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Surprise US-China trade deal gives global economy a reprieve

As Donald Trump says he may speak with Xi Jinping this week, the outcome forestalls for now a destructive clash between the world’s two biggest economies, with potential ripple effects across the globe.

Donald Trump and Xi Jinping may speak later this week.
Donald Trump and Xi Jinping may speak later this week.
Dow Jones

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 US and China agreed to a truce.

President Donald Trump dubbed the outcome a “total reset” as he said that talks with counterpart Xi Jinping could soon follow.

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 US inflation, crash China’s export engine and up-end the global economy.

“Yesterday we achieved a total reset with China after productive talks in Geneva,” Trump said. “I’ll speak to President Xi, maybe at the end of the week.”

Stock markets in the US and elsewhere surged on the news. The dollar and bond yields rose, reflecting expectations of faster US growth as trade tensions recede. Exporters breathed a sigh of relief.

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

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

The US tariff on many Chinese products will be higher than 30 per cent. US duties on steel, aluminium 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 non-tariff trade measures it had imposed to hit back at the US, potentially including easing export restrictions on critical minerals used in batteries and other hi-tech applications.

Speaking at a news conference in Geneva, Treasury Secretary Scott Bessent said the US 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 US 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 US 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 US 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 US would threaten millions of jobs tied to serving US 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 US products it still needs, such as Boeing planes, aircraft parts and certain chips.

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.

The impact of the climbdown was immediate for some exporters. Two makers of artificial Christmas trees in China, who had put some workers on temporary leave under pumped-up tariffs, said the 30 per cent tariff was a level with which they could work. The two factories intend to negotiate with their US clients to split the cost of the import levies. Both are now preparing for a boost to shipments during the 90-day pause, just in case tariffs rise again.

While the overall sentiment among Chinese factories was relief, Larry Hu, chief China economist at Macquarie Group, estimated in a research note that 30 per cent tariffs would lead to a 36 per cent decline in China’s exports to the US over the next 12 months.

In April, Chinese shipments of goods to the US dropped 21 per cent from a year earlier as a result of the increased tariffs. Meanwhile, Beijing’s exports to the bloc of Southeast Asian nations surged 21 per cent, suggesting that some Chinese manufacturers have rerouted goods to countries where Trump has paused his liberation day tariffs, analysts said.

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 per cent 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 US and China was likely during the 90-day window as both sides rush to take advantage of the lower tariffs, a repeat of front-loading 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 per cent tariff on China as part of his global tariff plan affecting most US 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 US 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 US 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 US 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 per cent 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.

Dow Jones

Read related topics:China TiesDonald Trump

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Original URL: https://www.theaustralian.com.au/business/the-wall-street-journal/surprise-uschina-trade-deal-gives-global-economy-a-reprieve/news-story/abd3bbc5b6fddce3ddd7ed1c37ac308c