US-China Trade Deal Only Slightly Improves US Economic Outlook

Many China goods unaffected by tariff reduction

The Trump administration announced that the US and China had agreed to reduce reciprocal tariffs by 115 percentage points for 90 days, a larger reduction than we expected. Due to a range of exemptions and carve-outs for specific goods (including consumer electronics, auto parts, and semiconductors), only about half of Chinese imports to the US were subject to 145% tariffs, leaving the rest unaffected by this deal (Fig. 1). With imports from China equal to just over 13% of total US imports, this implies that today’s deal is a dramatic cut in tariffs for roughly 6.5% of US imports.

Prospects for tariff deals

The outlook for US-China trade has improved with this 90-day freeze, but progress on trade negotiations for countries other than China has been slow and implied that 10% may be a hard tariff floor.

President Trump expressed confidence that the US and China would reach a deal during this 90-day period. In addition, he stated that although tariffs on China would rise if the two countries don’t reach a deal, the joint reciprocal and fentanyl tariff rate on China would not rise all the way back to 145%.

In contrast to the better-than-expected temporary agreement China, trade deals between the US and other countries have proceeded slowly. Thus far, there has only been a single deal, with the UK, a country with which the US already runs a trade surplus and which was never subject to reciprocal tariffs in excess of 10%.

The US-UK trade deal did not lower the US’s tariffs on the UK below 10%, a tariff level that may be a harder floor than we previously expected. Moreover, key US trading partners like Japan and South Korea have taken a relatively hard line with the US, so far refusing to agree to deals that don’t lower auto tariffs.

Updated trade & macro scenarios

Fig. 2 shows our current aggressive, baseline, and benign scenarios.

Our base case is for reciprocal and fentanyl tariffs against China to remain at the current 30%. Under this scenario, we expect the US to continue to implement sector-specific tariffs. Semiconductors, copper, timber, and lumber all appear likely to see additional tariffs. The exception is pharmaceutical goods, as President Trump signed an executive order on a most-favored-nation policy aimed to lower drug prices. In contrast, we assume country-specific tariff rates will remain unchanged at 10%, avoiding the increases scheduled for 8 July.

Our more benign tariff scenario assumes several trade partners successfully negotiate their reciprocal tariff rates below 10%. In addition, under this benign scenario, the US ends fentanyl tariffs on China, Canada, and Mexico. This scenario would also see the administration back down from all sector-specific Section 232 tariffs. Tariffs would still be elevated relative to recent history, but this scenario would not involve a major realignment of global trade.

A more aggressive scenario would see country-specific tariffs largely reverting to their Liberation Day levels. Under this scenario, sector-specific tariffs would continue to go into effect, and USMCA exemptions for Canada and Mexico would be allowed to lapse, reverting tariff rates to 25% for all imports from North America. In addition, more Section 232 sector-specific tariffs would be implemented.

If reciprocal tariffs are allowed to revert to Liberation Day levels, a recession would still be the most likely outcome, with GDP growth around -1.4% Q4/Q4.