The extraordinary trade war President Donald Trump unleashed has been taking a toll on the Chinese and American economies. China is in a far more precarious state, mostly due to preexisting problems, but the new trade agreement is unlikely to move the dial much for either of the world’s two largest economies.
On the surface, the headlines coming out of the historic meeting between Trump and Chinese leader Xi Jinping suggest a big victory for both sides. The agreement calls for the United States to lower tariffs on China by 10%, bringing the effective rate on Chinese exports down to 47%; and for China to delay export controls on rare earths and increase purchases of American soybeans.
Such measures might alleviate some of the pain businesses and consumers have felt since Trump returned to office. However, it’s going to take a lot more to address the wounds that have been festering.
Too little, too late?
For one particular part of the American economy that’s been hurting the most from the resurgent trade war with China, the agreement may be coming too late.
American soybean farmers have been reeling from China’s effective embargo on the commodity that began in May, when higher tariffs went into place. Up until this week, China hadn’t purchased any American soybeans, the top agricultural export for the US. China has historically been the largest export market for American soybeans, so the embargo has significantly depressed American soybean prices for the past few months.
And even though Trump said China will buy “tremendous amounts” of soybeans, with peak harvest season already in full swing, many US farmers may have already sold crop yields at lower prices.
No quick fix in sight for the US job market
Trump inherited a labor market that was already weakening, and the latest data shows that hiring slowed to a crawl in recent months.
His aggressive and unpredictable tariffs have only exacerbated that, as businesses have become hesitant to hire more workers due to uncertainty. Increasingly, US companies are now laying off workers, too. For the first time in years, there are more people unemployed than jobs available, according to the Bureau of Labor Statistics.
Advances in artificial intelligence are also playing in to some layoffs, as highlighted by Amazon’s massive job cuts this week. And while rate cuts have traditionally been the Federal Reserve’s primary tool to support the labor market, central bankers say AI may already have caused systemic damage that can’t be fixed through monetary policy.
Fed Governor Christopher Waller noted in recent remarks that even over a longer horizon, “if AI constitutes a structural shift in the demand for labor, monetary policy will not be an effective tool.”
Moreover, there are growing concerns that lower rates could do more harm than good, pushing up inflation at a time when goods and services are already more expensive. Some of that inflation is attributable to higher tariffs, and some is from tighter immigration controls that have cut back on the supply of workers in areas like child care and farming.
China’s cocktail of economic woes
For China, while its exports have shown remarkable resilience this year in the face of Trump’s global tariff offensive, its longstanding domestic economic woes have persisted to the point where there are even fewer immediate benefits of a trade deal compared to the United States.
Chief among the factors clouding China’s economic outlook are a prolonged property downturn, persisting deflation, dampened consumer confidence and high youth unemployment.
“Beyond a cyclical impulse, it’s hard to see today’s revised trade terms as materially shifting China’s more structural challenges at home, where we think tariffs are, if anything, fading in macro relevance,” Louise Loo, head of Asia economics at research firm Oxford Economics, said in a note on Thursday.
She added that the fentanyl-related tariff reduction as part of the Thursday deal could at best add a “marginal” 0.2% upside to China’s growth forecast next year.
Recent economic data from China continues to paint a gloomy picture. In September, the decline in China’s factory-gate prices, a gauge of deflation, extended into the 36th straight month, though the drop has narrowed following Beijing’s attempt in recent months to rein in price competition in certain sectors. China’s much-touted electric vehicle industry, for example, has been embroiled in a relentless race to the bottom, partly due to excess capacity.
It’s also not helping that consumer demand is on the decline, as evidenced by the pace of retail sales slowing to a 10-month low at 3% in September compared with a year ago.
Adding to the mix of challenges, China’s new home prices sank in September at their fastest pace in 11 months, despite traditionally being a peak season for property spending. The protracted slump, which began with developers’ debt defaults in 2021, is expected to continue weighing on consumer sentiment.
Not a done deal
The agreement Trump and Xi reached Thursday can merely be thought of as a rough draft — nothing has been signed. It’ll likely take several more meetings between American and Chinese counterparts to nail down a firmer agreement that eventually becomes a signed deal. Or it may not even get to that point at all.
For now, though, both economies can take some solace in the fact that Trump’s threat of an additional 100% tariff on Chinese exports, which Beijing almost certainly would have retaliated against, is off the table.
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