US–China Trade Truce Brings Relief
but Diverts New Business for India to Other Sources
The president’s trade truce with China has
lowered U.S. tariffs to a level that could pause a longer-term effort to reduce
America’s dependence on Beijing.
In a bid to ease tensions
with Beijing, Mr. Trump halved
a 20% fentanyl-related tariff,
reducing overall duties on many Chinese products. As a result, China now faces lower average tariffs than
several U.S. allies such as
India,
Brazil, Switzerland, and Canada.
After months of tariff turbulence,
the recent trade
truce between the United States and China has left many U.S. companies both relieved and confused.
For Travis McMaster, general manager of outdoor brand Cocoon
USA, President Trump’s decision
to cut
tariffs on Chinese goods meant
a $30,000
saving on an
incoming shipment — enough to fund a new seasonal hire. Yet, the shifting policy
has upended his plans to diversify. Having shifted production to India to escape
high China tariffs, McMaster now faces 50%
tariffs on Indian imports,
compared with 30%
on Chinese goods, forcing
him to reconsider his move out of China.
·
According
to the Yale Budget Lab, the average effective tariff on Chinese goods
rose 20.2
percentage points this year,
compared with 17.3
points for other
countries.
·
Economist
Chad
P. Bown of the
Peterson Institute places the overall Chinese tariff rate higher, at 47.6%, depending on how earlier tariffs are counted.
Businesses reliant on Chinese
manufacturing welcomed the reprieve, but many fear the truce may be temporary. Economists warn it could slow efforts to diversify supply chains, undermining U.S. goals to reduce dependence
on China.
“There isn’t a great incentive,
if this is the final tariff structure, to reallocate out of China,” said Brad Setser of the Council on Foreign Relations.
The Trump administration maintains that its national security tariffs — targeting sectors like auto parts, semiconductors,
and pharmaceuticals — will still disproportionately
impact China, even
as it touts progress toward reviving U.S. manufacturing.
China’s strong retaliatory
capacity, including rare
earth export controls, is seen
as a major factor in Washington’s softer stance. In the recent deal:
·
The U.S.
paused
new tariffs on Chinese
shipping and delayed sanctions on thousands of firms.
·
China agreed
to resume
U.S. soybean purchases, suspend
certain rare
earth restrictions for a year,
and curb
fentanyl-related chemical exports.
This mutual compromise has
reassured companies like Sean
Stein’s U.S.-China
Business Council, which called the deal “a strong step forward.” Yet, Stein admitted
it reduces
incentives to leave China,
given its unmatched manufacturing ecosystem.
The new tariff landscape
has grown inconsistent:
·
India
and Brazil: 50% tariffs
·
Switzerland: 39% tariff (linked to gold trade imbalances)
·
Canada: 35% (nominal, despite partial exemptions via
USMCA)
·
Britain
and Australia: 10% “reciprocal”
tariffs, despite U.S. trade surpluses with both
·
China: 10–30% depending on sector, lower than many
allies
Large corporations, having
diversified across Vietnam
and Southeast Asia, can better
weather the volatility. But for smaller
firms — like
McMaster’s Cocoon USA — China
remains the most viable option
for cost and technical efficiency.
“Ten percent is not nothing
— it’s effectively made China 10 percent cheaper for all of our customers,” said
Patrick
Soong, of Oregon-based
Allitra, which helps U.S. firms source Asian manufacturers.
The truce brings short-term relief but long-term ambiguity. With tariffs on China now comparable to or lower than those on allies, the move may undercut Washington’s push to diversify supply
chains — leaving
businesses betting once again on policy
stability that may not last.
For
Travis McMaster, the general manager of Cocoon USA, an outdoor and travel brand,
ordering products from his foreign suppliers this year has been a lot like gambling.
After
reading the news of a trade truce between the United States and China last week,
Mr. McMaster was relieved to have finally gotten a win. He estimated that President
Trump’s decision to lower tariffs on Chinese products would save him roughly $30,000
in tariff costs on a shipment the company has coming in from China this week — enough
to perhaps hire another seasonal employee in the small Washington town where Cocoon
is based.
But
the tariff deal came with a downside. Cocoon had begun shifting some production
to India this spring to avoid high tariffs on China. But in the past few months,
Mr. Trump has raised tariffs on India by 50 percent, while dropping tariffs on Cocoon’s
Chinese goods to 30 percent, scrambling the company’s plans.
