US-China trade truce and their existential conflict

The US and China have brokered a temporary mutual reduction in tariffs for 90 days in a bid to deescalate a simmering trade war initiated by US president Donald Trump against China and other countries around the world. Trump's trade war has roiled financial markets and threatened global growth. During the pause, both parties agreed that talks on economic and trade issues would continue toward an agreement but there were no suggestions how the deep underlying issues might be resolved. This agreement is very similar to the one worked out with the UK recently which was in effect a framework for an eventual agreement with details to be finalised later.

Trump imposed a 145 per cent tariff on imports from China last month and as the US steps up its trade war, China also was hitting hard almost matching the US tariff hikes with 125 per cent tariffs on imports from the US as well as restricting exports of critical minerals. Beijing officials described the tariffs as "blackmail". China also added US entities to its export control list, restricting their ability to do business in China. In fact, China was the only country to retaliate in response to the US tariff measures.

The meeting marked the first talks between China and the US since Trump announced tariffs on all the US' trading partners on April 2, later suspending them for 90 days for every country except China. The agreement while temporary, marks the first concrete step to de-escalate tensions that have been rising since Trump took office on January 20 and almost immediately began imposing tariffs on China.

However, Trump gave a positive reading of the talks even before they had concluded, saying the two sides negotiated "a total reset …..in a friendly, but constructive manner". Speaking after the conclusion of the talks with the Chinese officials in Geneva, US Treasury Secretary Scott Bessent said on last Monday that the US would cut existing tariffs of 145 per cent to 30 per cent. Despite the significant reduction in tariffs on Chinese imports, when combined with the existing tariffs imposed during Trump's first term as President, the effective average tariff rate would exceed 40 per cent.

China on its part will lower its duties on US imports to 10 per cent from 125 percent. China has also agreed to some easing of restrictions on the export of critical minerals to the US, which were imposed in response to the Trump tariffs. Both reductions took effect from last Wednesday.

Both sides were also in agreement that neither side wanted to decouple and what had occurred was the equivalent of a trade embargo, and neither side wanted that. They announced that "the parties will establish a mechanism to continue discussion about economic and trade issues".

The trade war brought nearly US$600 billion in two-way trade to a standstill, disrupting supply chains, sparking fears of stagflation and rising unemployment in the US. The Chinese economy will also get negatively affected if the US tariff rate remains as it stands now. But China has diversified its export destinations since 2020 and much less exposed to the US market. At the start of the first Trump trade war in 2018, US-bound exports from China accounted for 19.8 per cent of total exports and by 2023 that figure had fallen to 12.8 per cent.

Very recently the IMF has provided its revised growth estimates for the US and China. The revised growth estimate for the US now stands at 1.7 per cent for 2025, down from 2.7 per cent estimated in January. For China also the revised growth estimate now is 4 per cent for this year instead of 4.6 per cent estimated early this year.

This agreement along with the 90-day pause to his "reciprocal tariffs" (RT) demonstrates Trump and his trade advisers' belated realisation that his liberation day tariff measures threaten significant damage to the US economy and his domestic authority. Also, his backpedal from a full-scale trade confrontation with China is an implicit recognition that his tariffs will hurt the US economy.

The trade truce has sent a clear message to the US that in a deeply interconnected global economy it cannot achieve its economic, political or strategic objectives against China by economic means as reflected in China holding its ground firm in the face of massive US economic onslaught and compelling the US to change its course. 

It is important to note that the trade war truce came amid growing concerns over the bleak global economic outlook resulting from the trade war, which has disrupted supply chains, slowed down trade flows between the two countries.  Chinese exports to the US plummeted by 21 per cent in April indicating that within weeks the tariffs have already resulted in significant reduction in the volume of goods arriving in the US from China. As a result, there were growing fears of supply shortages of consumer goods in shops in the US, and this has also added to the urgency for the meeting.

Markets have risen sharply on the news of the tariff pull-back. US stock futures and the US dollar surged, while gold tumbled, inflation eased. Financial markets in Asia responded positively; Hong Kong Hang Seng index rebounded, easing losses sparked by the RT hikes announced on April 2.

Markets in the US have responded positively to the event last weekend as if the trade war is over. But the fact of the matter is the estimated effective average tariff in the US now stands at 17.8 per cent in comparison to 2.4 per cent average tariff before Trump assumed office in January. This rate is the highest rate since 1934.

The Financial Times in an editorial described the tariff pause agreement as an "uneasy détente" without any guarantee that the three-month pause would lead to a "enduring case-fire" and there was no indication that the talks would help to bring down the US trade deficit with China. 

Though rarely stated outright, Trump aims to break the dominance of China's export-led economic model. It is also a part of his strategic initiative to reshape global trading system to forestall China emerging as the dominant regional power in East Asia.

The Wall Street Journal, a mouthpiece of the US corporate establishment remains staunchly opposed to Trump tariffs. In an editorial it noted that Trump's approach had hurt his ability to rallying a united front against China because his tariffs targeted against allies had eroded trust in the US' economic and political reliability.

The US and China are also amid a battle for currency dominance, with the Chinese yuan or renminbi gaining considerable power over the last decade in global trade as countries seek less reliance on the US dollar as the US government ruthlessly weaponises its currency. China is also trying to woo other countries, presenting itself as a stable partner in contrast to a capricious US.

Also, trade decisions on this scale are not about trade alone. In his executive order, Trump declared that "large and persistent trade deficits constitute an unusual and extraordinary threat to the national security and the economy of the United States". The   key underlying objective in the conflict is the suppression of the economic rise, hence also military capabilities of China. The US considers it as an existential issue if the US is to remain the global hegemon.

The close integration of the global economy over the last 30+ years makes it impossible for the US to achieve its objectives against the rise of China by economic means alone as that will cause damage to the US economy as well.  The truce is viewed by some strategic analysts as a strategic retreat by the US rather than any strategic realignment.

The conflict predates Trump's appearance on the US political scene. The trade truce in no way, therefore, signals a policy shift in the drive towards achieving its long-term broader objectives against China which has a bipartisan support in the country. So, the pause, truce or détente whichever way one may like to designate the agreement reached between the US and China last Monday in Geneva is nowhere near resolving the existential conflict between them.

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