Can 90-day pause in US-China tariff battle bring an end to trade war?

The United States and China announced an agreement on trade tariffs after two days of talks in Geneva. What does this mean for Donald Trump’s tariff policy and global trade?

Both countries will drastically slash import tariffs on each other’s goods, with US tariffs on Chinese goods falling to 30 per cent and China’s tariffs on US goods to 10 per cent. This leaves quite a discrepancy, but the US rates are nothing like the unilateral 145 per cent on Chinese goods previously announced by Donald Trump in respect of what he regards as China’s unfair trading practices, or the 125 per cent tariff that was China’s response. The reductions are to take effect on Wednesday (14 May) and last for 90 days, the intention being to create space, and “a mechanism” for new talks on longer-term economic and trade arrangements.

The significance of the agreement should not be underestimated; China and the US are the two biggest economies in the world, and imports from China accounted for $438.9bn (£332bn), last year, leaving a deficit in China’s favour of $295.4bn.

But neither should it be overestimated. This is essentially a holding operation, for 90 days, after which it could expire should there be no progress. International markets have greeted it in a universally positive light.

The beginnings certainly looked unpromising. It was on 2 April that Trump announced differentiated trade tariffs on most US trading partners, with the highest reserved for some countries in southeast Asia, but especially China, because of the wide trade gap between the two countries, and the disparities the Trump administration had identified between local costs of materials and labour and costs in the US.

Britain, among others, took the announced tariffs as an opportunity to negotiate, but China took a more confrontational stance and immediately imposed new tariffs of its own, leading to a spiralling tariff war. Six weeks later, however, on Saturday 10 May, senior US and Chinese trade officials were sitting down to secret talks at the UN ambassador’s residence in Geneva, with the agreement announced late on Sunday night.

It has been averted for the time being, but could return in three months’ time – perhaps with both sides even more at loggerheads than before. However, what seems to have been the pragmatic approach adopted by both sides suggests that this will also be the preferred route in future. A generally hostile stance towards China taken not just by Trump but also the US Congress means that there could be trouble ahead still, especially if one or both of these two giant economies vie for supremacy rather than settle for peaceful coexistence.

When Trump presented his board, setting out new US import tariffs, there was consternation around the world. But also confusion, as to whether this was an opening gambit – essentially an invitation to haggle – or a take-it-or-leave-it unilateral move. It is still not clear whether the two agreements that have been reached since – the first with the UK, a relatively limited reduction of some of the new tariffs, and now the 90-day agreement with China – are what Trump intended to achieve all along, and, as some would see it, a mark of his business acumen being applied in the US commercial interest. Or, alternatively, whether they reflect a retreat on Trump’s part, after he saw the panicked response of international markets and the dire effect, especially on the US bond market and Americans’ pension savings.

In the short term, the message has to be that Trump’s dramatic wielding of the tariff weapon has brought some benefit to the US, which Trump saw as disadvantaged in the international trading system. In acting unilaterally, he also signalled his ongoing disdain for international institutions – in this case, the World Trade Organisation, perhaps hastening its decline and confirming the growing resistance to further globalisation.

Among those waiting in the wings for tariff negotiations, however, is the European Union, which could prove a tougher nut for the US to crack than China. Indeed, Trump himself said on Monday that the EU “is in many ways nastier than China”. The risk of a sustained US-China trade war may have receded, but other battles could lie ahead.