A Post-Truth Deal with China

Process is progress, but without strategy, progress will stall.

A temporary rollback of reciprocal and retaliatory US-China tariffs has bought time for what had been a rapidly deteriorating global business cycle. However, during the 90-day pause (ending August 10), uncertainty and volatility are likely to remain high, crimpling business decision making on capex and hiring. That underscores the persistence of downside risks to the US and Chinese economies, along with the potential for collateral damage to a still vulnerable global economy.

Yet process is progress, especially when compared with the alternative. The May 12 joint statement issued by the United States and China emphasized a process of consultation — now dubbed the so-called Geneva mechanism — to be led by US Treasury Secretary, Scott Bessent, and Chinese Vice Premier, He Lifeng; compared with the acrimonious earlier climate of nonengagement, punctuated by chargers and counter-charges that followed on the heels of Trump’s April 2 Liberation Day tariff war, re-engagement is an unequivocal plus. While the frequency of subsequent meetings and the structure of the upcoming dialogue remains uncertain, I am at least heartened by the commitment to process.

Scott Bessent and He Lifeng will bring very different perspectives to the negotiating table. The US playbook is a throw-back to Trump 1.0 — all Lighthizer and (thankfully) no Navarro. In media briefings after negotiations concluded with China, Bessent underscored the supporting ammunition he relied on in Geneva — especially a large binder on non-tariff barriers and subsidies, reminiscent of the material developed by former USTR Robert Lighthizer for his famous Section 301 Report of March 2018 that made the case for the Trump tariffs of 2018-19, most of which are still in place today. Bessent also repeatedly hinted at the failed “Phase I” US-China trade accord of Trump 1.0 as a Chinese “purchases-intensive” template for future negotiations. Like Trump, Bessent strangely argued that deficit nations hold most of the cards in trade negotiations — effectively dismissing the possibility that China might be able to exercise any pressure on the United States. If that is the case, one must wonder why Trump blinked, yet again.

China has a different playbook. In contrast to Bessent’s career as a market-savvy fund manager, Vice Premier He is much more of a technocrat — steeped in a decade of high-level experience with China’s National Development and Reform Commission. The NDRC, the modern-day counterpart of the old Maoist State Planning Commission, is arguably the most important ministry of China’s State Council. He Lifeng was chairman of the NDRC from 2017 to 2023 (and deputy director from 2014-17), a period that covers the rollout of some of China’s most aggressive, and arguably successful, industrial policy initiatives — including but not limited to Made in China 2025 (launched in 2015), the Internet Action Plan (2015), and China’s New Generation Artificial Intelligence Plan (2017). These industrial policy action plans, along with China’s latest emphasis on new high-quality productive forces, are all tightly aligned with the operational focus of Xi Jinping Thought. As such, they emphasize industrial policies as an antidote to China’s long list of structural problems — especially under-consumption, debt-intensive growth, and a lingering property crisis — in effect, fostering an overhang of excess capacity that has led to considerable frictions between China and the United States. From the US perspective, He Lifeng has been tightly aligned with China’s problem, not its solutions.

America’s fentanyl crisis was an important sidebar of the Geneva negotiations. In his postmortem on May 12, Bessent stressed that the Chinese side finally “gets it” on fentanyl. This is actually an encouraging development, as a 20% fentanyl tariff surtax remains in place today that could be eliminated if the US and China were to come to an enforceable agreement on fentanyl precursor chemicals, a possibility my sources suggest is within reach. If that were to happen, then China could celebrate its own Liberation Day, subject “only” to Trump’s 10% minimum tariff floor (more on that below.)

Alas, here’s where the Geneva deal starts to unravel. Thanks to the 19% tariffs on China of Trump 1.0, which are still in place today, a new 10% floor means that US tariffs would still be set at basically a 30% rate on all Chinese products —even in the event of a breakthrough on precursor chemicals that might eliminate the 20% fentanyl penalty tax. Relative to pre-Trump 1.0 tariffs on China that averaged closer to 3%, a ten-fold increase to 30% is a huge deal. Don't kid yourself —Washington is not exactly letting China off the hook if the spirit of Geneva somehow prevails.

That gets to a bigger, and more basic, problem with Trump’s tariff and trade strategies. He continues to harbor the bizarre belief that a balanced trade position — and all the wonderful things that presumably go with it, like a renaissance in US manufacturing — is best achieved through a series of bilateral deals. It follows, according to this logic, that the road to America’s Golden Age must start with the biggest sources of a large multilateral deficit, like China, and then progressively work its way on a reciprocal basis through other US deficit trading partners.

This argument makes absolutely no sense. It failed by going after Japan in the late 1980s and it is failing once again, this time with China. It ignores America’s own macroeconomic imbalances as a saving-short nation that force us to borrow surplus saving from abroad to fund domestic investment and economic growth. With that surplus saving comes America’s massive current account deficit and a multilateral trade deficit with many nations — 101 of them in 2024, including, of course, China. It’s hard to be certain of anything in Trump 2.0, but a bleak outlook for the Federal budget deficit is a pretty safe bet. That will continue to put pressure on domestic saving, leading to outsize balance of payments and multilateral trade deficits for as far as the eye can see. All the so-called bilateral trade deals in the world won't fix that.

Yet Trump has a theory for all this. He asserts, without evidence that the United States has been ripped off for decades. The trade deficit is his metric for the great rip-off. Never mind that the foreign capital that accompanies our trade deficit subsidizes US interest rates and holds down domestic prices, thereby boosting purchasing power of US consumers. He wants to tax the world for this flagrant rip off, arguing, again without any science, that a 10% minimum tariff floor on the rest of the world squares the circle.

A 10% tariff floor doesn't sound like a lot after Trump has just backed down on 145% tariffs on China. Think again. The chart above, complied by the Yale Budget Lab, shows the long history of US tariffs back to 1790. Over the past thirty years, 1995 to 2024, America’s overall effective tariff rate averaged 1.8%. Trump’s tariff floor of 10% is over five times that average — a massive tax hike by any standards. Relax, he says, they pay it, not us. “They,” I’m afraid, is us. Anything goes in a post-truth world — including yet another deal with China.