Multiple possibilities: US-China agreement marks a new beginning

American President Donald Trump has arranged a 90-day pause in his trade war with China. The two countries have indicated that the very high tariffs they had placed on each other’s imports would be sharply reduced in anticipation of a broader trade deal. It should be remembered that when Mr Trump announced the 90-day pause on his long list of retributive levies — not reciprocal, for they were not based on the other country’s tariff schedule — mainland China was excluded from the list. Imports from the country were also subject to significantly higher tariffs than the others, totalling about 145 per cent. In response Beijing had imposed tariffs of 125 per cent on various product lines. These will both be moved down by 115 percentage points to 30 per cent and 10 per cent, respectively. Stock markets across the world greeted this development effusively, with futures for the S&P 500 trading 3 per cent higher, as did the Hang Seng in Hong Kong — and some European markets showed an even greater positive impact.

 

Both countries had reasons to come to an agreement. Chinese factories have seen a clear reduction in demand for their goods, driven by the closure of the markets in the United States (US). Although they have tried to compensate by sending those same goods elsewhere — essentially dumping them on other markets or hoping that they will be repackaged and sent to the US anyway — that has not been enough to prevent many growth forecasts for the country from being downgraded. Meanwhile, many observers of the US economy had slipped into a near panic in recent days as visuals and data began to emerge of empty unloading areas at US ports and empty container ships. Global trade and orders operate with a lag. Had this ceasefire not been arrived at in the next few days, the impact of the original introduction of tariffs would have begun to be felt in the US.

 

It is hard to see this as anything but an obvious retreat by Mr Trump, and an admission that the US has more to lose from a trade war than China at this point. US Treasury Secretary Scott Bessent has said neither country wants an embargo on each other’s products. It would be more correct to say that the Trump administration has realised a blanket embargo on Chinese products was never a feasible idea. It is all very well to assume that these 90 days will be utilised in coming to an agreement with China. They would be better spent by the administration trying to gauge what impact on prices would be worth going through with its tariff hikes. As it stands, it is unclear what it will even bring to the table in terms of demands, given that the administration is also not certain about what pain it is willing to inflict on the US consumer in return.

 

The fear for other countries, including India, is that their efforts to make a deal with the US will become subject to the outcome of the negotiations with China. If the President is satisfied with the latter, then India will get a better deal, and vice versa. This is an uncomfortable position to be in. New Delhi should watch and wait for a deal with the US, while moving forward swiftly on alternative agreements such as with the European Union.