The recent trade talks between the United States and China have yielded greater-than-expected de-escalation in the ongoing trade war. The two sides agreed to a point-for-point mutual reduction in their respective tariff rates for an initial period of 90 days, bringing rates down to near the same levels that prevailed before the tit-for-tat escalation.
However, this de-escalation has not completely reversed the damage done to U.S. trade credibility and the role of the dollar on the global stage. The reduction in tariffs lowers the U.S. tariff rate on Chinese imports to 30 percent and 10 percent on U.S. goods flowing the other way, but Chinese goods are still subject to a universal 10 percent tariff on all U.S. imports.
The deal has already provided relief to financial markets, which had begun to reflect concerns that a collapse in U.S.-China trade flows could cause a disruption in supply chains. However, this stockpiling activity means greater demand for logistical services, resulting in higher container shipping costs and freight costs, which will add to inflationary pressures in the United States.
For China, the lesson learned is that the Trump administration isn’t willing to ignore domestic pressure from American businesses. Their supply chains are still dependent on China, making inventory logistics their Achilles Heel. This realization will be factored into China’s negotiation framework and economic statecraft calculations.
The trade talks have saved summer vacation for many U.S. households, but the road to a comprehensive deal is uncertain. The two sides have bought themselves three months to figure out what each side wants and what it must have. The natural starting place for further trade talks is to pick up where the 2020 Phase One Trade Agreement left off.
The current 90-day pause will probably be extended, but a further reduction in tariff rates seems unlikely. Beijing can live with a differential rate on Chinese goods that is only 20 percent higher than the rest of the world. The Trump administration will likely shift its focus to consolidating its position within the Western trade bloc by striking deals with Europe and Japan.
In the meantime, Chinese small businesses will continue to expand markets and manufacture facilities overseas in places where they can sell products for higher margins and further cut costs wherever possible.
Source: https://www.pbs.org/newshour/economy/analysis-trumps-truce-with-china-on-tariffs-comes-at-a-cost-to-u-s-credibility