Following exhaustive negotiations in London over two days, a consensus emerged between the United States and China to begin unwinding some of the punitive actions previously taken, signaling a return to the trade truce that was originally established in May. This development was preceded by what was described as a cordial conversation between President Donald Trump and Chinese President Xi Jinping last week. Leading the negotiations for these world powers were Scott Bessent, the US Treasury Secretary, and He Lifeng, the Chinese Vice Premier.
In the course of these negotiations, they have been seeking final ratification from both Presidents for the ‘framework agreement’, a gesture that will instantly put it into action once granted. Earlier in the year, the two nations achieved a 90-day tariff truce in Geneva on the 12th of May. Yet despite this, significant differences often arose, including issues such as alleged currency tampering, export subsidies, and various other non-tariff hurdles.
There was tension following the Geneva resolution, mainly characterized by accusations from Washington that Beijing was slow to execute an agreement on accelerating the exports of rare-earths. Beijing, on the other hand, said that the United States had been the first to contravene the agreement by enacting a series of new actions. These included restrictions on the sales of AI chips and software for chip design to Chinese firms, as well as visa cancellations for Chinese students.
Adding fuel to the fire, Trump went on to enact an executive order banning the use of Huawei AI chips by US companies, only one day after signing the agreement. Meanwhile, China, with its strong position in the global rare-earth supply chain, resumed trade discussions using this as leverage. From many things including electronics, automobiles, and healthcare equipment, to state-of-the-art fighter jets, rare-earth materials are vitally important.
Remarkably, China is responsible for generating about 70% of the world’s rare-earth materials and processes over 90% of these resources. However, despite this seemingly advantageous position, China does not have the upper hand in all areas. The nation continues dealing with sluggish economic growth rates, and it had already been struggling with a property bubble long before the initiation of any trade tussle.
In fact, China’s exports to the US took a considerable hit, plunging by an astonishing 34%. This is nevertheless partly balanced by the increased sales in Europe and Southeast Asia. It’s significant to note that the country’s aspirations to be a front-runner in the AI field are impacted by its reliance on the United States’ export of advanced semiconductors, because China is presently unable to manufacture similar high-tech goods domestically.
Moreover, Ethane, a major export for China, relies on the US for more than 99% of its supply. The US could exert further pressure by escalating arms sales to Taiwan. However, the news of the renegotiated truce has been received positively. The revitalization of the single most significant trading relationship in the global economy is truly an encouraging sign.
Yet, the challenges are far from over. Time isn’t in abundance; the tariffs have only been postponed by Trump until August, which necessitates a more comprehensive agreement to be attained before then. As a part of the deal, China would likely have to offer significant compromises such as enabling full domestic market access to US tech powerhouses like Meta and Netflix, among others.
China could also aid in the deal by stimulating domestic consumption, hence reducing the trade surplus that it holds with the US. Should these conditions be met, a treaty could allow Trump to permanently remove tariffs. Such an agreement could uphold the export-dependent growth framework that has profoundly transformed China’s economy in the last 30 years.
Additionally, it could allow China to continue its expansion in technology-driven industries that are usually under Western dominance. There is, however, no certainty that such a deal will materialize. Yet, should it come to fruition, the global economy will significantly benefit. More importantly, it would result in a mutual win, promising considerable advantages for both nations.