Last month, U.S. tariffs on Chinese imports skyrocketed to 145%. Some sectors, like cars, were hit particularly hard. Other sectors, like semiconductors, got exemptions. The numbers changed almost as quickly as the justifications, ranging from reshoring jobs to creating a new economic bloc against China.
This weekend, there was a new whiplash as U.S. negotiators announced that they would scale back tariffs to around 30%. In response, China reduced its tariffs on U.S. goods to 10%. Even though the details of the negotiation are still trickling out, the White House is already trumpeting the “Art of the Deal.”
While the U.S. did avoid a major economic calamity, this is not a deal. The U.S. blinked. Welcome to the tariff "omnishambles."
The initial round of negotiations thus has undermined much of the leverage that we have for future rounds.
Far from some diplomatic coup, the U.S. climb down reflects the economic risks of maintaining such high tariffs. Activity at West Coast ports had slowed to levels not seen since the pandemic. News from the ports was mirrored in reports of layoffs and bankruptcies among small businesses. Just as bond markets had forced the administration’s hand in April, when it had imposed extreme tariffs against many allies, cutting off trade flows with China had significantly raised the chance of a recession.
While the de-escalation between the U.S. and China will temper some of the worst fears of decoupling, the American economy is far from out of the woods. Reporting suggests that the negotiations provided no new wins in terms of U.S. access to the Chinese markets. And even the 30% tariff level will stoke inflation, as goods from China now face higher taxes than they did a year ago. Equally important, the Trump administration has included a 90-day review window in which the extreme rates could snap back. If you are a business, how can you make any sensible long-term investments? It is just this type of uncertainty that stokes fears of recession.
But for China, the negotiations have revealed the weakness of America's threats. Given that the U.S. was unable to maintain higher tariffs for more than a month, how credible is the proposed snap-back? In many ways, the bargaining dynamics mirror those between the U.S. government and bond markets a month ago. Repeatedly escalating to extremes and then backing down only further reveal U.S. pressure points. The initial round of negotiations thus has undermined much of the leverage that we have for future rounds.
And it is not only that China has learned something about our pain tolerance. As we lick our wounds and restock empty ports with new Chinese goods, Chinese President Xi Jinping is already meeting with Brazilian President Luiz Inácio Lula da Silva to secure new investments and boost Brazilian exports. The administration’s tariff policy has forced the U.S. to scramble to rebuild individual economic ties. Meanwhile, China is playing a global game, diversifying away from U.S. dependencies and going on diplomatic tours trumpeting itself as a free trader.
This leaves many of our closest allies even more confused. At least one of the purported justifications of the tariffs was to create an anti-China economic bloc, and U.S. officials reportedly have tried to pressure countries into reducing their economic ties with China. All the while, however, the U.S. has eliminated traditional incentives like U.S. development assistance that we use to get others on board. Now the U.S.-China negotiations suggest that even the U.S. is not willing to decouple. If that is the case, why would others be willing to risk it?
This leaves many of our closest allies even more confused.
The Trump administration has unleashed one of the most difficult and challenging economic policies of the post-war period; conducting 90 trade negotiations in 90 days is staggering. Now try doing it as you simultaneously fire thousands of State Department workers with key diplomatic and area expertise.
The word omnishambles — popularized in the British political satire “The Thick of It” -- captures a particular type of policymaking characterized by chaos and mismanagement. We are just in the first episodes, but omnishambles is already the clear theme of this show. And while the U.S. has temporarily paused escalation with China, the risks to our economy and global credibility have already started.