Trump needs to make a ‘nothingburger’ deal with China

Donald Trump declared there had been a “total reset” of trade relations between the United States and China after just two days of negotiations in Geneva. Is it really a “total reset”, though, or just an agreement to talk about one?

After US Treasury Secretary Scott Bessent and US trade representative Jamieson Greer concluded their meeting with China’s Vice Premier He Lifeng, Bessent described the talks as “very productive” while Greer said the speed at which agreement was reached “reflects that perhaps the differences were not so large as maybe thought”.

Donald Trump is desperate to extricate himself from the worst element of his trade war – the 145 per cent tariff on imports from China, and China’s 125 per cent response.Credit: AP

He Lifeng said an “important consensus” had been reached and the countries had agreed to create a mechanism to hold further talks on trade and economic issues – an agreement to talk more about an eventual agreement.

That’s similar to the recently announced UK trade “deal”, which was effectively just a framework for an agreement, with details to be filled in over coming months, or years, and which, given the US has a trade surplus with Britain and the British economy was already quite open to trade, has only very limited implications for both parties.

While Trump has hailed that agreement as “a tremendous trade deal”, others have described it as a “nothingburger” – and, in fact, a demonstration, along with the 90-day pause to his “reciprocal” tariffs, of Trump’s belated recognition (or maybe just that of his senior trade negotiators) that his “Liberation Day” tariffs threaten significant damage to the US economy and his domestic authority.

While it is promising that the Geneva meeting of US and Chinese officials appears to have been relatively friendly and constructive and did not further escalate existing tensions – which have created what is essentially a trade embargo between the world’s two largest economies – it’s difficult to see how the stand-off can be resolved without a humiliating backdown by one of the two.

It is, of course, conceivable that China could agree to buy more US goods – LNG, soybeans, planes or so forth, in exchange for a substantial cut to the 145 per cent tariff that Trump has imposed on its exports to the US. That’s what it did in 2020, when it struck the “Phase One” trade deal with the US during Trump’s first administration and trade war.

Then, it promised to buy $US200 billion ($311 billion) more US products than it had in 2017, before Trump’s tariffs were imposed. Instead, with the pandemic intervening, it ended up buying less from the US than it had in 2017. Nevertheless, the signing of that deal enabled Trump to declare a victory.

China would be aware that it only has to give Trump the appearance of a win for him to move on.

It also believes the US is in a weaker negotiating position today than it was in 2020.

The flight of capital from the US since Liberation Day, the market volatility, the implications of the Trump tariffs for US inflation, interest rates and economic growth and the shock to US consumers as shelves empty and prices soar mean the pressure on Trump can only intensify the longer his trade war on everyone continues.

Xi Jinping will be very aware that Trump will need to save face in a deal between the US and China. Credit: AP

China’s restrictions on exports of rare earths, magnets and strategic metals to the US will also be extremely damaging to a range of American industries, including those supplying its military. There are few alternative suppliers of those strategic minerals, with China holding near-monopoly positions in them.

China will also be hurt if the US tariff rate remains as it stands, but it has diversified its export destinations since 2020 and is now less exposed to the US and Trump’s tariffs. The International Monetary Fund has concluded that the damage will be greater to the US than to China, saying the hit to US GDP will be 90 basis points against China’s 60 basis points.

With China’s shipments to the US having almost completely stopped – already the West Coast ports are reporting container volumes down at least a third – the impact of Trump’s tariffs is going to show up imminently in higher prices for US consumers, lower margins for US companies, empty shelves at retailers and rising stress and bankruptcy rates among small businesses.

So, how does Trump extricate himself from the worst element of his trade wars, the 145 per cent tariff on imports from China and China’s 125 per cent “tit-for-tat” response?

It’s not by suggesting, as he did in a post on Truth Social on Friday, that an 80 per cent rate “seems right”. At 80 per cent (a rate the White House press secretary later said was simply one that Trump “threw out there”), there’d still be little, if any, trade between the countries.

US Commerce Secretary Howard Lutnick has suggested the “reciprocal” element of the tariff might settle at 34 per cent. With the tariffs left in place after the 2018-19 trade confrontation, that would produce a rate just above 50 per cent, which would still be very damaging but probably allow some limited trade between the economies.

In exchange for the reduced tariffs, the US would want China to agree to choke off the supply of precursor chemicals used in fentanyl production, to lift its effective embargo on exports of critical minerals and to open up its markets to US companies.

US Treasury Secretary Scott Bessent and US trade representative Jamieson Greer left the talks with China’s vice premier in a bullish mood. Credit: AP

If there is to be an eventual deal, Bessent and He Lifeng might have to come up with a formula within a press release that makes it look like Trump has gained something, without making it appear Xi Jinping has lost. In essence, they need another “nothingburger” deal.

On Friday, China’s April trade data was published. It showed exports, rather than being battered by the trade war, were up 8.1 per cent year-on-year. While that growth was more subdued than the rate in March, where exports had grown at 12.4 per cent, it was massively above consensus expectations.

Exports to the US, however, which were growing at more than 9 per cent in March, slumped by more than 21 per cent in April.

That says two things. One is that the tariffs have already, within weeks, resulted in a very significant fall in the volume of goods being shipped to the US. The other is that China has quickly redirected those goods to other markets, mainly within South-East Asia and potentially for trans-shipment to the US via countries with lower tariffs.

China would be aware that it only has to give Trump the appearance of a win for him to move on.

Trump’s ill-conceived reciprocal tariffs will – because countries will have different tariff rates – force the US to play an endless game of “whack-a-mole” with Chinese exports that are already showing how dynamic and opportunistic they are.

Whatever the final outcome of talks between the US and China, while ever Trump’s 10 per cent universal baseline tariff remains in place and China and others face reciprocal tariffs – even if reduced from their original punitive levels – the effective average US tariff will be many multiples of the 2.5 per cent (or so) level before Trump began this trade war.

Trump’s trade policy towards China, its key target, may have an element of mutually assured destruction to it. China, indeed the entire world economy, will be damaged by it. But his policy will also be highly self-destructive unless the countries’ negotiators can find a face-saving way to exit it.

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