• ●  The United States and China have agreed to a temporary 90-day pause in their escalating trade war, offering a narrow window to resolve trade tensions, though underlying policy disagreements and strategic competition remain unresolved.
• ●  Efforts to reach a lasting agreement are complicated by unclear U.S. trade objectives, enforcement issues from previous deals, recent legal setbacks for the Trump administration, and China’s push for greater self-reliance in manufacturing.
• ●  While both countries have short-term incentives to reach a deal, any agreement is likely to be unstable and partial, as it won’t fundamentally address structural issues like Chinese industrial policy or U.S. export controls.

For the moment, the United States and China have stepped back from the brink in their trade war. With the agreement on a 90 day pause in Geneva, the two sides now have an opportunity to narrow their differences on trade policy. However, US policy volatility and two recent court decisions have added additional uncertainty to reaching an agreement that would provide long-term stability in the economic relationship.

Prior to the truce, the United States and China were on what US Treasury Secretary Scott Bessent described as an unsustainable path. Both sides had engaged in escalatory tariff increases that quickly saw freight bookings from China to Southern California ports decline by 44 percent in a matter of weeks. With US tariffs at 145 percent on goods from China and US goods facing a 125 percent tariff in China, the two sides risked a full economic decoupling. Something both sides sought to avoid in Geneva.

The difficulty for resolving the trade war is the lack of a clear objective, something that is true more broadly with the Trump administration’s approach to trade with both allies and adversaries. Trump and administration officials have sent conflicting signals about whether the tariffs are for negotiations to lower the trade deficit and remove barriers to US goods in foreign markets, reshore manufacturing, or generate revenue to reduce taxes. Seemingly, the Trump administration wants to achieve degrees of all of these objectives. What does seem clear is the desire of the administration to establish a new universal 10 percent tariff that was included as the baseline in the reciprocal tariffs.

The dispute with China is complicated. The United States trade deficit with China was $295.4 billion in 2024, larger than the US trade deficits with the EU ($235.6 billion) or Mexico ($171.8 billion), and it is complicated by strategic competition between the two countries. From an economic perspective, US concerns extend beyond the trade deficit itself and can be placed into three categories: Chinese policies related to forced technological transfer as outlined in the first Trump administration’s Section 301 investigation; policies that encourage manufacturing and overcapacity as opposed to domestic consumption; and US export controls related to national security.

Reaching a lasting agreement with China that would reduce the US trade deficit or incentivize reshoring will be difficult. In the first Trump administration, the United States and China reached a Phase One agreement to address the intellectual property issues identified in the Section 301 case and rebalance the trade relationship. The four-year review of the agreement found that China had not followed through on its pledge to make changes to its intellectual property policies and a separate analysis by the Peterson Institute of the purchase agreement to address the trade deficit found that China had not followed through on its commitment to purchase an additional $200 billion in US goods.

The current talks are also facing difficulties. Less than three weeks after the talks in Geneva, President Trump is already suggesting that China is not living up to its end of the agreement and Secretary Bessent as described the talks as “stalled.” The current difficulties are likely a result of China slow walking the removal of countermeasures it placed on the United States related to rare earth minerals and the US decision to pause exports of airplane parts and stop exports of chip design software to China.

However, two recent court decisions have ruled that the Trump administration’s use of the International Emergency Economic Powers Act to reset tariff rates was illegal. While the administration is appealing and has received a temporary pause in the verdict of the first case, these decisions at least temporarily weaken the Trump administration’s hand. Though, it can utilize other trade measures, such as the Section 301 procedure, to achieve similar aims, for the moment it is in a weakened negotiating position.

China also appears reluctant to cut a deal. Shortly after the US and China reached a 90 day pause, Chinese President Xi Jinping seemingly doubled down on the policies that have created the friction between the United States and China to begin with. While visiting a Mao era factory, Xi remarked that “From relying on imports of foreign matches, soap, and iron in the past, we have now become the world’s largest manufacturing country,” adding “We need to keep improving our manufacturing sector, insist on self-reliance and self-improvement [and] master key core technologies.”

Separately, Chinese firms have pushed further to replace US and other foreign parts from their supply chain. While replacing US parts in the supply chain is a rational business reaction to shifts in US policy towards restricting access to US technology and the second US-China trade war, even a deal between the US and China is unlikely to completely reverse the trend due to the Chinese government’s desire for self-reliance and the Trump administration’s capricious approach to trade policy. In the long run, the shift from US parts in China’s supply chain will likely add to the tensions as US manufacturing exports to China decline.

The shift away from US and foreign parts has implications beyond US-China trade. Concerns that China’s industrial policies discriminate against foreign firms and that China has not done enough to spur domestic consumption to deal with its overcapacity issues are not limited to the United States. Without domestic reforms in China to consume more and to allow foreign goods to compete on an equal footing, governments beyond the United States will need to take steps to adjust their supply chains as they are squeezed by US export controls and Chinese shifts towards domestic production. They will also need to put in place tariffs to prevent Chinese overcapacity from undermining domestic industries, something we are already seeing take place in response to overcapacity in China’s EV sector.

Despite these challenges, we should expect the United States and China to move towards a deal. Each side has incentives to reach a more comprehensive truce, even if it may be unstable in the longer term. The United States needs continued access to rare earth minerals, especially, rare earth magnets, as it develops alternative supply chains, while China was already seeing damage to its manufacturing sector from the tariffs.

The recent trade deal with the United Kingdom provides some insight into the type of deal the Trump administration may be seeking. Any agreement will maintain the 10 percent baseline tariff and include tariff rate quotas in key areas. The tariff rate quota will likely apply to areas where the administration wants to ensure increased US manufacturing, such as semiconductors and pharmaceuticals, but still needs imports from China. In areas such as automobiles, where China is not currently a player in the US market, we should expect the Trump administration to try to maintain barriers to Chinese entry.  Any agreement will likely contain some understating on rare earth minerals, and we should expect China to seek reductions in US export controls on semiconductors. 

The agreement will also likely include steps to reduce the US trade deficit with China, but this will need to be bound in a more realistic set of purchasing goals than the Phase One agreement. Reducing the deficit is also one reason why baseline tariffs will likely remain in place.

Since any agreement is unlikely to significantly adjust domestic Chinese policies underlining the current US-China trade war or continued US use of export controls on critical technologies, any agreement will be an unstable truce. The Trump administration’s willingness to threaten higher tariffs when it is unhappy with progress will also add an element of instability to any agreement, but in the short run avoiding a sudden decoupling is in both countries’ interest.