Some Thoughts on the Trade Deals with China and the UK
We have two new trade deals with the United Kingdom and China, and the stock market is thrilled. The S&P 500 index rose yesterday by more than 3%. Several economists also reduced their estimated probabilities of a recession downward. These deals were indeed good news, but the market reaction is simply reflecting its assessment that Trump has walked away from some profoundly stupid trade policies—and not an assessment that our trade policy is in the right place. I thought the reality was best captured by a small businessman interviewed by the Washington Post:
“It’s like they tried to feed us a rotten egg sandwich and hope we’re happy to drink spoiled milk instead,” he said. “We are going from possibly losing our company and going out of business to just losing our profits for the year.”
While these are only two deals out of the hundreds that are still being negotiated, they do suggest the framework moving forward. The 10% base tariff on all goods imported into the United States seems to be the minimum tariff that Trump will accept, but both deals otherwise largely abandon the huge “reciprocal” tariffs announced last month. The UK deal gave the UK lower tariffs on cars, aluminum and steel than the announced 25 % tariffs. The UK agreed to increase its imports of ethanol and some other agricultural products, but otherwise made only modest changes to non-tariff barriers to trade.
China’s tariff will be reduced to 30%. Given that China was the focus of the Trump trade war, we would expect other country deals to come in below this level as well. It does not appear, however, that China made any concessions on structural issues (most notably manufacturing subsidies).
So what to make of these deal? I have a few observations.
First, these deals are not permanent, and the final negotiations could go south. The ultimate tariffs could once again go higher. As a result, while the China deal in particular has already caused U.S. importers to once again begin shipping products to the U.S., most businesses will have a wait and see attitude toward making long term investment decisions. Moreover, given that the China deal is only guaranteed to last 90 days, there is a rush to import items in the next 90 days, which could increase shipping costs.
Second, even though the tariff reductions are significant, they are still at historically high levels and will harm U.S. consumers and the U.S. economy. The effective U.S. tariff rate on China will be 41%—nearly four times higher than the 11% effective rate before the Trump tariff announcements. The Yale Budget Lab notes that after these deal, the effective tariff rate on all imports will be 28%, which is the highest rate since 1901. And the effect on U.S. consumers and our economy will still be significant according to the Yale Budget Lab:
“The price level from all 2025 tariffs rises by 3% in the short-run, the equivalent of an average per household consumer loss of $4,900 in 2024$. Annual pre-substitution losses for households at the bottom of the income distribution are $2,200. The post-substitution price increase settles at 1.6%, a $2,600 loss per household.”
“The 2025 tariffs disproportionately affect clothing and textiles, with consumers facing 87% higher shoe prices and 65% higher apparel prices in the short-run. Shoes and apparel prices stay 29% and 25% higher in the long-run respectively.”
“US real GDP growth is -1.1pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.6% smaller respectively, the equivalent of $180 billion annually in 2024$.”
“All tariffs to date in 2025 raise $2.4 trillion over 2026-35, with $631 billion in negative dynamic revenue effects.”
In short, U.S. households will face significantly higher costs, the economy will grow at a slower rate, and both unemployment and inflation will increase. Not good at all.
Of course, as Trump has argued, if the U.S. benefits in the long run—by increasing manufacturing in the U.S.—there might be offsetting gains to these loses. There is little reason to believe that this will be the case. It is noteworthy that the Yale Budget Lab model assessments take increased domestic manufacturing into account and still find a loss of employment and growth.
If the goal is to increase good manufacturing jobs in the U.S., our trade policy should use a targeted approach. Much of what we import from China is the result of low margin and low skill manufacturing processes for which manufacturing in the U.S. will never make economic sense even at high tariffs levels—such as textiles, plastics, toys—and for which there is no security concerns for foreign manufacturing. Imposing high tariffs on these items will never bring jobs to the U.S., but will instead impose higher costs on U.S. consumers. Moreover, some of these items are not end-products themselves, but are instead components or industrial equipment used by U.S. manufacturers. Increasing the cost of these items will hurt, rather than help U.S. manufacturing.
There are, however, some items manufactured in China for which higher tariffs may make sense. China has long used subsidies to encourage and assist Chinese companies. The products that are subsidized have changed over time, but lately have focused on high margin, high skill industries such as semiconductors, batteries, solar panels and electric vehicles. These subsidies are significant, and they distort the market. They are also in strategically significant industries. A tariff policy designed to level the playing field—by setting tariff levels to account for these subsidies—could make sense.
Ironically, the new tariff levels may be too low to counter the Chinese subsidies.
Alas, nuance is not a feature of the Trump Administration, and we thus end up the worst of worlds—largely uniform tariffs (except on steel and aluminum) that are too low for strategic items subsidized by China and too high for items that will never be manufactured in the U.S.