US and China Reach Temporary Truce in Trade War, But More Turbulence Ahead

The truce does not shift the underlying structural reality that both are locked into a long-term cycle of escalating strategic competition.

- Peter Draper and Nathan Howard Gray

Defying expectations, the US and China have announced an important agreement to de-escalate bilateral trade tensions after talks in Geneva, Switzerland.

The good news is their recent tariff increases will be slashed. The US has cut tariffs on Chinese imports from 145 percent to 30 percent, while China has reduced levies on US imports from 125 percent to 10 percent. This greatly eases major bilateral trade tensions, and explains why financial markets rallied.

The bad news is twofold. First, the remaining tariffs are still high by modern standards. The US average trade-weighted tariff rate was 2.2 percent on Jan 1, while it is now estimated to be up to 17.8 percent. This makes it the highest tariff wall since the 1930s.

Overall, it is very likely a new baseline has been set. Bilateral tariff-free trade belongs to a bygone era.

Second, these tariff reductions will be in place for 90 days, while negotiations continue.

Talks will likely include a long list of difficult-to-resolve issues. China's currency management policy and industrial subsidies system dominated by state-owned enterprises will be on the table. So will the many non-tariff barriers Beijing can turn on and off like a tap.

China is offering to purchase unspecified quantities of US goods—in a repeat of a US-China "Phase 1 deal" from US President Donald Trump's first presidency that was not implemented.

On his first day in office in January, amid a blizzard of executive orders, Mr. Trump ordered a review of that deal's implementation. The review found China didn't follow through on the agriculture, finance and intellectual property protection commitments it had made.