[Reuters Breakingviews] US-China truce cools down trade war, for now

HONG KONG, May 12 (Reuters Breakingviews) - Doomsday has been undone, for now. Forty days after President Donald Trump announced his reckless reciprocal tariffs in the White House Rose Garden, leading to a full-blown U.S.-China trade war with triple-digit levies, both sides have coordinated an about-face. The roll-back prompted a rally in stocks and the dollar, though the outcome is better for one side than the other.

In a joint statement on Monday, the world’s two largest economies agreed to scrap eye-watering levies. For the next 90 days, additional U.S. tariffs on Chinese goods imposed this year will stand at 30%, which encompasses the now-standard baseline 10% charge on most of Washington’s trading partners plus a 20 percentage point hike Trump imposed in January over fentanyl concerns. China’s tariffs on U.S. goods will be cut to 10%.

But this is not a deal, it is a fragile truce governing $600 billion of bilateral trade and it could easily be shattered by new sector-specific tariffs vowed by the Trump administration. There is no clarity on where American export restrictions on semiconductor shipments to China, or a review of the U.S. electronics supply chain based on national security concerns, will end up, for instance. Nor is there a clear path to ensure U.S. tariffs don’t rise back up to 54%, or Chinese tariffs up to 34%, after the 90-day deadline passes in August, so uncertainty on two-way trade will endure.

Yet this truce is an obvious win for Beijing. Until now, Chinese leaders faced a 2.4 percentage point hit to annual GDP growth that, going by earlier estimates from Goldman Sachs, has now been pared to roughly 1 percentage point. Hitting their headline target for an expansion of around 5% still looks unlikely, but the shortfall will be less painful. The significant de-escalation in trade tensions implies a rapid and dangerous financial decoupling is off the table for now, too.

It is also a propaganda win. Both the joint statement and Treasury Secretary Scott Bessent’s comments were peppered with references to “mutual respect”, a phrase straight out of Communist Party officialese. Chinese leaders also have agreed vaguely only to “suspend or remove” non-tariff measures, such as restrictions on rare-earth sales to the U.S., taken since April 2 – hardly a firm commitment.

The pact demonstrates to other countries locked in tariff talks with Washington the tangible value of pushing back: Trump has shown that he will retreat when economic consequences start to bite and bond markets revolt. The rest of the world has every reason to hold the president’s feet to the fire now that he has blinked again.

CONTEXT NEWS

The U.S. and China on May 12 agreed to temporarily slash reciprocal tariffs.

Additional tariffs imposed on Chinese goods during President Donald Trump’s second administration have been lowered from over 145% to 30%.

The revised level includes 10% in line with a baseline levy Washington imposed on other trading partners on April 2, as well as an additional 20% tariff imposed on China in January relating to fentanyl.

Those in the opposite direction have been cut from 125% to 10%, with Beijing also promising to “suspend or remove” non-tariff measures taken since April 2.

The joint statement implies that additional American tariffs on Chinese exports could rise to 54% after 90 days, and Chinese tariffs on U.S. exports could rise to 34%.

Graphic: Trade truce with China sends US Treasury yields higher