Trade Truce?

Answer: Let’s have a quick refresher on tariffs first. Tariffs are essentially taxes on goods imported from other countries. They’re used to help protect domestic producers from foreign competition, along with other purposes. Trump’s tariffs are designed for these reasons, and to let China know that there is a significant penalty for their part in the U.S. fentanyl crisis.

The Brookings Institution cites that China is the primary source for chemicals used to make fentanyl shipped to Mexico. Mexican cartels then manufacture fentanyl and smuggle it into our country. According to the Centers for Disease Control Prevention, in 2022-2023 there were 111,000 fentanyl overdoses. By 2024, this number dropped to 85,000 for the first time since 2020. The Administration is imposing a 20% fentanyl related tariff to deter this activity by China.

At the meeting in Geneva, the US and China announced a deal that significantly reduces tariffs on both sides, at least temporarily. This is an important easing of the trade war, which escalated earlier this year. At the peak, US tariffs on most imports from China reached 145%. After the talks, this percentage came down to 30%, which includes a 20% tariff related to fentanyl, plus a 10% base tariff on all imports.

On China’s side, the tariff on most imports from the US decreases from 125% to 10%. This is a temporary 90-day deal designed to provide enough time for a longer-term, more comprehensive agreement. The key point is that the new tariffs (30% and 10% ) will allow relatively normal trade between the two largest economies to resume, alleviating a great deal of angst for consumers and corporations. For the past six weeks, trade between the two countries has plunged because of suggestions that the tariffs would be at the higher initial rates.

Back Story

The current trade war began in 2018 during Trump’s first term and became a mostly non-existent issue during the COVID pandemic. For example, China’s exports fell by 40.6% in February 2020 as documented by the National Institute of Health. During the Biden administration, tensions between the two countries were at low levels. When Trump returned to office, on February 1, he announced a 10% fentanyl tariff on China. On March 4, this fentanyl tariff was doubled to 20%. On April 2, the White House announced reciprocal tariffs of 34% on China plus a 20% fentanyl penalty to total 54%. As a result, financial markets fell substantially the following week. On April 9, Trump issued a 90-day pause rate of 10% on other countries, except for China, which went up to 145%. China then retaliated by responding to US actions with a 125% retaliatory tariff on goods going into China from the US.

As a result, marine shipping dropped off in both directions. If a tariff pause hadn’t been obtained, there could’ve been supply chain disruptions causing actual product shortages for longer than the trade war may last. China is the third-largest source of US imports, representing 14% of our total imports in 2024. The agreement eases these fears for both countries. There was a collective sigh of relief in the US knowing that China wasn’t going to shift imports of soybeans or liquid natural gas (LNG) to Brazil or European countries.

The question remains: will the 30% tariff on Chinese imports continue after the next 90 days? There is a July 8th deadline for trade deals with everyone except China. It’s expected that ultimately the effective tariff rate may be around 15% to 17%. Noteworthy progress has been made with China, yet uncertainties remain concerning trade with China and other trading partners.

Thoughts

Markets responded favorably to the trade deal announcement from Geneva and are up from the recent lows set on April 9. Reducing tariffs on China to 30% was far better and an improvement over the anticipated 60+% rate prior to the US/China meeting. This gives manufacturers, shippers, businesses, and consumers greater clarity for business planning. With a wide range of potential outcomes, although tariff policies have softened, optimism continues to be guarded.

Tariff and fentanyl negotiations will take time and finesse, which is why President Trump may have chosen to tackle this before addressing tax cuts. Discussion of tax plans, concessions, and compromises may provide an opportunity to leverage votes for any tariff reductions. We’ll have to watch and see the outcomes. That’s a discussion for another day! Stay focused and plan accordingly.

*Data Source: The White House and CDC