzerland. 

In a briefing with a small group of reporters, Bessent said that although fentanyl wasn’t the main focus of the trade talks, the Chinese delegation included China’s minister of public security, Wang Xiaohong, who was able to discuss the issue in detail with U.S. officials. Such an official isn’t usually part of a trade team, Bessent said, and that “shows their responsiveness to our concerns,” he said.

Since the start of his second term, Trump has been adamant about the need to raise tariffs on China, sticking to his position even when markets were taking a hit. He said China had been ripping off the U.S. for decades and it was time to put pressure on Beijing. 

But in recent weeks, Bessent had focused on the potential downside of an extended trade war with China. He repeatedly said the situation with China was unsustainable.

In the same social-media post suggesting an 80% tariff on China, Trump also named his Treasury secretary as the person to make the call. He said the rate was “up to Scott B.”

Bessent said during the briefing that Trump was given updates after each of the two days of meetings in Geneva.

Write to Brian Schwartz at brian.schwartz@wsj.com and Jason Douglas at jason.douglas@wsj.com

 

Author: Brian Schwartz Follow in Geneva and Jason Douglas Follow in Singaporex

Source: WSJ:

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