US-China Trade War Detente: A Relief but Not a Cause for Celebration

Strategic Insights -

The three-month detente in the US-China trade war has provided a much-needed relief for the global economy, with both sides agreeing to slash duties on each other by 115 percentage points and establishing a "consultation mechanism" to help resolve ongoing trade disputes. Beijing has also committed to "suspend or cancel" non-tariff measures taken against America, including curbs on critical mineral exports. While the development is a positive step, optimism should be tempered given the still-elevated tariff rates and the uncertainty surrounding the negotiations.

Key Takeaways:

  • The US-China trade war detente has resulted in a significant reduction in duties on imports and exports between the two countries, with a 115 percentage point drop.
  • The effective US tariff rate on goods from China is now around 40%, significantly higher than before Trump's second term began.
  • Tariff rates between the US and China are still elevated in historical terms, and the White House is still considering implementing sector-specific duties.
  • The economic impact of the initial prohibitive tariff rates between the two countries will be felt for some time, and shipping between Shanghai and Los Angeles is unlikely to recover quickly.
  • There is no guarantee that the three-month truce will lead to an enduring ceasefire, and cross-border trade and investment between the US and China will remain subdued as long as tariff rates remain unsettled.
  • The ongoing trade talks are unlikely to address the underlying economic imbalances between the US and China, including the US trade deficit with China, which stems from oversupply in China and excess demand in America.
  • Trump has stated that he will raise tariffs if no deal is reached in 90 days, which adds uncertainty to the negotiations.
  • The UK and China deals should not be taken as a template for future trade agreements, and investors should be cautious in extrapolating from these deals.
  • Increased risk appetite and market optimism may be misplaced, considering the lingering economic uncertainty and the nonbinding nature of America's latest trade deals.

Statistics:

  • The US-China trade war detente has resulted in a 115 percentage point drop in duties on imports and exports between the two countries.
  • The effective US tariff rate on goods from China is now around 40%, according to Capital Economics.
  • The tariff rate on Chinese goods is significantly higher than before Trump's second term began, which was around 10%.
  • The US trade deficit with China totals an estimated $375 billion in 2018.
  • The US economy has shed an estimated $1.4 trillion in revenue due to the trade war.

Sources:

  • The Times of London
  • Capital Economics
  • White House Official Statement on US-China Trade Deal
  • CNBC - US-China Trade War
  • Bloomberg - US-China Trade Talks