Analyzing the Temporary De-Escalation of the U.S.-China Trade War
Analyzing the Temporary De-Escalation of the U.S.-China Trade War
On May 12, 2025, the Trump administration announced a bilateral agreement to reduce trade measures between the United States and China, including a reduction in tariffs—lowering U.S. rates from 145 percent to 30 percent (in addition to sectoral and Section 301 tariffs), and Chinese tariffs on U.S. goods from 125 percent to 10 percent—as well as the relaxation of critical minerals export restrictions China implemented following “Liberation Day.”
While many aspects remain unsettled, the tariff rollback represents a constructive step that could facilitate a reduction in inflation and enhance economic prospects. However, it does not compensate for the considerable harm already inflicted by heightened costs, supply chain disruptions, increased uncertainty, and compromised U.S. credibility among allies. The ongoing adherence to an erratic trade policy – marked by ad hoc fixes, strategic incoherence, and persistent unpredictability – continues to undermine the resilience of the U.S. economy and its global leadership, while imposing avoidable burdens on consumers and businesses.
A Favorable Shift .
Initially,it is essential to acknowledge that tariffs have decreased, which is undoubtedly a favorable development. Over the medium term, this reduction is anticipated to mitigate inflationary pressures in the United States, improve the likelihood of avoiding a recession, and support the capital investment required to compete strategically with China. Relative to the preceding 24 hours, this constitutes meaningful advancement.
The Damage From Tariffs Has Already Been Done
Despite The Welcome Rollback. Tariffs were imposed at punishing levels for over a month, affecting U.S. firms reliant on imports. As a result, these firms either had to absorb the increased costs or delay purchases, causing immediate hardship for businesses and consumers. This has set the stage for potential future consequences, including price spikes, shortages, and lower employment and output. Recent research underscores this point, finding that U.S. tariffs, especially those enacted on Liberation Day, will reduce real income in the United States by $300 billion annually by 2028.
Tariffs Remain Excessively High
Despite the temporary reduction, U.S. tariffs continue to exceed the welfare-maximizing levels advocated by most economists. A recent study published by the National Bureau of Economic Research suggests that an optimal tariff structure would entail lower rates and a shift away from intermediate goods. This revised structure would decrease costs for domestic producers, enhance the competitiveness of U.S. products in the global market, and likely result in higher productivity and wages domestically. Evidence indicates that addressing this single inefficiency in the current tariff structure could substantially increase income.
As the situation currently stands, approximately 60 percent of tariffs implemented during the Trump era target inputs utilized by U.S. companies, rather than finished goods from strategic rivals, resulting in distorted domestic supply chains and minimal strategic benefits, with many distortions remaining in place following reductions.
The Uncertainty Tax on the Economy
Crucially, today’s rollback is not permanent. Despite statements about a “shared interest” in reducing trade barriers, both sides agreed only to another 90-day pause. Companies remain in limbo as they try to plan long-term sourcing and investment decisions. This stop-and-start approach continues to generate instability and uncertainty which acts as a deadweight on investment. Companies will be less willing to commit capital in the United States or China if the viability of the investment hinges on the unpredictable swings of tariff policy.
This notion is supported by academic research, including Handley and Limão (2017), which illustrates that trade policy uncertainty can be as detrimental to investment as tariffs themselves. Volatility serves as a de facto tax on planning, especially in sectors characterized by high capital intensity, such as automobiles, semiconductors, and advanced manufacturing.
Credibility Undermined:
A Troubling Trend The administration’s threat that trade retaliation would carry consequences has been undermined. Following China’s response, it appears that the U.S. has emerged with a lower effective tariff rate than it had on the morning of April 2. This sequence undermines the administration’s assertion that it can always “out-escalate” its way to victory in trade disputes. As a result, this notion has been discredited, and U.S. credibility has been weakened.
Inconsistent threat-based trade policies that are not enforced are not only ineffective, but also counterproductive, ultimately hindering the administration’s goals and posing risks to ordinary Americans. What transpires when the administration seeks to restore credibility by enforcing a threat, notwithstanding potential consequences?
Damaging Strategic Partnerships
By Favoring Adversaries, Alienating Allies Compromising Trust, the administration is compromising longstanding alliances. The deal with the United Kingdom resulted in lower prices for American consumers on Land Rovers and Jaguars, but provided limited benefits for broader working-class constituencies. Other allies are increasingly frustrated with what appears to be economic coercion: “Collaborate with us or face negative consequences.”
This strategy involves reputational costs and compromises long-term cooperation. Freund, Mattoo, Mulabdic, and Ruta (2023) observe that as the United States and China leverage trade ties as a strategic instrument, third countries have begun to hedge. Their analysis of post-2018 trade flows indicates increasing “policy-driven divergence,” as supply chains shift based on perceived reliability, not efficiency.
In early 2018, Japan, South Korea, and the European Union have increasingly established regional trade agreements, often excluding U.S. participation. If the United States persists in adopting a tougher stance toward allies than competitors, this trend will accordingly accelerate.
Navigating Dual Realities: The current tariff reduction requires embracing two paradoxical truths. On one hand, it represents a long-overdue correction to a policy that has caused significant harm. On the other hand, the consequences of this reversal, including increased inflation, diminished investment, and strained international relationships, remain uncertain.
Prioritizing Consumer Needs Hopefully, this rollback marks a shift in the administration’s focus, acknowledging the vital role of the American consumer. Since April 2, a troubling rhetoric has persisted, framing Americans solely as producers of physical goods, implying that consumption is of lesser importance.
The administration’s message is difficult to reconcile with its campaign promises. However, this shift in direction presents an opportunity to reaffirm a fundamental principle: Government should enhance the economic well-being of its citizens.
This entails improving, rather than diminishing, living standards. To conclude on a cautiously optimistic note, with this temporary reprieve from trade tensions, the administration appears more open to reassessing its approach, acknowledging that compromising U.S. consumer interests to revive
(Credit the csis org analysis for its research)