President Donald Trump was elated following the first in-person meeting of his second term with Chinese President Xi Jinping.
“On a scale of zero to 10, with 10 being the best, I would say the meeting was a 12,” Trump said.
From the perspective of financial markets, the trade truce is a big nothing. At least economic relations with China are momentarily stable. Coincident with the trade truce, Trump ordered the U.S. military to resume testing nuclear weapons in response to the very rapid buildup of China’s nuclear weapons arsenal. By 2030, China’s goal is nuclear weapons parity with the United States. The decision to resume nuclear tests, which were halted in 1992 by former President George H.W. Bush, is also a response to Russia’s nuclear saber-rattling.
What, specifically, did Trump and Xi agree to?
A few major concessions. For the U.S., the most important outcome of the meeting was a one-year suspension of the embargo on exporting rare earths from China to the U.S. and other countries. China’s effective monopoly on rare earths was like a loaded pistol to America’s head. The U.S. military is very dependent on rare earths, especially magnets, from China.
The U.S. must use this window to launch an “Operation Warp Speed” rare earths project. There are vast quantities of rare earths located in the U.S. and in allied nations such as Australia. Extract the rare earths and start refining them immediately. This is a matter of the highest priority.
For its part, the U.S. agreed to reduce tariffs on Chinese exports to the U.S. from 57% to 47%. This is an aspect of reducing Trump’s fentanyl tariffs from 20% to 10%. The truth is that the fentanyl matter is a side show. Fentanyl deaths have been declining sharply over the past 2 years. The fentanyl “virus” has already burned through the most vulnerable populations.
China also agreed to resume buying soybeans and other grains from the U.S. This is important to American farmers, a base of support for Trump. But from the standpoint of the economy and the U.S. balance of trade, it’s a “nothing burger.” China has already reconfigured its soybean imports from Brazil and Argentina away from the U.S. For the first seven months of this year, the U.S. trade deficit with China was up 22%, to $807 billion. China’s agreement to buy a few billion dollars’ worth of soybeans is frankly meaningless. It’s performative, not substantive.
On other aspects of the new trade truce, the U.S. and China will suspend anti-market measures against each nation’s shipping and shipbuilding operations. The U.S. also agreed to suspend for one year a rule that placed export restrictions on businesses at least 50% owned by Chinese firms on the U.S. entity blacklist. China also said it would resolve ownership matters related to TikTok.
Still, there were no provisions addressing semiconductors or artificial intelligence. There are hints that Nvidia may be allowed to sell older, non-state-of-the-art chips to China, but its most advanced Blackwell technology seems set to remain off-limits. There was also no mention of advanced software exports or clarity on how the truce will affect U.S. semiconductor equipment makers.
The most positive takeaway was the stabilization of trade relations, at least temporarily, and the leaders’ agreement to exchange visits in the coming 12 months.
TRUMP ANNOUNCES DECREASE ON CHINA TARIFFS AFTER ‘AMAZING’ MEETING WITH XI
But the fundamental weakness of this deal is that it does nothing to slow China’s campaign to dominate global manufacturing. China’s economy depends on exports. Allowing Chinese goods to continue flowing into the U.S. will further erode America’s industrial base. The U.S. needs a comprehensive strategy of economic decoupling.
Of course, the key to reducing the trade deficit with China is for the U.S. to reduce its fiscal deficit, now running at about 5%-6% of annual GDP. Economists agree that the U.S. trade deficit is largely a function of the budget deficit. But Trump and his economic advisers refuse to acknowledge this truth.
James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X and reached at [email protected].
