HONG KONG, April 24 (Reuters Breakingviews) - Donald Trump and Xi Jinping have an interest coming to the negotiating table. The U.S. president’s 145% additional tariff on many Chinese goods, and his counterpart in Beijing’s corresponding 125% charge, are unsustainable. The problem is that their last deal did not work, while Washington sees China and its technological ambitions as a growing national security threat. That will make a pact between the world’s two largest economies hard to negotiate and even harder to uphold.
Trump has expressed optimism that he can reach an arrangement with China that would “substantially” cut levies. On Wednesday, a source familiar with the situation told Reuters any action by the White House would not be made unilaterally. Last week, Xi Jinping appointed a new trade negotiator, underscoring Beijing's willingness to de-escalate tensions over the pair’s nearly $600 billion of bilateral trade.
Yet any deal they produce will deserve ample scepticism. After all, a relatively narrow so-called "Phase One" agreement in January 2020, supposed to defuse Trump’s first trade war, did not work.
That arrangement, detailed in a 91-page document, , took a year and half to negotiate and, while pausing further tariff hikes, provided no path for removing those already in place. China also failed to keep its promise to buy no less than $200 billion of additional American goods and services each year.
That makes the 2020 deal a poor template for resolving the current standoff, which includes everything from China's role in the supply chain of fentanyl, an opioid widely abused in the United States, to the future of viral video app TikTok’s U.S. business.
A second problem with striking a meaningful deal to avert a global economic shock is the sheer size of the U.S. deficit with China. Goods imports directly from the People’s Republic were nearly a fifth lower last year than in 2018, when Trump launched his first tariff assault. But after including indirect trade passed through third countries, the United States may be taking more Chinese goods now than it did back then.
The gradual decoupling, of the Sino-American relationship has shrunk China’s direct share of U.S. imports by 8 percentage points to 13% between 2017 and 2024, according to the U.S. Census Bureau. Yet Asia's total U.S. imports rose by more than a fifth to $1.3 trillion. China's share of global exports also grew. This suggests many companies have been re-routing goods from the People’s Republic to the United States through other places like Vietnam.
For a long time, Trump seems to have viewed the existence of a goods deficit as tantamount to China taking wealth from the United States. It arguably follows, then, that repairing the relationship requires more balanced trade. But it is difficult to see how that would work.
Forcing Chinese companies to make more toys in the U.S., rather than importing them, would take years and boost costs, given the wage differential between the countries. More importantly, Chinese investment is increasingly unwelcome in the United States.
The recent decisions by Taiwan Semiconductor Manufacturing (2330.TW), and South Korea’s Hyundai Motor (005380.KS), to increase production in the U.S. pleased Trump but Washington does not appear to want top Chinese companies like chipmaker Huawei or automaker BYD (002594.SZ), to make things for Americans.
A third, related, problem is that Trump's discontent with trade imbalances is hard to disentangle from escalating concern in Washington about the threat posed by China’s increasing technological prowess.
Take electronics, like smartphones and computers. Trump paused U.S. tariffs on those goods only to announce an investigation into the whole supply chain and semiconductor sector on national security grounds. Smartphones including those made by Apple (AAPL.O), were the top U.S. import from China in 2024, amounting to $42 billion, while laptops were second, at $33 billion, according to Census Bureau data.
While the president's trade war has plenty of critics in Congress, concern about the Chinese threat is bipartisan. Trump signed an order aimed at keeping Huawei out of digital wireless networks in 2019, while Democrat President Joe Biden unveiled sweeping U.S. export restrictions on semiconductors in 2022 and banned the sale of Chinese electric vehicles.
In effect, Trump is rapidly expanding the Biden administration's "small yard, high fence" policy where the U.S. built barriers around specific high-tech industries that could advance the Chinese military, while seeking cooperation with the People’s Republic on other issues like climate change.
As the yard widens and Trump builds an insurmountable fence, the room for co-operation is shrinking. Washington recently required California-based Nvidia (NVDA.O), to obtain a licence before selling its H20 artificial intelligence chip to China, which may effectively amount to a ban. The move illustrates the challenge: it targets a product designed to comply with previous U.S. curbs, forcing the company led by Jensen Huang to warn of a $5.5 billion charge.
The final problem is an inherent one to do with China's size. Its population is four times larger than the United States, and the output of its manufacturing sector surpassed the U.S. a decade and a half ago, according to World Bank data.
Two factors exacerbate the size issue. China’s investment-led development model has fuelled industrial overcapacity. And Beijing's Made in China 2025 vision, laid out in 2015, explicitly stated the goal of dominating 10 areas, including global high-tech manufacturing.
Though China has since downplayed the plan, Western powers continue to refer to it. Last week, Jens Eskelund, president of the European Union Chamber of Commerce in China, noted, : “China faces a choice between continuing Made in China 2025-style policies or taking a more targeted and sustainable approach to technological self-reliance that minimises negative externalities."
In the near term, Trump may simply want to use tariffs as a tool to project dominance over Beijing. But China will view it as a full-on effort to contain its rise – whether or not the tensions ebb and flow each year, warns Christopher Beddor, deputy China research director at Gavekal.
The U.S. president has in recent weeks painted his trade war as an effort to rally countries like India, Japan and South Korea in a grand encirclement strategy against China. That will make striking a deal with Xi even harder. Even if the two leaders come to terms soon, tensions and mistrust will remain high, leaving the threat of a sudden tariff snapback and other trade sanctions hanging over the global economy.
