Why US & China have agreed to temporarily slash tariffs

What were the tariffs until now?

Since February 1, US President Donald Trump has imposed tariffs on China for a variety of reasons. The first lot of tariffs was for the sale of fentanyl, an opioid that is responsible for thousands of deaths due to overdose in the US. On April 2, which Trump designated as “Liberation Day”, Washington imposed an additional 34% tariffs on China.

China responded with its own counter-tariffs, unlike most other countries. By April 10, the tariffs had reached a prohibitive level. The US had imposed 145% tariffs on China, and China had responded with 125% tariffs on US imports. At this 145% rate, the price of an $100-worth imported Chinese good in the US would rise to an eye-watering $245.

In addition to tariffs, China also imposed some non-tariff barriers on the US, such as export restrictions on rare earth minerals, and restrictions/investigations against multiple US companies.

US Secretary of the Treasury Scott Bessent (left) and US Trade Representative Jamieson Greer speak to the press after the second day of a bilateral meeting between the United States and China, in Geneva on Sunday. (Photo: AP)

What is the situation now?

After the truce, the base tariff rates have fallen to 10% for both countries. However, the US continues to levy a 20% tariff on account of fentanyl smuggling.

So effectively, consumers in the US now face a tariff of 30% on imports from China, and consumers in China face a tariff of 10% for imports from the US.

China has also suspended the non-tariff barriers it installed after April 2.

Why were tariffs placed in the first place?

Explaining the rationale behind the tariffs, the US Trade Representative Jamieson Greer yet again pointed to the $1.2 trillion trade deficit on goods that the US had with the rest of the world. This essentially means that US consumers import goods worth $1.2 trillion more than what the consumers in the rest of the world import from the US.

The Trump administration sees a trade deficit negatively, saying it is proof of the fact that the rest of the world is “ripping off” the US. That is because, as Greer argues, while the US opens its markets to the rest of the world, other countries protect their companies, and subsidise them to take over the US market.

Greer said the trade deficit had ballooned more than 40% since the end of President Trump’s first term in 2020. He also underscored that merely talking and requesting other countries to open their markets had not helped over the decades, and that imposing high tariffs was the most logical way forward.

Why has there been a truce?

Tariffs are not the solution to trade imbalances. Put simply, they are counterproductive, and hurt the domestic economy’s consumers while protecting its producers. But since the hurt on consumers is spread over a large number of individuals and the benefit of protection is concentrated over a small number of producers, it can appear that tariffs help.

Unsurprisingly, the US economy started wilting under the price pressure of tariffs because all imports started getting costlier. There was a genuine risk that if this truce had not been announced, the shelves in retailers such as Walmart would have soon become empty.

The US economy contracted in the first quarter of 2025, before the full effects of the highest tariffs would have even been registered. After the April 2 announcement, the consensus view among economists was that the US was set to face recession — that is, two consecutive quarters when the overall GDP declines in absolute terms. Worse, with tariffs raising the price level, the odds of the US facing a stagflation — economic stagnation coupled with high inflation — were becoming higher.

So, which country won the tariff war?

There are no winners in a tariff war. However, currently, it appears that China has managed to get the better of the US.

For instance, even though China’s exports to the US fell by 21% in April, its overall exports grew by 8%. According to an Axis Bank analysis, China’s trade surplus grew by $96 billion in April. In the quarter where the US contracted, China’s GDP exceeded expectations by growing by 5.4%.

Also, at 10% baseline tariffs, China now faces the same rate that the United States’ traditional allies, such as the United Kingdom and Australia, face. These are the rare countries which had a trade deficit with the US, and still got charged with a 10% tariff rate.

The 20% tariffs on fentanyl are likely to go away, given the fact that both Greer and US Treasury Secretary Scott Bessent spoke positively about China’s engagement on the issue.

What’s next?

The immediate reaction from all market parameters is positive, but that should be seen as a huge sigh of relief. Investors can see that the worst possible outcome — a trade embargo between the world’s two largest economies — is behind them.

Stock markets have risen, and so has the US dollar and the price of oil — all pointing to better economic prospects — while prices of assets (gold and government bonds) that are considered safe havens have fallen.

However, the fact is that this is not a “deal”. It is just a truce to start talks. As there is no clarity on who called first for talks in Geneva, the actual negotiations could be quite thorny and tense.