Source : THE AGE NEWS
There were enormous sighs of relief in global financial markets when the US and China announced far bigger than expected cuts to their tariffs on Monday. However, the deal cut in Geneva is a reprieve within the trade war, not a resolution.
While the reductions in tariffs – the US dropped its rate from 145 per cent to 30 per cent and China slashed its retaliatory tariffs from 125 per cent to 10 per cent – were greater than anyone (including Donald Trump) may have anticipated, the cuts last only 90 days.
The big rebound in sharemarkets and a bounce in the US dollar seemed to price in an end to the worst of Trump’s trade wars. Yet given how fixated he is with tariffs, and his proclivity for announcing lurching policy shifts via social media posts – seemingly on the spur of the moment – the markets’ reaction might be premature.
President Donald Trump has blinked in the stand-off with China.Credit: Bloomberg
In effect, the Geneva meeting has bought time for the US and China to negotiate, with no certainty that, come mid-August, the trade war might not escalate again. One could say something similar about the 90-day pause in Trump’s reciprocal tariffs on another 90-odd countries that ends in July.
No one knows what the world’s trade regime will look like at the end of these pauses. Uncertainty and the 10 per cent universal baseline tariffs that remain in place continue to affect supply chains, businesses, investment and employment around the world until the outcome is known. Even with the pauses, real and material economic damage is already being done.
Despite the weekend agreement between the US and China, that’s particularly true of the damage the trade war is causing to their economies.
The Geneva meeting has bought time for the US and China to negotiate, with no certainty that, come mid-August, the trade war might not escalate again.
The “truce,” as it is being described, might lessen the economic fallout from the absurdly high rate that Trump imposed and China responded to, but harm has already been caused. Uncertainty about the eventual outcome will do more – businesses will put their plans on hold – and, meanwhile, the remaining tariffs are in place.
The effective average tariff on China’s exports to the US is around 40 per cent once the pre-existing tariffs are included – those from Trump’s first term, the punitive rate for China’s role in the supply of chemicals to make fentanyl and the tariffs on steel and aluminium. Before Trump launched his new trade war, the average duty on imports from China was about 20 per cent.
More broadly, while the Geneva agreement might temporarily bring down the average rate on all imports to the US from around 25 per cent to less than 15 per cent, that is still more than six times higher than the 2.4 per cent average rate before Trump regained office.
Even at 30 per cent, a level at which Chinese exporters might absorb some of the cost, the tariff on China’s goods translates to material price increases for US companies and consumers.
So even with the reprieve, the trade war will be inflationary and will cost US jobs and investment, even if it won’t be as inflationary or cost as many jobs or as much investment as a 145 per cent rate and China’s response would have (and could still), depending on what happens in August.
The positive take on what happened at the weekend is that it shows the US, or at least its Treasury Secretary Scott Bessent (unlike his boss), understands that trade isn’t a zero-sum game but a negative zero-sum game. Instead of a winner and a loser, trade wars deliver lose-lose outcomes.
China was, however, the bigger winner from the weekend’s negotiations.
It gave up nothing of significance other than a preparedness to continue talking. Xi Jinping had made it very clear beforehand that China wanted to hold talks to avert a complete cessation of trade between the two countries, but a precondition was that the US drop its tariffs back to pre-Liberation Day levels. Xi got what he wanted.
Trump started and escalated the trade confrontation by imposing massive tariffs on China and Bessent lowered the temperature by being prepared to slash the rate with China, which only responded to Trump’s actions.
Ahead of the Geneva meeting, Trump had suggested that an 80 per cent rate on China’s exports “seems right,” but also said the US position in the negotiations was Bessent’s call. One suspects that the outcome – the degree to which Bessent was prepared to slash the rate – would have been something of a shock for Trump.
Even though he has defended Trump’s trade policies, Bessent does appear to understand that, while the tariffs will inflict significant damage on China’s economy and are already doing so, they will also result in self-inflicted wounds to the US economy and raise the very real and threatening prospect of a stagflationary recession.
They have also been roiling financial markets, destroying Americans’ wealth and undermining America’s safe haven status for global capital, a status that has given the US unlimited access to cheap funding despite its soaring deficits and debt.
They are also doing significant damage to Trump’s popularity, which polls show has been tumbling, and to the Republicans’ prospects at next year’s mid-term elections.
If the US economy slows markedly as a result of the effects of the trade war on growth and confidence – and most analysts have it growing by less than half a percentage point, at best, this year – Trump will be a lame-duck president even before those mid-terms.
That’s why, almost regardless of what happens over the 90-day standstill, it is near-certain that the trade regime that emerges will be significantly less hostile towards China than before the weekend.
Xi doesn’t face the same domestic political pressures as Trump and the Republicans, although the heavy job losses and the impact on China’s manufacturers if the pause ends in another escalation would raise significant concern in Beijing and cause economic harm to a vulnerable economy and, potentially, civil unrest.
The Chinese president will feel that his stance in standing up to Trump, responding to US aggression by matching it and refusing to make concessions, has been vindicated by the outcome of the negotiations.
Now that it knows Trump will blink in a stand-off, China will no doubt offer the US some minor wins in the discussions over the next 90 days. It will inevitably promise to do more to cut off the supply of fentanyl chemicals – it effectively did so at the weekend – and pledge to buy more American products.
It is conceivable, setting aside those tariffs that were in place before Trump won back the White House, that if China plays its cards skilfully over the next 90 days, it could end up with only the 10 per cent baseline tariff rate that the US has applied globally.
While even the baseline tariff rate lacks any legitimate rationale and will damage the global economy, including America’s, an average tariff rate in the low-double digits on most imports to the US would be “less bad” than the destructive regime that the self-proclaimed “tariff man,” his similarly obsessed trade adviser Peter Navarro, and the other trade and China hawks in his cabinet envisaged.
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