US & China have Agreed to Temporarily Slash Tariffs

Syllabus: GS3/Economy/Trade

Context

• The U.S. and China agreed to suspend most tariffs on each other’s goods.

Background

Why were Tariffs Levied?

• Trade Imbalance: The U.S. Trade Representative pointed to a $1.2 trillion trade deficit with the rest of the world as justification for tariffs.
  • The Trump administration viewed this as the U.S. being “ripped off” by trading partners who protected and subsidized their own industries while benefiting from open U.S. markets.
• Strategic Protectionism: The administration believed that talking had not helped change global trade behavior, so high tariffs were seen as a tool to force other countries to open their markets.

Revised Tariffs After Geneva Talks

• Both have reached an agreement on a 90-day pause and substantially move down the tariff levels. 
• The deal means “reciprocal” tariffs between both countries will be cut from 125% to 10%. 
• The U.S.′ 20% duties on Chinese imports relating to fentanyl will remain in place, meaning total tariffs on China stand at 30%.

Why Was There a Truce?

• China’s Retaliation: Unlike other countries, China responded with its own counter-tariffs and non-tariff barriers escalating the trade conflict.
• Economic Concerns in the U.S.: At peak levels (U.S.: 145%, China: 125%), tariffs became prohibitively expensive for consumers and businesses.
  • Example: A $100 Chinese product became $245 in the U.S.
  • The U.S. economy began contracting in Q1 2025 — even before the full impact of the tariffs had hit.
  • Economists predicted a recession and possibly stagflation (a rare combo of economic stagnation and inflation).
• Consumer Pressure: U.S. consumers faced rising prices and shrinking product availability, especially at major retailers like Walmart.
  • Public and political pressure mounted as economic conditions worsened.
• China’s Economic Resilience: While China’s exports to the U.S. dropped 21%, its overall exports rose 8%, and GDP grew 5.4% in the same quarter.
  • China’s global trade surplus increased, indicating that it had managed to diversify and offset the U.S. losses.

Way Ahead

• The current agreement is a truce, not a full trade deal.
• Market reactions have been positive — stocks and the dollar rose, while gold and bonds fell, indicating reduced risk perception.
• However, the talks that follow will be complex, and no guarantees exist for a comprehensive trade deal.

Source: IE