The U.S.-China tariff reductions will provide near-term economic relief for both countries, even as significant long-term decoupling remains likely, and they will embolden China to retaliate strongly in future spats and to withhold major consumer stimulus at home. U.S. Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer announced on May 12 that they had reached a deal with Chinese Vice Premier He Lifeng during May 10-11 meetings in Geneva, Switzerland, to temporarily cut tariffs for 90 days during further negotiations. These cuts, effective May 14, will reduce U.S. reciprocal tariffs introduced in April on Chinese imports from 125% to 10%. However, the 20% U.S. tariffs on China ostensibly over its role in the fentanyl trade, various U.S. sectoral tariffs (e.g., on automobiles, steel and aluminum), and the roughly 25% U.S. tariffs on China imposed before U.S. President Donald Trump took office will remain in place. The May 12 deal also does not include any commitments to forestall new sectoral tariffs, like the tariffs on pharmaceutical imports that Washington has hinted at for months. For its part, China will drop its tariffs on U.S. imports from 125% to 10% and suspend nontariff restrictions imposed since April 2, including its April 4 curbs on rare earth exports. In a press conference on the deal, Bessent noted, "We would like to see China open to more U.S. goods," adding that the U.S. team expected more opportunities as talks progressed for purchase agreements to rectify the U.S. trade deficit with China. He also said, "We had a very robust and productive discussion on steps forward on fentanyl." Bessent hinted at an exemption extension beyond the 90 days, noting that "as long as there is good faith effort, engagement and constructive dialogue, then we will keep moving forward." Greer asserted the weekend's talks focused on reducing tariff levels to "something that is not an embargo, but still allows the United States to pursue its goal of trade deficit reduction," and he added that issues related to the "Phase One" trade deal reached under the previous Trump administration were not part of the discussion. A White House brief about the deal noted that "both nations agreed to establish a mechanism to continue important discussions about trade and economics." Meanwhile, Trump said on May 12 that the reprieve would give the U.S. side time to address "larger structural issues" with China, adding that he would speak with Chinese President Xi Jinping "maybe at the end of the week."

• Two days after the United States imposed 34% reciprocal tariffs on Chinese imports on April 2, China imposed export licensing regimes on some medium and heavy rare earths, including samarium, gadolinium, terbium, dysprosium, lutetium, scandium, yttrium and related compounds, which are used in the aerospace, defense, electronics and energy sectors. Under the May 12 deal, these licensing regimes will likely remain in place, but Beijing will likely accelerate application times and reduce the prevalence of license rejections.
• The January 2020 Phase One trade deal saw the United States agree to reduce or pause the escalation of many of its tariffs, while China agreed to purchase an additional $200 billion of U.S. products, mainly energy, agricultural and manufactured goods. China also promised to curb its forced technology transfers and other practices that hurt the competitiveness of U.S. businesses serving China's market. In the following years, however, China largely failed to fulfill these terms.

A comprehensive U.S.-China deal will remain out of reach, making future tariffs and trade retaliations, as well as significant decoupling, likely, but the recent breakthrough will offer near-term economic relief. The rapidity of this deal and the scale of tariff cuts without major Chinese concessions suggest the White House underestimated the domestic economic side effects of rapidly escalated tariffs on China and desired the 90-day reprieve to conduct protracted negotiations. Moreover, given these economic effects and rhetoric from Bessent, Greer and Trump about the unsustainability of ultra-high tariffs, future tariffs will likely remain well below the 170% level (the total of the reciprocal, fentanyl and preexisting tariffs on most Chinese exports before the May 12 deal) regardless of whether future talks result in a broader agreement. Still, contentious negotiations over the next several months will likely see U.S. tariffs (and Chinese tariffs and nontariff restrictions) rise again from currently pared-down levels, even if the 90-day reprieve is extended. This is partly because the United States remains likely to demand concessions on its many deeper concerns with Beijing beyond the trade deficit, like China's industrial subsidies. In this likely scenario, the two sides will still fail to reach a comprehensive trade deal, including permanent relief from all bilateral tariffs and concessions by China on most U.S. structural concerns. In a less likely scenario, the Trump team could remain narrowly focused on reducing the trade deficit and on Chinese cooperation to stop fentanyl flows — for instance, if the White House perceives that it has little ability to follow through on future tariff threats due to a domestic economic downturn. In this case, China would be more likely to agree to a "Phase Two" trade agreement focused primarily on preventing tariff escalation and buying more U.S. goods. In the meantime, the May 12 tariff cuts will offer some economic relief, with traders likely to stock up on Chinese exports amid expectations of future tariffs. They will also help mitigate against the recurrence of the U.S. bond market fluctuations that contributed to the Trump team's decision to offer a similar 90-day reprieve on reciprocal tariffs on non-China countries in mid-April. Additionally, the tariff cuts will reduce the chance of a U.S. recession and a significant Chinese growth slowdown in 2025, particularly if both sides agree to extend the tariff reprieve in mid-August. Still, if not removed, the remaining 55% tariffs on China — 10% reciprocal plus 20% fentanyl plus 25% preexisting U.S. tariffs on China — will cause significant U.S.-China trade decoupling over the next one to two years, with Bloomberg Economics estimating they could reduce bilateral trade by 70%.

• Some issues that could revive escalating bilateral tariffs and/or Chinese nontariff retaliations include U.S. efforts to restrict sectoral trade with China, e.g., in chips and pharmaceuticals; hold China to account for its failure to meet the Phase One purchase agreements; or extract human rights concessions from China, like Trump's pledge to use trade talks to secure Hong Kong newspaper owner Jimmy Lai's release from Chinese detention. Likewise, China's failure to lift export restrictions on key industrial inputs (e.g., germanium, gallium and graphite), curb exports to the United States of fentanyl precursors, or agree to sectoral voluntary export restrictions could rekindle bilateral retaliation.

The rapidity of this deal will encourage China to announce strong economic retaliation when trade talks falter, as well as maintain its conservative approach to domestic economic stimulus, reducing the near-term prospects of a revival of Chinese consumption and U.S. engagement in China. The rapid U.S. removal of tariffs on China will embolden Beijing to levy strong tariffs and nontariff retaliations in the future to insulate China from the U.S. "containment" strategy, as China phrases it. Though China will remain reactive — imposing new restrictions in response to U.S. actions — Beijing will continue with its proportional responses, e.g., imposing 30% tariffs in response to U.S. 30% tariffs, and with its asymmetric responses, e.g., by adding new U.S. companies to its various export control lists or new rare earth export restrictions. This suggests the U.S.-China trade war will likely cause more supply chain shocks, including in other countries. For example, U.S. tariffs on China will likely hurt South Korea, which exports many electronic components to China that manufacturers use in final products exported to the United States. Domestically, the May 12 deal significantly reduces the likelihood that, in the next 90 days, Beijing will deviate from its plans to reform the economy toward more sustainable growth and to resist major economic stimulus, plans that ultra-high U.S. tariffs would have threatened. Tactically, this means China will remain reliant on tools like subsidies for industrial equipment and consumer goods trade-in programs, eschewing more substantial stimulus measures like cash handouts to consumers or major expansions of social services. Thus, though Chinese consumer spending will gradually grow — buoyed partly by near-term exports in the 90-day tariff reprieve and concomitant (if marginal) employment and wage benefits — such spending will remain stubbornly below pre-COVID-19 levels. Prolonged low Chinese consumer spending will further reduce the motivation for U.S. producers and investors to revive their engagement in China so long as strategic competition persists and as a comprehensive U.S.-China trade deal remains elusive.