The US-China "Trade Deal"

Key Concepts

US-China Trade War
Tariffs (baseline, reciprocal, additional, effective rates)
Trade Deal/Agreement
Geneva Meeting
90-day Tariff Reduction
Fentanyl Crackdown
Rare Earths Export Controls
Section 232 Tariffs (steel, aluminum, auto parts)
Section 301 Tariffs
De Minimis Exemption
Onshoring Manufacturing
Inflation
Economic Growth Impact
Morning Brew Newsletter

US-China Trade War Update: A Tentative Agreement and Lingering Concerns

This video discusses a recent development in the US-China trade war, where an agreement was reached after a meeting in Geneva, Switzerland. The agreement, described by the US as a "trade deal," involves a reduction in baseline tariffs by 115% for 90 days, with President Trump calling it a "total reset" in US-Chinese relations. This news led to a positive market reaction, with the S&P 500 rising 3% and tech and consumer discretionary stocks seeing significant gains.

What Actually Happened This Past Weekend?

Leading up to the announcement, there were indications of cooling trade tensions. The US had also announced a trade deal with the United Kingdom, which included an exception for 100,000 UK car exports to the US at a 10% tariff rate, and exempted the UK from steel and aluminum tariffs. This was seen as a positive step, demonstrating a willingness to offer exceptions to high levies.

The meeting in Geneva between US Treasury Secretary Scott Besson, Chief Trade Representative Jameson Greer, and China's Vice Premier Heong resulted in a joint statement on Monday. Key points of this statement included:

Both countries recognized the importance of a sustainable, long-term, and mutually beneficial economic and trade relationship.
Each country would roll back tariffs imposed on or after April 2nd, reverting to a baseline 10% tariff for 90 days.

Details of the Agreement and Its Implications

The agreement effectively brings both countries back to pre-liberation day tariff levels. This involves the US rescinding tariffs imposed on China. For context, on liberation day, Trump had imposed a 34% reciprocal tariff, which escalated with subsequent retaliatory tariffs from both sides, reaching as high as 145% on US goods and 125% on Chinese goods.

While the announcement suggests a rollback, the confirmed details indicate a return to a baseline tariff rate of 10%. The US will maintain an additional 20% tariff that was in place before April 2nd. This includes the fentanyl tariff, initially 10% in February and increased to 20% in March, given China's role as a primary source of fentanyl.

China has also agreed to remove non-tariff countermeasures implemented after April 2nd. This includes softening export controls on rare earths, crucial components for high-tech products in the US, and removing certain firms from trade sanction or export control lists. President Trump also stated that China has agreed to stop sending fentanyl to the United States.

Market Reaction and Underlying Realities

The market reacted favorably, with stocks, particularly in tech and consumer discretionary sectors, experiencing significant jumps. The dollar index rose 1.4%, and even defensive assets like gold and treasuries saw a sell-off as investors shifted to riskier assets.

However, the video argues that despite the positive market sentiment, the situation is more complex. A 30% tariff on Chinese goods and a 10% tariff on US goods, while lower than previous levels, still represent significant rates.

US Tariff Rates: The 30% tariff on Chinese goods brings the average US tariff rate to around 18%, the highest in 90 years.
Existing Tariffs Remain: These new rates are in addition to other levies that were introduced prior to liberation day and are still in effect.
- Section 232 Tariffs: A 25% rate on all imports of steel, aluminum, and auto parts (with the UK exception).
- Section 301 Tariffs: Apply to specific Chinese products deemed to face unfair trade practices. For example, solar cells from China still face an additional 50% tariff, resulting in an effective rate of 80%.
De Minimis Exemption Closure: The US is maintaining its "cheap imports tax," applying either a 54% tariff or $100 per parcel for packages valued below $800. This tax was reduced from a post-liberation day level of 120% but still significantly impacts cheap imports from China, affecting companies like Shein and Temu. It's estimated that these goods represented roughly $46 billion in US imports from China in 2024, about a tenth of total imports. This tax is particularly impactful as these goods previously faced no duties under the de minimis exemption, which has since been closed during the trade war.

China's Remaining Tariffs and Trade Stoppages

On China's side, while they've agreed to reverse actions taken after April 4th, additional tariffs from the initial phase of the trade war remain in effect. For instance, China imposed 10-15% tariffs on coal, crude oil, liquid natural gas, agricultural machinery, and agricultural products from the US. Given that China purchases about a fifth of US agricultural exports, these tariffs continue to have a meaningful impact.

The video highlights that US exports of liquefied natural gas to China have already halted since February, and no crude oil exports were scheduled for May, indicating that even these lower rates make trade uneconomical.

Impact on Inflation and Onshoring

While April inflation data was cooler than expected, the full impact of tariff policies on inflation is anticipated in the coming months. In the previous trade war iteration (2018), US importers bore the brunt of the tax burden, with exporters not significantly lowering prices.

The hope of onshoring manufacturing back to the US has seen some companies commit to investing in the country, though the scale of some investments is questioned. However, widespread onshoring has not materialized. The volatility of trade policy makes companies hesitant to invest in the US, as they lack incentives until the situation stabilizes.

Broader Economic Concerns and Future Outlook

The recent update is seen as positive for global trade, but it underscores the dynamic and challenging environment for businesses. Economists still anticipate a negative net impact on economic growth due to the current trade situation, even if it's less severe than with higher tariffs.

The publicly disclosed details of the agreement are limited. While there's no signed agreement yet, there's a possibility of softer, in-principle agreements. President Trump's statement about China opening up to American business is a point of contention, as a similar agreement in 2018 to restructure markets and purchase $200 billion more in US goods largely failed to address the trade gap.

On a positive note, the 90-day pause is expected to boost Chinese imports as companies build inventories before the deadline. There's optimism that this represents a step in the right direction, with Trump shifting from a hardline stance to acknowledging the importance of US-China trade. Market valuations remain extended, suggesting that investors may not fully expect a return to high tariffs.

However, the video concludes that while this is a positive development, a fundamental improvement requires explicit trade deal agreements and a demonstration of commitment from both nations. Given historical precedents, achieving this could be challenging.

Sponsor Mention: Morning Brew

The video is sponsored by Morning Brew, a daily business, finance, economics, and tech newsletter. It's described as an easy-to-read, informative, and witty newsletter sent out seven days a week, covering daily happenings and important stories. Examples of their coverage include the recent US-China trade updates and new FTC anti-bait-and-switch pricing rules. Morning Brew is free, and viewers are encouraged to sign up via a link in the description.