What’s the Outlook for US-China Relations After the One-year Trading Truce?

With many US industries heavily reliant on the China-dominated rare-earth value chain, Beijing has the means to extract meaningful concessions during trade disputes. China’s approach might also prove a playbook for larger trading blocs in managing their negotiations with the Trump government.

New Trade Tensions Are Very Likely to Emerge Many details of the US-China deal remain to be worked out. New trade tensions are very likely to emerge. The upcoming US Supreme Court decision on many of the US tariffs might also create further uncertainty. The pattern observed during both Trump presidencies suggests repeated cycles of escalation for building negotiating leverage followed by de-escalation as a response to market, economic and/or political pressure.

US officials have described as “very successful” and “very substantial” the framework arrangement even as Chinese authorities have sounded far more cautious, describing the agreement as “preliminary” and “basic”. Such contrasting narratives may demonstrate who has held the upper hand (China) and who has been under more pressure to deliver a result (US).

The roller-coaster ride that is US-China trade relations has reached another high point with Trump even building up an idea of ​​a global peace plan with Xi Jinping – also demonstrating how hollow many of the past threats may have been.

Existing Tariffs Weigh on the Two Economies Scope’s modeling suggests existing tariffs weighing on the two economies, curtailing China’s medium-term real output by around 0.6pps while trimming 0.9pps from US GDP (Figure 1). Such mutually damaging economic outcomes underscore the pressure for ultimate de-escalation – even as tariffs stay above pre-dispute levels despite agreement on some reductions.

Figure 1. The cumulative medium-run impact of the tariff barriers on the level of real GDP