Mr.
McMaster lamented the time he had spent on building up production in India. At least
for the time being, he said, “I’m not going to spend any more energy trying to get
out of China.”
After
a chaotic year of tariff threats and trade deals, the United States has landed,
at least temporarily, in a surprising situation. In the face of a potentially devastating
trade clash with China, Mr. Trump agreed to cut in half a 20 percent tariff he had
used to punish China for its role in the flow of fentanyl.
That
has pared back U.S. tariffs on certain Chinese products to levels that are nominally
near or sometimes below those he has put on products from other countries, including
some allies like Switzerland, India, Brazil and Canada. According to calculations
by the Yale Budget Lab, the average effective tariff on Chinese goods has risen
by 20.2 percentage points this year, compared with 17.3 percentage points for the
rest of the world.
Not
every company pays the same tariff, and other calculations that include earlier
tariffs on China indicate a higher overall rate. Chad P. Bown, an economist at the
Peterson Institute, has calculated an average tariff rate for China of 47.6 percent,
but it is not clear how that compares with U.S. tariffs on other countries.
Companies
that rely on doing business with China have been grateful for the tariff reduction,
even as they scramble to parse what the latest deal means to them and how long it
will last. Some economists and executives argue that the outcome may slow the move
by companies to find alternatives to China, potentially complicating a longer-run
effort by U.S. officials to reduce America’s dependence on Chinese supply chains.
Many
companies remain intent on diversifying where they source their products and are
cautious about tying their fortunes to China over the longer term. Yet the current
system of tariffs removes some of the urgency for companies to find factories outside
China. It also chips away at the economic advantage that companies had expected
from moving factories to Brazil, Vietnam and India.
“There
isn’t a great incentive, if this is the final tariff structure, to reallocate out
of China,” said Brad Setser, an economist at the Council on Foreign Relations. He
argued that the tariff differential between China and other countries was much smaller
now than Mr. Trump had suggested in his 2024 campaign, when he proposed putting
a 60 percent tariff on Chinese goods and a 10 to 20 percent tariff on products from
the rest of the world.
“Contrary
to what many in the administration are saying, they haven’t ended up with a tariff
structure that really encourages relocation out of China,” Mr. Setser said.
The
Trump administration disputed that idea, saying that its national security tariffs
— which impose taxes on products like auto parts, pharmaceuticals and semiconductors
— would disproportionately affect China. Officials also argued that the administration
was focused on ending China’s chokehold on other products, like rare earths.
Kush
Desai, a White House spokesman, said in a statement that Mr. Trump had pledged to
end “America’s foreign reliance by reviving domestic manufacturing and industry.”
The trade deals and trillions of dollars in investment commitments “prove that the
Trump administration’s trade and tariff policies are delivering on this pledge,”
he said.
In
an interview with CNN Sunday, Treasury Secretary Scott Bessent said that the United
States doesn’t want “to decouple from China, but we need to de-risk. They’ve shown
themselves to be an unreliable partner in many areas.”
China’s
ability to retaliate appears to be one reason that the country is not facing more
severe tariffs, as India and Brazil are. Mr. Trump has threatened repeatedly to
put triple-digit tariffs on China, but Beijing responded by hitting back at the
United States where it hurt. It created a system to regulate the export of rare
earth minerals and clamped down on those shipments, threatening to shutter U.S.
auto plants and other factories.
The
strategy worked. Xi Jinping, China’s top leader, walked out of negotiations with
lower fentanyl-related tariffs than countries like Canada, which have tried to placate
Mr. Trump.
After
a meeting in South Korea last week, Mr. Trump agreed to pause new fees on Chinese
ships and delay sanctions on thousands of Chinese companies, in addition to cutting
a 10 percent tariff. China said it would suspend the rollout of certain rare earths
restrictions for a year and return to buying U.S. soybeans. It also said it would
crack down on shipments of the chemicals used to make fentanyl.
Sean
Stein, the president of the U.S.-China Business Council, said companies viewed the
agreement as “a very strong step forward, giving some certainty and some predictability
to to what’s happening in the U.S.-China relationship.”
He agreed, however, that the deal might lessen the incentive for companies to find
alternatives to China.
He
said many companies have found that “in no place has it been possible to replicate
the manufacturing ecosystem and cost efficiencies that you get in China." The
instability and unpredictability of where tariffs might land in other markets had
made companies “doubly hesitant about expanding supply chain networks outside of
China,” he added.
