Last month, we came close to imposing a de facto trade embargo between the United States and China—with reciprocal tariffs on goods from both countries standing well in excess of 100 percent, threatening to severely disrupt $582 billion dollars of trade in goods. Container shipping volumes between the two largest economies in the world plummeted. Goods shortages and empty shelves loomed on the horizon. U.S. businesses began to assess whether they had to close down or fire workers as their access to critical inputs was curtailed.
Then, last weekend, U.S. Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer traveled to Geneva, Switzerland, to meet with Chinese President Xi Jinping’s economic policy czar, Vice Premier He Lifeng. They struck a truce, at least temporarily. That’s a good thing.
After hours of closed-door negotiations, the United States and China agreed to pause steep reciprocal tariffs for ninety days, lowering the U.S. tariff rate on most Chinese imports to 30 percent (with select sectors continuing to be subject to substantially higher rates), and dropping Chinese tariffs on U.S. exports to 10 percent.
The tariff truce falls well short of a bona fide trade deal, but the stage is now potentially set for serious negotiations on a broader and longer-term agreement. What that agreement looks like remains to be seen. On Saturday, President Donald Trump wrote on Truth Social that he wanted to see “for the good of both China and the U.S., an opening up of China to American business.” For decades, the United States worked to get China to open its market by adopting a series of policy reforms to move from a one-sided economic strategy driven largely by export-led growth policies to a more balanced approach with substantial domestic, consumer-demand-led growth. These efforts had only modest success.
The alternative approach is to replicate what Trump did in his first term, which is to negotiate an accord that is more of a purchase-and-sales agreement than a true trade agreement. The Phase One agreement Trump agreed to in 2020 basically committed China to buy an additional $200 billion of exports from the United States above 2017 baseline levels. China also agreed to open select financial services sectors, improve intellectual property rights enforcement, and refrain from currency manipulation and forced technology transfer—commitments China had already largely made in previous negotiations.
How did the Phase One deal work? According to Chad Bown at the Peterson Institute for International Economics, China ended up meeting just over half of its total purchase commitments—58 percent of what it had agreed to buy. COVID certainly played a role, but even as China’s economy bounced back, its overall imports of covered goods did not hit the target levels.
The Phase One agreement always bothered me. Much of what China bought were agricultural products (e.g., soybeans) or energy products (e.g., LNG). Increasing exports of agricultural and energy products is no doubt a positive, especially for American farmers, but it struck me that such an outcome might be more appropriate for a developing country than for the most advanced economy in the world.
This is the risk with fetishizing the bilateral goods trade deficit with China, which actually went up in the years immediately succeeding the signing of the Phase One Agreement. If the primary metric of success is only whether the United States sells more goods than it did before, one might not distinguish between commodities and higher value-added goods, such as manufactured products, let alone value-added services, including digital services, where the United States is the undisputed global leader.
Much has changed in the U.S.-China relationship since Trump last held office, but the structural dynamics of our economic and trading relationship have endured. China, of course, still tops the list for the largest single deficit with the United States. According to USTR, the U.S. goods trade deficit with China totaled $295.4 billion in 2024. China remains committed, perhaps more than ever, to its mercantilist, export-driven economic model, backed by a continued industrial policy program in the semiconductor and clean energy sectors, among others.
If Trump opts to pursue a Phase Two style deal, it would be advantageous this time—given his focus on the reindustrialization of the United States—to put greater focus on manufactured products. A good start would be to press China to fulfill the commitments it made under the Phase One deal.
Trump does not seem to place as much value on services, which employ 80 percent of American workers and which now pay more on average than manufacturing jobs, but there remains the issue of how Trump might apply the principle of reciprocity to services, specifically whether U.S. firms should be able to operate in China the way Chinese firms operate in the United States.
As for tariffs, the deal announced with the United Kingdom—a country with whom the U.S. does not have a yawning bilateral goods deficit—appears to indicate that the Trump administration is determined to establish a 10 percent tariff as the new worldwide baseline. That is about a fourfold increase in the average level of tariffs which existed prior to Trump taking office in January, but it has largely been accepted—by markets, commentators and even the corporate sector—with a sigh of relief.
It is fascinating to see how effective Trump is in setting out a maximalist position—in his proposal to impose reciprocal tariffs as high as 48 percent on countries such as Laos and 145 percent on China—and then being seen as securing a significant achievement by backing down to a level that hasn’t been seen in eighty years.
At 10 percent, the question remains whether the Trump administration will be successful in achieving its objectives, including raising revenue and reindustrializing the U.S. economy. A 10 percent tariff is likely to reduce but not eliminate imports and, therefore, could raise customs revenue, though too little to pay for making the Trump tax cuts permanent or substitute for the federal income tax, as some have suggested. But a 10 percent tariff, discounted by the uncertainty about whether it is permanent or subject to change, is probably not sufficient to compel companies to make the significant investments necessary to move their production or their supply chains to the United States, even if that were cost-competitive.
Trump seemed to recognize this when he distinguished between the baseline tariffs and higher tariffs on strategic sectors. As Trump told reporters at a press conference on the pharmaceutical drug pricing, the ninety-day pause “doesn’t include tariffs on cars, steel, aluminum, things such as that, or tariffs that may be imposed on pharmaceuticals, because we want to bring the pharmaceutical businesses back to the United States.” In other words, if the Trump administration is to pursue “strategic decoupling” and encourage production of strategic goods in the United States, it might well require tariffs in critical sectors at a substantially higher level.
Settling on a 10 percent tariff might, therefore, be the worst of all worlds—from the perspective of Trump’s objectives. It could be too low to raise substantial revenue, too high to avoid pushing up prices, but not high enough to reindustrialize the United States.
Trump has conditioned the markets, the business community, and our trading partners—not to mention Congress—to accept a new unilateral blanket tariff on exports to the United States, with some variations for specific sectors and specific countries. A 10 percent tariff on most of the world, and a 30 percent on China, could well be the new normal. As tariffs have proven to be quite sticky—difficult to lift once imposed—this might well prove to be one of Trump’s most enduring, if less than fully successful achievements.
We welcome your feedback on this column. Let me know what foreign policy issues you’d like me to address next by replying to president@cfr.org.
