Expectations grow for US-China trade truce

Politico

2 days ago

With help from Doug Palmer
QUICK FIX
— The United States is likely to extend a trade war truce with China that is set to expire Tuesday. The two could nail down a firmer deal during a global gathering this fall.
— The White House clarified that Japan's 15 percent duty won't stack on top of existing tariffs amid conflicting interpretations of the trade deal.
— The Trump administration is hiking duties on Canadian softwood lumber days after slapping the country with a 35 percent tariff on goods.
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Driving the day
U.S.-CHINA DEAL TRACKER: The United States and China are likely to extend a tariff truce that expires on Tuesday. They could also push for a more comprehensive trade deal by the end of October, when leaders of the Asia-Pacific Economic Cooperation will meet in South Korea for their annual summit, according to three former U.S. trade officials.
'You can see the choreography of what's happening,' said Jeff Moon, a former assistant U.S. trade representative for China, during a discussion posted Friday by the Washington International Trade Association. Certain 'confidence-building steps,' including China easing restrictions on rare earths exports and the U.S. effectively reversing a ban on H20 chips, highlight the hopes of a bigger deal to manage trade relations between the two sides, he said.
Context needed: With existing duties remaining in place, the U.S. in May agreed to temporarily lower tariffs on Chinese imports from 145 percent to 30 percent, while the Chinese dropped levies on U.S. goods from 125 percent to 10 percent.
That agreement is set to expire and would amount to an effective blockade on trade between the world's largest economies.
Chris Padilla, who was Commerce undersecretary for international trade in the George W. Bush administration, and Stephen Vaughn, who was USTR general counsel in the first Trump administration, both agreed that President Donald Trump was likely to extend the tariff truce.
But the three had varying opinions about how likely the two sides were to reach a deal by the Oct. 31 APEC leaders summit and how comprehensive any agreement might be.
Who has the upper hand? Trump 'exhausted his tariff leverage three months ago when he threatened an effective embargo and then backed off,' Moon said. 'The Chinese now have the leverage because they've found rare earths as a magic bullet and something that the West absolutely needs.'
Trump's apparent decision not to hit China with 'secondary tariffs' over its oil purchases from Russia, after threatening to do that and hitting India with them last week, is another sign of how badly he wants an agreement, both Padilla and Moon said.
What kind of deal? Vaughn, a partner at King & Spalding, where U.S. Trade Representative Jamieson Greer formerly worked, disagreed that the negotiating dynamic has shifted in favor of Beijing and said any deal reached at APEC is likely to be similar to the broad frameworks that the administration has reached with other trading partners.
But Padilla said he doubts Chinese President Xi Jinping would agree to a 'very high-level, informal' deal like the ones Trump struck with the European Union, Japan and South Korea in which few details are written down. 'I call them 'bar napkin agreements,'' Padilla said.
Moon said he thinks any deal would probably look like the January 2020 'Phase 1' agreement that committed China to buy an additional $200 billion worth of U.S. goods over two years — even though Beijing fell short of those purchase commitments.
REGULATORY REVIEW
CLARITY WANTED: Higher tariffs on Japanese imports will replace existing duties rather than be stacked on top, a White House official confirmed to your host on Sunday, clearing up competing interpretations of the agreement unveiled last month.
'We agreed in subsequent discussions to provide Japan the same treatment as the EU with respect to MFN duties and reciprocal tariff rates. But that was not what was initially hashed out in the Oval Office,' said the White House official, granted anonymity to divulge details.
The statement seeks to clear up uncertainty over the terms of the U.S.-Japan trade agreement, after a 'no stacking' provision was applied to a trade deal between the U.S. and the EU but not Japan. That would mean certain Japanese commodities already subject to duties could see tariff rates rise, such as from the current 26.4 percent to 41.4 percent for beef. Trump is expected to issue a new executive order to make the change official in the near future.
Why it matters: The development is the latest indication of how the lack of a deal on paper is sparking confusion and raising tensions between the U.S. and its fifth-largest trading partner.
Keep in mind: The White House added that the 15 percent rate is 'separate from 232 matters,' referring to tariffs imposed under the Trade Expansion Act of 1962. Japan is still vulnerable to duties on critical sectors, after the administration hiked levies on steel, aluminum, autos and auto parts using the provision, and is conducting probes in nine additional sectors.
FIRST IN MORNING TRADE: Fifty-two House Democrats sent Trump and Secretary of State Marco Rubio a letter Sunday asking for more information about the status of the U.S. negotiations with the Democratic Republic of Congo on critical minerals, which are being held behind closed doors.
'As Members of Congress, we are deeply concerned with your administration's failure to consult Congress and the lack of transparency, especially given the dire security, human rights, labor, and environmental situation associated with mineral mining in the DRC,' the lawmakers wrote in the letter, which was led by Rep. Linda Sanchez (D-Calif.).
Keep in mind: China has historically outmaneuvered the U.S. when it comes to developments in Africa, particularly the DRC, thanks to Beijing's deployment of large-scale financing projects that include government-to-government engagement deemed exploitative by U.S. officials.
Around the World
LUMBER DUTIES HIKED: The Commerce Department on Friday announced higher countervailing duties on Canadian softwood lumber to offset what it says are unfairly low prices and Canadian subsidies, raising the total duty rate to 35.19 percent.
The countervailing duty rate is being raised to 14.63 percent, up from 6.74 percent, and would be in addition to existing anti-dumping duty rates.
Another stressor: The final levels are largely in line with projections, but are poised to inflame tensions between the U.S. and Canada as they pursue broader trade talks, and come days after Trump slapped a 35 percent tariff on the country, affecting goods deemed noncompliant with an existing North American trade deal known as the U.S.-Mexico-Canada Agreement.
'This decision will harm communities on both sides of the border,' Kurt Niquidet, president of the BC Lumber Trade Council, which advocates for the Canadian lumber sector, said in a statement. 'It places unnecessary strain on forestry-dependent regions in Canada while driving up construction costs for American builders and families.'
Context: The duties on Canada come as the Trump administration separately pursues a Section 232 probe that could lead to new tariffs on lumber from more countries.
TRADE OVERNIGHT
—After the trade war, a new essay in Foreign Affairs from former United States Trade Representative and Council on Foreign Relations President Michael Froman.
— Foreign governments bet big to lobby Trump on tariffs. Most came up empty, POLITICO reports.
— Intel CEO Singled Out by Trump to Visit White House on Monday, per the Wall Street Journal.
— Canada courts Mexico as Trump escalates tariff fight, POLITICO reports.
— WTO cuts 2026 trade forecast as Trump tariff hike takes hold, per POLITICO Pro.
— Trump calls for Intel CEO to resign, per POLITICO Pro.
— Coast Guard discloses role in probe of Chinese ship-to-shore cranes, per POLITICO Pro.
THAT'S ALL FOR MORNING TRADE! See you again soon! In the meantime, drop the team a line: [e-mail], [e-mail] and [e-mail]. Follow us @POLITICOPro and @Morning_Trade.