Economy

TL;DR

America and China struck a 90-day trade truce in Geneva, reducing tarrifs from 125% down to 10% and pausing other retaliatory moves. However old tariffs like America’s 20% fentanyl penalty remain. But it's for 90 days, after which America’s original 34% tariff would resume.

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After a busy weekend of trade negotiations in Geneva, an impatient reporter asked when the results would be revealed. Li Chenggang, a Chinese official, replied with a wry smile and an old saying: “Good food is never too late.” The dish, when it at last arrived on Monday May 12th, was surprisingly tasty. America had agreed to cut the “reciprocal” tariff it inflicted on China last month from 125% to a more digestible 10% for at least 90 days. China has agreed to do the same. It will also suspend other retaliatory measures, such as restrictions on 17 American companies deemed “unreliable entities”.

The agreement therefore reverses much of the April madness. Indeed, the S&P 500 share-price index of large American companies is now 5% higher than it was at the end of March. China’s CSI 300 is about the same as it was back then.

Tariffs imposed by each country before April will, however, remain. They include an American levy of 20% intended to punish China for making the ingredients of fentanyl, a synthetic opioid, as well as the narrower duties that China adopted in retaliation. Moreover, America’s tariffs now apply even to “small value” packages, worth less than $800, which previously escaped duties on the grounds the revenue was not worth the hassle of collecting. That exception ended on May 2nd.

Chart: The Economist The result is that even after the agreement, America’s tariffs on China average about 39%, according to Goldman Sachs, a bank, when they are weighted by the value of last year’s imports. At the same time, China’s tariff on America averages about 27%, at least assuming that China continues quietly to exempt American chemicals, medicines and other essential goods from the duties. Both of these averages are far higher than when the year began, although they are also much lower than seemed likely a few weeks ago, when Mr Trump was admonishing China for a “lack of respect” and China was digging in for a protracted trade war (see chart).

Before the talks began, Scott Bessent, America’s treasury secretary, had said the two sides were seeking merely to agree on what to talk about. Mr Trump had posted on social media that a tariff of 80% on China “seems right!” When the negotiating teams were seen leaving the venue after only a few hours on Saturday, some feared the talks had broken down. In fact, the negotiators were just going for lunch.

What, then, explains China’s unexpected success? Jamieson Greer, America’s trade representative, gave credit to the venue. The negotiations took place not in a “sterile” hotel, but in the intimate rooms and attractive grounds of an ambassador’s residence. According to Mr Greer, many of the most difficult issues were discussed on patio sofas under a beautiful tree.

Meanwhile, the economic backdrop was becoming much less comfy. Chinese exports to America fell by more than a fifth in April compared with a year earlier. The prices of Chinese goods listed on the websites of big American retailers have also been rising slowly but relentlessly, according to data scraped by Alberto Cavallo of Harvard University and his co-authors.

In a press conference on May 12th, Mr Bessent all but conceded that tariffs on China had got out of hand. Mr Trump had announced a “reciprocal” levy of 34% on China on April 2nd, or “Liberation Day”, as the president called it. That had quickly jumped to 84% and then 125% in response to Chinese retaliation. The result was the “equivalent of an embargo”, which neither country wanted, Mr Bessent said.

Sealed with the Swiss The financial chaos following Liberation Day included a bond-market revolt and a plunging dollar. This disturbance persuaded Mr Trump to offer a 90-day reprieve to most of America’s trading partners on April 9th. After the Geneva talks, China has now been added to the list. Its reciprocal tariff of 10% is as low as any country enjoys. Moreover, this low rate applies even though China, unlike other countries, still has a 10% retaliatory tariff in place. Now the most important question is what happens after Mr Trump’s latest 90-day pause. Typical trade agreements take considerably longer to negotiate. And America’s commercial grievances with China run especially deep, encompassing its industrial policies and implicit subsidies for state-owned enterprises. Mr Bessent was careful to point out that the 34% tariff chosen for China on Liberation Day is not a dead letter. It is the default to which America will return after the pause, if nothing happens in the interim.

To forestall that possibility China could conceivably agree to buy more commodities, such as oil or soyabeans, from America—goods that it might anyway have bought from elsewhere. It could also convince American politicians that it really is working harder to crack down on the production of fentanyl ingredients. Mr Bessent was impressed that China’s delegation included a minister of public security, who was well-versed on the drug-traffic issue. Maybe the two superpowers will orchestrate a compromise in which America raises the reciprocal tariff back to 34% but removes the 20% fentanyl penalty. That might be enough to turn the Swiss truce into a more lasting peace. The Chinese adage about the punctuality of good food often continues to another line: “Interesting talk is never too slow.” If they are to avoid a return to the tariff disaster of the past months, China and America must hope that their talks over the next 90 days do not drag or bore.