“At the beginning of the Trump administration,
there was a very clear sense that there was going to be a lot of pressure for companies
to move supply chains out of China,” Mr. Stein said. “But at this point, that pressure
hasn’t materialized.”
The Numbers
In
the wake of last week’s agreement, Mr. Trump will have added a 20 percent tariff
to all Chinese imports so far this year. That includes the 10 percent fentanyl tariff
and another 10 percent tariff that Mr. Trump said is directed at slowing the flow
of Chinese imports into the United States.
A
portion of Chinese imports also face an additional tariff of 7.5 to 25 percent left
over from Mr. Trump’s first-term trade war. Chinese products are also hit by Mr.
Trump’s global tariffs on industries like autos, steel and aluminum,
as well as pre-existing tariffs from the World Trade Organization, and Chinese goods
qualify for fewer tariff exclusions than many other countries’.
Although
U.S. tariffs on Chinese products are high, American tariffs on certain products
from other countries are now sometimes similar or higher, for reasons that make
little sense.
For
example, Mr. Trump has imposed a 10 percent “reciprocal” tariff on exports from
Britain and Australia, now the same reciprocal rate as for China. The administration
says that tariff is directed at offsetting the U.S. trade deficit, but the United
States runs trade surpluses with both Britain and Australia, while it racked up
a nearly $300 billion trade deficit in goods with China last year.
The
United States also runs a trade surplus with Brazil. But Mr. Trump has put a 50
percent tariff on goods from Brazil and India, amid spats over Brazil’s treatment
of a former president and India’s refusal to credit Mr. Trump in making peace with
Pakistan. Mr. Trump has also imposed a 39 percent tariff on Switzerland in response
to the country’s trade surplus with the United States, even though much of that
recent trade has been gold bullion that investors have imported to hedge against
tariffs.
Canada,
America’s closest ally, faces a 35 percent tariff that Mr. Trump imposed in part
because of his claim that Canada is a significant source of fentanyl for the United
States. While in practice many goods coming from Canada
are exempted through the United States-Mexico-Canada Agreement, the nominal rate
is still much higher than China’s 10 percent fentanyl tariff, despite far more fentanyl
coming from China than Canada.
Countries
in Southeast Asia, where many companies have moved their factories after leaving
China, typically now face a reciprocal tariff of 19 or 20 percent, the same as or
slightly lower than the base line tariff on China. But economists said countries
like Vietnam and Cambodia could be heavily affected by the administration’s plans
to put an additional tax on goods that are made with a certain proportion of Chinese
content.
A Range of Strategies
For
many companies that have spent years planning an exodus from China, an overall tariff
reduction of 10 percent on goods made in China is not big enough to lead to any
sudden strategic changes. Companies also remain wary that the U.S. trade truce with
China could quickly crumble, as it has before.
“Ten
percent isn’t quite enough to move the needle,” said Cameron Johnson, a supply chain
consultant in Shanghai. He said many of his clients are still waiting to see how
things play out when Mr. Trump meets with Mr. Xi again in China next year.
“There
is a bit of skepticism about whether this will hold. You’re
not going to move your factory or production for six months and a 10 percent reduction,”
Mr. Johnson said, referring to a comment Mr. Trump made last week about visiting
Beijing in April.
Companies,
particularly larger ones, have found ways to weather the volatility in the U.S.-China
relationship by diversifying their supply chains through partnerships with factories
in neighboring countries like Vietnam, or setting up their
own factories outside China. Across southern Vietnam in Ho Chi Minh City, dozens
of sprawling new industrial parks have popped up amid the influx of demand for a
factory alternative to China.
“I
don’t think you’ll see companies moving out of Vietnam, India and elsewhere to go
back to China. It’s the big number that actually matters,” said Adam Sitkoff, the
executive director of the American Chamber of Commerce in Hanoi.
But
many smaller companies have not had the resources to diversify their supply chains.
The truce between Mr. Trump and Mr. Xi will provide some relief for firms that are
too small to negotiate new factory deals in other countries and depend on Chinese
factories for highly technical work.
“It’s
a strange moment of celebration,” said Patrick Soong, whose Portland, Ore., firm,
Allitra, helps American companies find manufacturers in
Asia. Referring to the recent agreement to cut U.S. tariffs on Chinese imports,
he said, “Ten percent is not nothing and it’s effectively made China 10 percent
cheaper for all of our customers.”