Following reports of a US/China trade agreement in London, we await final details from both sides. That said, the deal appears to be a limited exchange of rare earths for advanced technology/foreign student visas rather than a more fulsome breakthrough. Below, we outline our views of the emerging agreement, as well as the overall Trump trade agenda and its broader impact on geopolitics. Please reach out with any questions.
London Agreement Toplines
- A total 55 percent US tariff on Chinese goods, which includes stacking the 10% baseline with the 20% tied to fentanyl trafficking, and roughly 25% from preexisting levies from Trump 1.0 (and MFN rates);
- A total 10 percent Chinese tariff on US goods;
- Immediate access to rare earths and minerals as agreed to in Geneva;
- Approval/resumption of Chinese student visas; and
- Some relief from US advanced tech export controls (e.g., chips, semiconductors, software) and other items (e.g., jet engines).
Outstanding Items. We are skeptical that the agreement includes a loosening of the US’s Huawei or Chinese-connected vehicles restrictions, Chinese concessions on currency, a statement on Taiwan, military presence/influence by either side in the Indo-Pacific, or other such existential items.
It is also unclear if there will be more detail on the Phase I commitments, but given President Xi’s unhappiness with that previous outcome, we highly doubt it has been addressed or resolved in the London talks. It’s unlikely that any agreements were reached on fentanyl given the 20% tariff remains in place.
Next Steps. Knowing that the Administration’s 90-day pause expires in August, it is our assumption that President Trump will provide an additional extension of the fulsome tariff pause pending implementation of the above details.
To that end, it is worth keeping a close eye on actions by the PRC’s newly-created Office of National Export Control Coordination Mechanism to assess whether rare earths metrics are being met in the U.S.’s eyes.
China’s Securities Times had previously written in May that rare earth export controls “will not be cancelled, only adjusted.” Meaning, the CCP will never fully give up its leverage on rare earths. To date, China has purportedly been giving preference to EU companies, which has likely further irritated the U.S. side heading into London.
Secretary Bessent on the Hill. Earlier this morning, Treasury Secretary Bessent appeared before the full Ways and Means Committee to address both tax and trade (he has various additional hearings today and tomorrow in the House and Senate).
His opening remarks did not provide specific details on the London agreement. Rather, his comments outlined the Administration’s overall trade strategy and characterized them as a “rebalancing of the global economy.” According to the Secretary, the U.S./UK trade deal should be viewed as a preview of what’s to come in order to make global trade more “fair,” which includes bringing down barriers and halting labor subsidies.
Specific to London, Bessent called the talks “successful negotiations” that will “stabilize” the economic relationship between the US and China and make it more balanced overall. According to Bessent, “China has an opportunity to stabilize” its economy by moving away from excess production and increasing consumption. China’s 30 percent share of global manufacturing–which they continue to grow–is unacceptable to the Administration.
Bessent hinted at what the Administration views as its leverage in talks: a weakened hand for China in terms of its real estate crisis that threatens its economy and a strengthened US hand as evidence by inflation returning to its slowest pace since 2020 via today’s CPI data. But ultimately, both have something the other wants: rare earths and advanced technology. So the London talks should be seen as a temporary breakthrough solely on that one issue: exchange of the items each side immediately wants/needs and does not have.
Trump Administration Trade Strategy. The Administration has a strategic goal of lowering excess global manufacturing and increasing foreign consumption, while reducing trade barriers, both explicit (tariffs) and non-explicit (export licenses, DSTs, currency, etc.).
To that end, the Administration received favorable news via the US Court of Appeals which granted its request to keep the IEEPA tariffs in place while it hears the appeal of the CIT’s ruling. Arguments are fast-tracked for July 31. Not having a view into how the Court rules, it’s inevitable that the losing side will appeal to the Supreme Court.
Thus, slow-walking one-on-one negotiations with the US as the IEEPA appeals play out is likely short-sighted for two reasons. First, the Administration is confident SCOTUS will ultimately side with it. And second, those who slow-walk will leave themselves vulnerable to future escalations (e.g., the recently increased tariffs on steel and aluminum do not apply to the UK given its first-out-of-the-gate deal).
US/China Tensions Unresolved. The existential conflict between the US and China is no less fraught despite the targeted rare earths for chips breakthrough in London. Case in point, the PLA recently held unannounced exercises over Taiwan and ventured ever farther into the Pacific, reportedly rehearsing interdicting U.S. forces en route from Guam should kinetic conflict ultimately arise.
Both the PLA and Chinese Coast Guard also held joint sea and air combat readiness exercises in waters and airspace around the Philippines and Japan. In addition to the size and scope of the exercises, what’s noteworthy is the lack of public communication. Clearly the PLA is signaling its ability to operate throughout the Pacific with impunity.
These exercises are also likely a response to Taiwanese President William Lai’s May 20 address and Defense Secretary Pete Hegseth’s recent keynote at the Shangri-La Dialogue in Singapore in which he invoked the US’s resolve in “deterring aggression by Communist China,” including an invasion by the PLA of Taiwan. Hegseth stated that “any attempt by Communist China to conquer Taiwan by force would result in devastating consequences for the Indo-Pacific and the world” and that the US is prepared to “fight and win.”
OUTLOOK/ANALYSIS. Given that talks between Ukraine and Russia-as well as the US and Iran-seem to be making little progress, the US/China London agreement should not be viewed as a sign of de-escalation. Rather, it is a limited exchange of rare earths for advanced tech/foreign student visas. The global trade and geopolitical rebalance marked by Donald Trump’s election in November continues apace. The Administration remains intent upon rebalancing trade with traditional allies while strategically isolating China, the latter goal of which continues to shape the expanding China/Russia alliance.
One-off trade agreements throughout the summer and into Q4 will likely materialize while the existential struggle between the world’s two largest economies for dominance in GDP, military power, diplomacy, and advanced technology hangs over all.
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