Policy Alert: 90-day Reductions on Tariffs for Certain US-China Trade

Action: US and Chinese negotiators reached an agreement to reduce tariffs on much trade between the two countries for 90 days while a longer-term agreement is developed. Under the agreement, US tariffs on covered Chinese goods will be reduced to 30%, and China will lower its retaliatory tariffs to 10% on covered US goods. The reduced tariff of 30% for Chinese goods includes the 20% tariffs imposed on China due to the declared national emergency on fentanyl and the 10% “reciprocal” tariff imposed as a minimum tariff on goods from all countries due to US concerns about goods trade imbalances.

Key Insights

• The US and China had imposed tariffs of 145% and 125% respectively on each country’s imports (with some exceptions), effectively a trade embargo. The effects of decoupling of US-China trade clearly worried the negotiators.
• However, the agreement simply removed the retaliatory tariffs both sides had imposed after the announcement of the “Liberation Day” tariffs on April 2; it did not change the fundamental US policy seeking to use tariffs to balance goods trade. Similarly, China has kept the retaliatory tariffs (for instance, on US agricultural products) that it imposed following the fentanyl-related tariffs.
• This temporary agreement aims to address immediate concerns over the availability of Chinese goods in the US and the possibility of empty shelves. However, the uncertainty surrounding a long-term deal could continue to disrupt supply chains, particularly the longer it takes for negotiators to finalize a permanent agreement. Since sea freight can take up to 45 days to travel from China to the US, importers hesitant to accept the risk of higher tariff rates may still opt to delay shipments, introducing potential disruptions to holiday shopping later this year.
• While markets reacted positively to the announced agreement, optimism should be cautious. The remaining 30% tariffs are still high and will raise costs for businesses and consumers. It is also unclear what concessions China may be willing to make that would form the basis of a permanent deal. The most likely steps will relate to reducing the fentanyl trade, which China has already signaled it would be willing to work to reduce. However, concerns about the US goods trade deficit with China that originally led the Administration to impose 10% “reciprocal” tariffs will likely remain unless there is a broader shift in Administration trade policy.
• It is also unclear how geopolitical concerns, for instance US policy on Taiwan or the South China Sea, may play into future economic discussions.
• An additional concern remains the prospect and extent of trade diversions that could lead to a de facto reduction of US-China trade or shifting of that trade elsewhere. Notably, how much will China shift to focus on domestic consumption as a means of economic growth? And how much trade will shift away from the US as a result of tariffs (for instance, Chinese purchases of Brazilian soybeans [after an initial pre-tariff spike] and grains rather than sourcing these products from the US)?