Let’s take a closer look at the implications of two trade and tariff developments from last week and what they mean for negotiating leverage and tariffs: 1) Secretary Bessent’s comments that trading partners acting in good faith are “highly likely” to get extensions of the pause on tariffs, and 2) the U.S.-China trade talks in London.
Negotiating In Good Faith To Get An Extension
Secretary Bessent said at a congressional hearing that it is “highly likely” that partners negotiating in good faith would receive an extension of the tariff pause currently set to expire on July 8th (note: this post assumes that the 10% universal rate will remain and the tariffs at issue are the country-specific “reciprocal” tariffs set on April 2nd).
Will any country’s exports face tariffs on July 9th? The President said that the Administration is notifying countries what their rate will be if they do not negotiate in good faith. This creates an opportunity for partners to make offers ahead of the deadline and demonstrate to the Administration that they are operating in good faith. Many countries will meet this threshold and avoid tariffs. However, the Administration may decide it needs to impose tariffs on at least a few partners to have a credible threat moving forward as it seeks leverage to extract concessions from partners.
Will any “U.S–U.K” style deals be reached before July 8th? To refresh, the U.S. and U.K. announced a framework that set out goals the two sides would continue working toward; not a final trade agreement. The Administration is now saying partners only need to demonstrate they are negotiating in “good faith” to avoid tariffs on July 9th, which means most countries, including our most significant trading partners (i.e., Japan, the EU, Korea, Vietnam) are very unlikely to reach a deal with the U.S. by the deadline. However, we could see a few nations that have close ties to the U.S. and/or are minor trading partners reaching U.K.-style frameworks before the 8th (i.e., Israel, Argentina, Switzerland, Taiwan).
Bottom line: While the Administration had predicted “90 deals in 90 days,” anyone who has worked in trade knew that was completely unrealistic as trade negotiations take time, even with a partner that may be motivated by the fear of being hit with tariffs. Negotiations will continue throughout the summer and into the fall with the threat of tariffs hanging over them. The key question is: how much leverage can the Trump Administration create in the next few weeks to strengthen its hand in negotiations that will take place in the next phase starting after July 8th?
The U.S.-China Deal: Limited Concessions and Unresolved Issues Signal a Rocky Road Ahead
It has been five days since President Trump wrote that the deal with China is “done” yet questions remain. First, while reports indicate that China has granted export licenses for rare earth minerals, Reuters reports that China has not agreed to lift restrictions on rare-earth magnets that the U.S. uses for military planes and missile systems. Second, no text of an agreement or joint statement was released, and President Xi has not commented on the deal publicly, while Chinese officials downplayed the talks and focused instead on the need for continued negotiations to resolve issues. And, China only agreed to issue export licenses for a 6-month period thereby maintaining leverage moving forward.
Bottom Line: The 90-day tariff truce that dropped tariffs on Chinese imports from unsustainable levels expires in mid-August and, while last week did bring the two sides back to the negotiating table, the unresolved issues and limited concessions made by China demonstrate that it will be very difficult for the U.S. to extract any meaningful changes to China’s policies before the end of the 90 days. This all points to a rocky road ahead of the August deadline. While the Administration could stick by the deadline and the threat of increased tariffs, China’s leverage due to its grip on rare-earths and the distance between the two sides suggest an extension of the August deadline may be the most likely outcome.
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