On May 11th, the United States and China reached agreement related to the tariffs each had imposed. Let's dive into what the announcement included and what this means moving forward.
The Big Picture - A significant tariff reduction but uncertainty continues ahead of another summer tariff cliff.
What drove the pause and reduction: economics and politics - The 145% rate (and the 125% tariffs on U.S. exports to China) threatened to cripple the U.S. economy. As Secretary Bessent said following the announcement, the tariffs created a trade "embargo" and "neither side wants that." Maintaining the 145% rate would have been painful for businesses, prices, jobs, and markets, as well as the Administration and congressional Republicans' political position.
Details: The U.S. overall tariff rate will be 30% on Chinese imports for 90 days (mid-August). The 30% is from: 20% tariff related to concerns about China's role in fentanyl imports and 10% "reciprocal" tariffs. If no deal is reached and tariffs kick back in after 90 days, the rate would rise to 54% (34% for "reciprocal" tariffs plus the 20% "fentanyl" tariffs). Note that the U.S. eliminated the additional tariffs the President imposed after China's retaliation under the agreement, which implies that the higher total rate of 145% may not return (though things can change).
China reduced its rate on U.S. exports to 10% for 90 days while agreeing to suspend or remove the non-tariff retaliation it imposed since April 2nd.
What to watch ahead of the August deadline:
1) How will negotiations regarding fentanyl go? The 20% "fentanyl" tariff was not changed as part of this announcement. The Administration noted increased engagement from China on the issue but details and a path to a resolution remain unclear.
2) What will dictate the Trump Administration's thinking on the "reciprocal" tariffs? The Trump Administration has cited several factors: reducing the trade deficit with China, interest in China agreeing to purchase more U.S. goods, and bringing back manufacturing to the United States. The Trump Administration reached a purchasing agreement in the first Administration (that China never lived up to) and will likely push for a new version.
3) How this fits into other U.S. actions and politics:
---The Trump Administration's reciprocal tariffs on nearly 60 countries are paused until early July. If the President can announce some deals and tariff rates on these countries are not significantly raised in July, that could give the President more political cover to play hardball with China ahead of the August deadline.
---Congressional Republicans are seeking to pass a tax bill this summer around the time the two tariff pauses end. Republicans are struggling to find the revenue to pay for the legislation. If they can't find enough revenue through legislation, there may be pressure to keep tariff rates high as a way to persuade deficit-focused Members to support the tax legislation.