Donald Trump has blinked on tariffs before China’s Xi Jinping did, reducing the prospect of an all-out trade war between the world’s economic superpowers which could threaten a global recession or gravely impact Australia.
Trump’s surprise claim that he will substantially lower his unprecedented 145 per cent tariff on Chinese imports and “won’t play hardball” with Beijing marks a dramatic retreat from the precipice by the US President.
It appears to have been driven by Trump losing his nerve on tariffs – once again – in the face of regular collapses on Wall St and growing predictions by economists of a recession in the US flowing from his tariff policies.
It comes after US Treasury Secretary Scott Bessent told investment bankers that the current level of tariffs with China – 145 per cent imposed by Trump and a counter 125 per cent imposed by Xi – were unsustainable for both countries.
It also comes after the International Monetary Fund warned that Trump’s tariff wars will help to slow global economic growth to 2.8 per cent this year from 3.3 per cent last year.
At every turn, from investors, to economists, to America’s trading partners to US opinion polls, Trump is getting hammered for his zigzagging tariff policy.
As maverick as Trump is, he does not want to be the president who sends America into a recession and that is why we are now seeing him retreat on tariff policy with China which accounts for 14 per cent of all US imports. The Trump playbook on China tariffs has followed a similar pattern to other countries in that he initially levies massive tariffs only to retreat when the fallout becomes too much.
Earlier this month, when stock and bond markets crumbled, Trump retreated from his large ‘Liberation Day’ tariffs to announce a 90 day pause in which tariffs for almost all countries were reduced to 10 per cent.
Trump claims that he now has the upper hand in negotiating new tariff deals with these countries but none has yet eventuated.
Xi deserved no plaudits or sympathy in his tariff battle with Trump given his own country’s self-imposed obstacles to free and fair trade. But given the outsized egos of both leaders, someone needed to give way and Trump’s backdown will be welcomed by all free-trading countries including Australia.
But the lesson from Trump’s first 100 days is that nothing is certain or permanent and this reprieve from crazy-level tariffs between Trump and Xi may not last.
The two leaders have yet to have a conversation and although Trump claims to have a good relationship with Xi, this alone does not guarantee that a sensible deal on tariffs will eventually be nutted out between the two leaders. For example, Trump’s claim to have a good relationship with Russia’s Vladimir Putin has delivered zero so far on advancing a peace deal to end the Ukraine war.
Global economic and political realities are progressively forcing Trump to temper his tariffs regime against America’s trading partners. Although they will ultimately be higher than what Australia and the world would like, they will be far less than the level which Trump initially hoped for.
The biggest and most important question is what tariff levels Trump and Xi will eventually settle on. Trump’s retreat is a good start, but the tariff war between our largest trading partner and our closest ally still has a long way to run.
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