The US and China are headed for a dud of a deal. What went wrong.

Mint

15 hours ago

About the author: Christopher Smart is managing partner of the Arbroath Group, an investment strategy consultancy, and was a senior economic policy advisor in the Obama administration.
Lost in the fanfare around the deals President Donald Trump has either agreed to or imposed on America's trading partners is the uncomfortable fact that the world's two largest economies have yet to come to terms.
The good news is that both Trump and Chinese President Xi Jinping appear eager to reduce trade tensions. They agreed this month to pause their full tariffs until Nov. 10, and have alluded to plans for more talks before then.
The bad news is that they seem likely to sign one of the least consequential deals in nearly a half-century of their countries' diplomatic relations.
Trump, who built his political career off a vendetta against Chinese goods, still seems poised to try to address supply-chain issues and secure Chinese orders for U.S. goods. But it is unlikely a deal will properly address Chinese export distortions. China's manufacturing export juggernaut will keep growing, undercutting industrial production worldwide and aggravating trade tensions. If anything, Trump's tariffs will reroute U.S. orders through other countries, making the problem worse.
The deal will likely include what has been agreed temporarily and what each side wants most. China will provide assurances of a steady supply of rare earths. The U.S. will expand access to advanced technology. There may also be a pledge to let Chinese students continue their studies at American universities.
Beyond that, there will likely be echoes of Trump's first-term 'phase one" deal with Chinese commitments to buy lots of American soybeans, beef, and airplanes. If they work hard, there may be something that can stop the flow of fentanyl and save TikTok. Tariffs will settle roughly where they are now in this suspended phase, with China's 10% on American goods and America's 30% on China's.
None of this will change the status quo of global trade or manufacturing.
With China's domestic growth slowing, it is flooding its goods into world markets in breathtaking quantities. China's manufactured trade surplus clocked in at $1.14 trillion in the 12 months through June—more than a 30% increase from the year prior. China now accounts for a third of the world's manufactured output, surpassing the combined output of the U.S., Germany, Japan, South Korea, and Britain.
The effects of this are inescapable. Long before Trump's re-election, the cautious European Union began anti-dumping investigations, which led to tariffs placed on Chinese electric vehicles, solar panels, and textiles. Even developing countries like Brazil and South Africa have attempted to push back by increasing restrictions on Chinese imports.
China itself suffers from the distortions caused by its trade surplus. Deflationary pressures are spilling back into its domestic market, aggravating the drag from the country's real estate bust. Western politicians and analysts are quick to call out Chinese subsidies as cheating global trade rules. Still, Xi Jinping believes that his country's best path to what he has called a 'great rejuvenation."
Trump's decision to focus on a narrow deal may simply reflect an understanding that not even U.S. tariffs at nosebleed levels will force China to rethink its economic model. Indeed, in search of an agreement, Trump has stripped out the most contentious issues that might stand in the way of a deal. Not only has he effectively ignored the most geopolitically charged questions over Taiwan, Ukraine, and the Uyghurs, but he has also frozen engagement in areas where there had been potential for cooperation, such as climate.
Trump has also dropped talk on China's need to protect intellectual property or free its exchange rate. Even his tariffs related to fentanyl enforcement are starting to look more like a bargaining chip than a sticking point, as he pursues any kind of agreement that might have any effect on narrowing America's trade deficit with China.
For Xi, anything that keeps the conversation squarely in the realm of economics and trade is a double victory. Not only does it block the West's finger-wagging on human rights abuses and Taiwanese sovereignty, but it also allows the Chinese president to portray himself as the defender of an international trading system that Trump is actively trying to dismantle.
And so Trump's sky-high 145% tariffs on Chinese goods and Xi's 125% riposte have been paused until Treasury Secretary Scott Bessent works out some agreement with Vice Premier He Lifeng. The hope is that their teams can hammer out something the two presidents might sign at a Beijing summit, possibly timed to coincide with an October meeting of the leaders from the Asia-Pacific Economic Cooperation.
After a deal is struck, the bilateral trade deficit may narrow somewhat as direct Chinese shipments decline. But many Chinese goods will continue to find their way to the U.S. after being finished in Vietnam or Malaysia. This is where any licensed economist would insist on saying that bilateral trade deficits reflect differences in savings and demand within countries, more than any trade practices. Overall, Chinese exports were up 7.2% annually in July, despite the tariffs.
Previous U.S. administrations tried to present a common front in negotiations with China, working with Europeans, Japanese, and others to convince Chinese officials that 'fair trade" wasn't just a Washington concern. But if all Trump and Xi want is a deal that temporarily lowers tensions without addressing the underlying causes, that is just what they will get.
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