The White House is edging back from the brink in its trade war with China. The question for investors is how the world’s two biggest economies can get to the off-ramp and what a de-escalation looks like.
President Donald Trump said on Tuesday that tariffs on China will drop substantially from their current 145%, though not to zero, using less heated rhetoric toward China and regarding dealmaking. That rekindled expectations the two rivals could find a way to reduce the intensity of the trade war.
Stocks opened higher on Wednesday, partly because Trump’s comments built on remarks from Treasury Secretary Scott Bessent at a closed-door investor meeting that the current trade situation with China was unsustainable. Further fueling gains was a Wall Street Journal report that the Trump administration isconsidering slashing its tariffs on Chinese imports, in some cases by more than half.
One reason for caution is that Bessent didn’t say any negotiations were in the works or even planned. While Bessent said in a speech on Wednesday that more than 100 countries had approached the U.S. as it seeks to rebalance global trade, he didn’t mention China as one of those countries.
“There is an opportunity for a big deal here,” if China is serious about reducing its dependence on export-led growth and rebalancing its economy toward domestic demand, the Treasury secretary said. He spoke at the Institute of International Finance as government officials from around the world gathered for this week’s meetings of the International Monetary Fund and the World Bank.
On Wednesday, a spokesperson from China’s Ministry of Foreign Affairs said that the country’s doors “are open if the U.S. wants to talk” in a post on X. “If a negotiated solution is truly what the U.S. wants, it should stop threatening and blackmailing China and seek dialogue based on equality, respect and mutual benefit. To keep asking for a deal while exerting extreme pressure is not the right way to deal with China and simply won’t work,” the person said.
Geopolitical analysts say that the back channels needed to set up high-level discussions about a truce aren’t in place, even though both the U.S. and China want to de-escalate.
Analysts at Beacon Policy Advisors note that within the myriad comments from Trump and Bessent, there was no indication that Trump has backed off from his insistence that a direct dialogue between Chinese leader Xi Jinping and himself be the opening step to these negotiations. The problem is, that isn’t how China works.
Geopolitical analysts stress that back-channel, lower-level conversations are needed to lay the path to such a dialogue among the leaders. Beacon analysts note that China has called on the U.S. to appoint an interlocutor, a point person for the talks, which the Trump administration hasn’t done yet.
Xi is also unlikely to take the initiative in backing away from confrontation, especially as his current approach has yielded some success. The U.S. exempted a raft of electronics goods from tariffs and is pulling back on the port fees it had imposed on China-built ships.
“The only thing that is clear now is that China is not going to make the first move to de-escalate. Therefore, the Trump people have got to figure out their off-ramp,” Arthur Kroeber, head of research for Gavekal, tells Barron’s. “[The U.S.] needs to score some ‘deals’ to prove that the tariffs ‘worked.’ Once they have some of those illusory victories, they can suspend some of the China tariffs and open up some kind of negotiation.”
For investors, the point to watch is whether there is progress in setting up some sort of dialogue between the two countries. Of the two leaders, Beacon analysts think Trump may be the more likely to retreat, given the growing resistance to the tariffs in the U.S.
“The White House is under extreme pressure, sustained now for the last week, including over Easter weekend, from the investment community,” says Henrietta Treyz of Veda Partners. “The White House has gotten the message about recession and empty shelves and is floating ideas to placate them.”
After a visit to Beijing last week, Andy Rothman, head of China-focused Sinology, said it is clear Chinese officials are looking forward to an opportunity to talk with the Trump administration.
Rothman’s advice to the White House: Ask Trump to appoint someone he trusts and who is knowledgeable about the issues, to begin negotiations. ”This could be Bessent. Right now, Beijing has no one to talk to,” Rothman says. ”Second, make clear to China both what Trump would like them to do, and what he is willing to do in return. Right now, Beijing has no idea what the president’s priorities are.”
But Rothman, a longtime China analyst who previously served in the State Department, stresses that the U.S. should keep in mind it doesn’t hold all the cards. Only 15% of China’s exports last year went to the U.S., amounting to less than 3% of China’s gross domestic product.
“China clearly has other options. Last year, the U.S. accounted for only 14% of global imports,” Rothman said.
A rollback of tariffs, even to levels before Trump unveiled a 10% universal tariff and so-called reciprocal tariffs on many countries on April 2, would be good for the world economy. In its World Economic Outlook, released on Tuesday, the IMF lowered its targets for global economic growth, saying the tariff escalation between the U.S. and China and the uncertainty it has brought significantly contributed to the cut.
If tariffs were dialed back to pre-April 2 levels, it would have reduced its global growth projection by only 0.1 percentage point from its January forecast, leaving it at 3.2%.
It is worth keeping expectations in check: Even once talks are established, and even if tariffs are rolled back or more exemptions are put into place, the old U.S.-China relationship wouldn’t be back. A host of other restrictions related to China are in the works, including possible duties on semiconductors and other goods.
“If Washington follows through with tariff reduction, or simply appointing a credible point person, China will respond positively and real negotiations can begin,” said Rory Green, head of China research for TS Lombard. “Whether a deal can be reached is another question. Beijing is keen to reach an agreement but any such ‘accord’ will take time to hammer out.”
BARRONS