What Could a U.S.-China Deal Look Like?
Neither side looks ready to compromise, but there are only a few potential elements to an agreement that averts economic calamity.
It’s official! The world's two largest economies are actually shutting down their $700 billion annual trade flows! Not even the best manufacturing firms can make money after China’s 125% duties, let alone America’s 145%. Chinese President Xi Jinping denounced "unilateral bullying acts." President Donald Trump insisted, "The ball is in China’s court!"
Markets slumped precipitously after Trump announced all his reciprocal tariffs, even if they rebounded somewhat with the 90-day pause for negotiations. It’s hard to disentangle those dynamics from the simultaneous escalation in China tariffs, but the selloff would have been much worse if investors believed that Washington and Beijing were serious about permanent decoupling.
It’s hard to envision either leader backing down from confrontation today, but there are only a limited number of viable bargaining chips that might begin to restore some predictability to the economic relationship.
Trump has, in the words of Treasury Secretary Scott Bessent, given himself "maximum leverage” in trade negotiations by slapping on tariffs at eye-watering levels. But he also seems to have undercut that leverage by insisting there will be deals with most of America’s trading partners, including China. The textbook says you’re not supposed to look too eager to settle.
Xi will have noticed that Trump’s erratic policy rollout remains sensitive to market reactions. If Trump can tolerate a sharp slide in stocks, he will back down when bond investors get “yippy” and start dumping the world’s safest asset. And having booked 5.4% GDP growth in the first quarter, China’s economic policymakers may feel they can stand the pain of the current standoff longer.
When the time comes to envision a potential deal, however, the problem remains that Trump’s priorities remain mysterious. Is the top goal to reduce bilateral trade deficits with China or to disengage entirely? If creating new manufacturing jobs in America is key, would the president welcome Chinese investment? Just how much does he care about currency manipulation, intellectual property theft or fentanyl exports?
The uncertainty gives Trump the flexibility to pick and choose from any potential Chinese offers and declare victory. But if he really wants a deal, China needs to understand what he wants most. We may get a better sense of the president’s real priorities as Japan and the United Kingdom agree on frameworks for an agreement. But China is a very different relationship, and there are many other points of friction.
The Biden Administration liked to speak of three sets of issues in the U.S.-China relationship: areas of conflict (Taiwan and human rights), areas for cooperation (climate, public health), and areas of competition (mostly trade and investment). Fortunately for settling the trade war, Trump cares very little about the first two categories any minimal next agreement can avoid guarantees of Taiwanese sovereignty or China’s carbon footprint.
But China may have a much harder time agreeing to a one-sided deal as it did in 2020 and will likely insist on more than just a reduction in U.S. tariffs.
At the same time, whatever agreement comes into view will likely have to be bigger than the so-called Phase One Deal agreed during Trump’s first presidency. You may recall this involved Chinese commitments to purchase $200 billion in U.S. goods over two years that were quickly interrupted by the pandemic. There were also pledges by Beijing to strengthen intellectual property protection and forced technology transfers.
This time, given the focus on the bilateral trade deficits, Trump may insist on big new purchasing commitments, but that shouldn’t be difficult given China’s continuing need to import energy, food, and even the Boeing jets it just banned. The agreement might also include an implicit Chinese pledge to boost domestic demand, which would help reduce the flows of manufactured exports spilling into global markets and help ease the path to Beijing’s 5% growth target.
But China may have a much harder time agreeing to a one-sided deal as it did in 2020 and will likely insist on more than just a reduction in U.S. tariffs. Even as U.S. export controls ratchet higher, could there be carve-outs for purely civilian uses? Trump has sometimes said he would be open to more Chinese investments in U.S. manufacturing. Could that be codified into the agreement? Would hosting Xi at a lavish State Dinner help address Beijing’s craving for respect?
What about some soft linkage to the Congressional approval of a new budget that restores some sustainability to U.S. debt and helps symbolically reassure Chinese bondholders? Could there be a private understanding that recent restrictions on U.S. investment in China will be softened?
Right now, none of these compromises seems enough on their own to bring China to the table, and many seem like too much of a stretch for Trump to offer. But if a deal is to be done, if tariffs are to come down to more viable levels and if the global economy is to avoid calamity, then some package that allows both sides to declare progress is unavoidable.
And if anyone can deliver such concessions amid mounting China hawkishness, it’s the man who started it all.