“Understanding the Temporary De-Escalation of the US-China Trade War”

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Philip Luck

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“Understanding the Temporary De-Escalation of the US-China Trade War”

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On May 12, 2025, the Trump administration announced a mutual reduction in trade measures between the United States and China. This includes not only a reduction in tariffs—bringing U.S. rates down from 145 percent to 30 percent (which is on top of sectoral and Section 301 tariffs), and Chinese tariffs on U.S. goods from 125 percent to 10 percent—but also the relaxation of the critical minerals export restrictions China put in place following “Liberation Day.”

While many details remain unresolved, this tariff rollback marks a welcome step that could help ease inflation and bolster economic prospects. However, it does not undo the significant damage already inflicted by elevated costs, disrupted supply chains, heightened uncertainty, and weakened U.S. credibility with allies. The ongoing reliance on an erratic trade policy—marked by temporary fixes, strategic inconsistency, and persistent unpredictability—continues to undermine long-term economic resilience and U.S. global leadership, while imposing avoidable costs on consumers and businesses alike.

A Step in the Right Direction . . .

First things first: Tariffs are lower today than they were yesterday, and that is undeniably a positive step. Over the medium term, this reduction should help ease inflationary pressures in the United States, improve the odds of avoiding a recession, and support the capital investment needed to compete strategically with China. Compared to where things stood just 24 hours ago, this is real progress.

. . . But Damage Has Already Been Done

While the rollback is welcome, tariffs were set at punishing levels for more than a month. U.S. firms dependent on imports were either forced to absorb these elevated costs or delay purchases altogether. This caused immediate pain for businesses and consumers and set the stage for future price spikes, potential shortages, and in the long term, lower employment and output. Recent research underscores this point, finding that U.S. tariffs, especially those enacted on Liberation Day, will reduce real income in the United States by $300 billion annually by 2028.

Tariffs Are Still Too High

Even after the temporary rollback, U.S. tariffs remain well above what most economists consider welfare-maximizing levels. A recent report published by the National Bureau of Economic Research argues that the optimal tariff structure would involve lower rates overall and a reallocation away from intermediate goods. This structure would reduce costs for domestic producers, increase the competitiveness of U.S. products in global markets, and likely lead to higher productivity and higher wages here at home. Evidence suggests that fixing just this one inefficiency in the current tariff structure could raise income considerably.

As it stands, nearly 60 percent of Trump-era tariffs target inputs used by U.S. firms—not finished goods from strategic rivals. This distorts supply chains at home while offering little strategic advantage. Even post-reduction, many of these distortions persist.

The Uncertainty Tax on the Economy

Crucially, today’s rollback is not permanent. Despite statements about a “shared interest” in reducing trade barriers, both sides agreed only to another 90-day pause. Firms remain in limbo as they try to plan long-term sourcing and investment decisions. This stop-and-start approach continues to generate instability and uncertainty which acts as a deadweight on investment. Firms will be less willing to commit capital in the United States or China if the viability of the investment hinges on the unpredictable swings of tariff policy.

This fairly obvious point is backed up by academic literature, including Handley and Limão (2017), who demonstrate that trade policy uncertainty can hurt investment as much as actual tariffs. Volatility becomes a tax on planning, especially in capital-intensive sectors like automobiles, semiconductors, and advanced manufacturing.

Credibility Is Eroding—and That’s Dangerous

The administration warned that trade retaliation would carry consequences. But after China’s counter, it appears to have emerged with a lower effective tariff rate than it faced the morning of April 2. This sequence undermines the administration’s preferred posture that it can always “out-escalate” its way to victory in trade disputes. That proposition has now been disproven, and U.S. credibility is weaker for it.

Threat-based trade policy without consistency or follow-through is not just ineffective, it is counterproductive, which is detrimental to administration’s goals and risky for everyday Americans. What happens when the administration feels the need to regain credibility by following through on a threat—regardless of the consequences?

Favoring Adversaries, Alienating Allies

Beyond credibility, the administration is draining trust from longstanding allies. While the deal with the United Kingdom reduced the cost of Land Rovers and Jaguars for American consumers, it did little for broader working-class constituencies. Meanwhile, other allies are growing frustrated with what increasingly resembles economic coercion: “Deal with us or suffer.”

This approach imposes reputational costs and undermines long-term cooperation. Freund, Mattoo, Mulabdic, and Ruta (2023) find that as the United States and China weaponize trade ties, third countries have begun to hedge. Their analysis of post-2018 trade flows show growing “policy-driven divergence,” as supply chains shift based on perceived reliability, not efficiency.

Since 2018, Japan, South Korea, and the European Union have all expanded regional trade agreements—often without U.S. involvement. If the United States continues treating allies more harshly than competitors, that trend will only accelerate.

Two Truths at Once

Like many reversals from this administration, today’s tariff cut requires accepting two truths at once. First, it is a necessary and overdue correction to a damaging policy. Second, the costs of the reversal—higher inflation, weaker investment, and strained alliances—are still unfolding.

