Opinion | With an unpredictable Trump, it’s best to be cautious over US-China trade truce

I am among those pleasantly surprised by the trade war truce reached between China and the United States after only two days of talks in Geneva. Earlier this year the US had imposed tariffs of 145 per cent on all Chinese imports; China had responded with tariffs of 125 per cent.

Both countries have now agreed to reduce tariffs against each other by 91 percentage points. They also agreed to suspend a further 24 percentage points for the subsequent 90 days, leaving in place tariff rates of 10 and 30 per cent on imports from the US and China respectively. This essentially returns tariffs to their levels before US President Donald Trump’s “Liberation Day” announcement on April 2, with the difference between the rates being the 20 per cent tariff imposed over China’s alleged failure to cooperate on halting the flow of fentanyl into the US.

This simultaneous rollback of tariffs is a victory for both countries and the entire world. It is precisely what is needed to restore some semblance of normalcy to global markets.

The so-called reciprocal tariffs are hardly reciprocal in the true sense of the word. A truly reciprocal tariff between two countries is an identical tariff rate for each other’s imports. The US “reciprocal” tariffs should more properly be called unilateral tariffs.

One of the stated goals of Trump’s tariffs is to raise revenue for the US government, but a high tariff rate will not necessarily generate high levels of revenue. There is no revenue at zero tariffs, of course, but there might still be no revenue with 100 per cent tariffs because imports from the targeted country would cease. Few firms have the profit margin to absorb 100 per cent tariffs, but at 10 per cent some trade will occur and generate revenue.

A second goal is to reduce the US trade deficit. If Trump had his way, all US bilateral trade balances would be zero or tilted in his country’s favour. This is unlikely to happen except in the extreme case of the US ending international trade altogether. Manipulating bilateral exchange rates alone cannot achieve zero or negative bilateral trade deficits.