US-China tariff dispute escalates

[WORLD] The U.S. and China remain locked in a dispute over compliance with a temporary tariff reduction agreement reached in Geneva last month. Under the May 12 deal, both nations agreed to slash reciprocal tariffs from 125% to 10% for 90 days, while maintaining existing duties like the U.S.’s 20% fentanyl-related levy. However, U.S. officials now accuse China of delaying implementation, with Commerce Secretary Howard Lutnick claiming Beijing is “slow-rolling the deal” and President Trump asserting China “totally violated” the terms without providing specifics.

China has vehemently denied these allegations, calling them “bogus charges” that contradict the facts. Beijing’s Commerce Ministry emphasized it has “been firm in safeguarding its rights and interests” while implementing the agreement, but criticized recent U.S. actions like export controls on AI chips and visa restrictions on Chinese students as violations of the deal’s spirit. The ministry urged Washington to “correct its wrongful actions” or face retaliatory measures.

The Geneva agreement initially eased trade tensions that had seen U.S. tariffs on Chinese goods peak at 145% in April. While the truce sparked a global market rally, fundamental disagreements about China’s state-driven economic model and U.S. tariff enforcement mechanisms remain unresolved.

Implications

For Global Supply Chains

The stalemate reintroduces uncertainty for manufacturers reliant on cross-Pacific trade, particularly in semiconductors and rare earth minerals. U.S. restrictions on chip-design software exports to China1 and Beijing’s control over rare-earth magnets threaten production timelines in automotive and electronics sectors. Businesses may need to accelerate diversification efforts despite the 90-day window.

Consumer Impact

While the tariff reduction lowered prices for some goods, renewed tensions could reverse this trend. Oxford Economics estimates the deal reduced effective U.S. tariffs from 18% to 15%, easing inflationary pressures. A breakdown could reignite cost increases for holiday-season imports.

Diplomatic Calculus

The impasse highlights the fragility of tariff-based diplomacy. With U.S. Treasury Secretary Scott Bessent noting negotiations “lost some drive”, the situation may require direct Trump-Xi engagement to prevent escalation. However, China’s emphasis on “mutual respect” clashes with U.S. demands for enforceable compliance mechanisms.

What We Think

The Geneva deal was always a temporary ceasefire rather than a lasting peace. Three critical insights emerge:

Asymmetric Motivations: The U.S. seeks rapid, verifiable compliance, while China prioritizes procedural parity. This mismatch explains Beijing’s focus on U.S. export controls as deal-breakers.

Domestic Pressures Drive Posturing: With Trump facing legal challenges to his tariff authority and China grappling with manufacturing contraction, both sides have incentives to appear resolute despite economic costs.

The 90-Day Clock Matters: Markets are pricing in an 82% chance of tariff reinstatement by August. Companies should treat this period as a supply-chain reprieve rather than a resolution.

Broader Decoupling Continues: Even with lowered tariffs, overlapping restrictions in tech and education signal enduring strategic competition. The deal manages symptoms but doesn’t address the disease of systemic rivalry.

Global Ramifications: Third countries like Vietnam and the EU remain caught in the crossfire, facing residual tariffs up to 49%. This could accelerate regional trade bloc formation as nations hedge against U.S.-China volatility.

The path forward requires structured working groups and depoliticized enforcement mechanisms—neither of which currently exist. Until then, expect turbulence through 2025’s back-to-school and holiday retail seasons.