The evidence increasingly tells a consistent story: Politically motivated tariff shocks may serve short-term goals, but they weaken long-term economic resilience, degrade institutions, and undermine U.S. global leadership. The price of unpredictability is high—and rising.

Consider the Consumer

Hopefully, this rollback signals something else: The administration may be remembering the importance of the American consumer. Since April 2, there has been a worrying drumbeat of rhetoric portraying the American people solely as producers of physical goods—implying there is no need to worry about who is able to consume them.

That message is hard to reconcile with the administration’s own campaign promises. But this change in course is an opportunity to reaffirm a basic principle: Government should improve the material well-being of its people. That means raising, not lowering, living standards.

So, to end on a somewhat hopeful note, with this pause in trade hostilities, the administration seems more open to the idea that boiling the U.S. consumer alive to bring back “traditional jobs” may not be the best path forward. That is a good thing.

Source - https://www.csis.org/analysis/understanding-temporary-de-escalation-us-china-trade-war

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The external factors are the characteristics of the foreign market such as legal, political, and economic system, cultural similarities, market dynamics, consumer and competitor behavior and the characteristics of the domestic government, which include government tax rates, government export support, government policies and the domestic business environment. 5.       Compared to other ASEAN countries, SMEs in Myanmar are less likely to export, reporting that only 4.2 % of medium-sized firms and 0.8 % of small enterprises export directly or indirectly at least 1% of their sales (World Bank’s Enterprise Survey, 2014). Export destinations of Myanmar SMEs differ across firm size. Large firms have much more export propensity than SMEs and large firms have the capacity to export to high-income markets such as the EU and US. But, SMEs opt for regional markets such as China, Malaysia and Thailand whose target customers are less-demanding. According to World Bank Enterprise Survey, on the bright side, only 27% of medium-sized firms and 13% of small enterprises in Myanmar use material inputs of foreign origin. In Myanmar, SMEs from 4 states, 7 divisions and Union Territory, Nay Pyi Taw are engaged in export. ASEAN is an important market for Myanmar’ exports and Myanmar SMEs mainly export to China and Japan. Most of the exported products are agricultural products, marine products and wood and wood-related products. Agricultural products mainly include rice, different types of beans, white yam powder, coffee seed and coffee powder, Myanmar Tea, tamarind, jaguar, coconut, groundnut oil, sesame oil, ginger oil, oil palm, rubber, sugar, bees, lemon and honey. Marine products consist of fish, frozen fist stake, shrimps, soft shell crab, squid and lobster. Wood and wood-related products are wood, teak, value-added wood products, rattan products and bamboo place mate. Government Export Assistance Programs6.       In accordance with notification (64/2023), which was issued by Ministry of Planning and Finance, the government provides exemption of commercial tax on 27 kinds of goods listed as different kinds of corn, fresh fish and shrimps, soil bean, milk and dairy products, yogurt, animals and animal products, fertilizer, various kinds of pesticide and weed killer that are used in agriculture, animal, fish and prawn medicines, veterinary preventative medicines, raw and finished materials for animal, fish and prawn feed (not included animal food that used for pets), pure seeds and seedlings of crops, raw materials for cotton, agricultural products, coconut oil, state flag, stationeries, X-ray, absorbent cotton wool, gauze, bandages, hospital sundries to take medicines, surgical mask (once used), cap, surgical glove, masks that used to prevent flu infection, household pharmaceutical and other medicines and traditional medicines, fire engine and hearse, raw materials used in making soap, battery electric vehicles and goods purchased by donated fund. The government offers tax incentives such as offering SMEs exemption from income tax for 3 consecutive years in accordance with Union Taxation Law. The government strives to adjust their tax rates with the enactment of Union Taxation Law each year as a way of rehabilitating economy when the economy slows down. Furthermore, SME loans are offered through different loan programmes. Now, it has been recently announced that Small and Medium businessmen can get loans from 15 private banks as well as state-owned Myanmar Economic Bank (MEB) and Myanmar Agricultural Development Bank (MADB). 7.       In conclusion, the Central Committee for Development of Micro, Small and Medium Enterprises has been planning MSMEs products’ exhibition to encourage SMEs. I happened to visit one of those exhibitions and witnessed a lot of local SMEs’ products, which are displayed well. I gladly realized most SMEs just made use of local raw material. Some SMEs’ products are not well-recognized in the local market, but these products are value for money. These potential SMEs need some assistance in making their quality products well-recognized in the market. Some SMEs do not have enough capital to make mass production and these quality products disappear in the market sadly. Some of these local products equal other imported products. I believe that if these local products are well-promoted with special support from all responsible government organizations, it would be a great thing.  If SMEs’ requirements and government’s export assistance programs coincide, these products can survive in the domestic market as well as foreign market. ReferencesThe Global New Light of MyanmarMyanmar Micro, Small and Medium Enterprise Survey (2019)Myanmar Business Insight Report (2020). Inya Economics.Factors Affecting Propensity to Export: The Case of Indonesian SMEs.  
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