1 Analyzing the US-China tariff pause and Beijing’s negotiation constraints
US and China de-escalate trade tensions
May 10 – May 11
Senior officials from the U.S. and the PRC met in Switzerland for trade talks. The U.S. delegation was led by Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer. PRC vice premier He Lifeng led the Chinese delegation, which also included vice finance minister Liao Min, international trade negotiation representative Li Chenggang, and public security minister Wang Xiaohong, according to media reports.
The meeting lasted at least eight hours on May 10 and several hours on May 11, according to The Wall Street Journal. Secretary Bessent later announced that “substantial progress” was made during the talks and that a complete briefing would be held on May 12.
On May 10, President Donald Trump wrote on Truth Social that the U.S. had a “very good meeting” with China in Switzerland and there was a “total reset negotiated in a friendly, but constructive, manner.” He added, “We want to see, for the good of both China and the U.S., an opening up of China to American business. GREAT PROGRESS MADE!!!”
May 12
The U.S. and the PRC issued a joint statement saying that they would suspend their respective tariffs for 90 days and establish a mechanism to continue discussions about economic and trade relations. The U.S. would reduce its tariffs on Chinese imports to 30 percent from 145 percent, and the PRC would lower its tariffs on U.S. imports to 10 percent from 125 percent.
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Other points about the Sino-US tariff pause include:
- President Trump told reporters at the White House that the China tariffs will not go back to 145 percent even if a longer-term deal cannot be reached after 90 days, but “they would go up substantially.”
- The U.S. retains pre-April 2 tariffs on Chinese imports, including a 20 percent Section 301 tariff and a 20 percent fentanyl tariff, aggregating to approximately 50 percent. Additionally, the U.S. retains targeted 4 percent tariffs and other restrictive measures on four critical sectors: automobiles, semiconductors, steel and aluminum, and pharmaceuticals.
- Trump signed an executive order on May 12 to cut the “de minimis” tariff targeting low-value packages (value up to $800) to 54 percent from 120 percent. Two delivery experts told Reuters that the rates for packages under $800 is now 30 percent.
- The PRC will remove non-tariff countermeasures adopted against the U.S. since April 2, but it is unclear how Beijing will walk back those measures.
- It is unclear whether the PRC measure requiring all exporters to seek licenses before shipping seven types of rare earths will be paused because it applies to all countries.
No US generalized decoupling?
May 12
1. Secretary Bessent told CNBC’s “Squawk Box,” “We do not want a generalized decoupling from China. But what we do want is a decoupling for strategic necessities, which we were unable to obtain during COVID and we realized that efficient supply chains were not resilient supply chains.
Bessent also said that PRC officials “are now serious about assisting the U.S. in stopping the flow of precursor drugs.”
2. President Trump told reporters at the White House, “The biggest thing that we’re discussing is the opening up China, and they’ve agreed to do that. But it’s going to take a while to paper it.”
Trump also said that “the talks in Geneva were very friendly” and “we’re not looking to hurt China.”
PRC remarks on the tariff pause
May 12
1. A spokesperson of the PRC commerce ministry said that the PRC took “firm and legitimate countermeasures” in response to the U.S. government’s tariff hikes on Chinese goods since April. The spokesperson added that the high U.S. tariffs “seriously damaged normal bilateral economic and trade exchanges” and “severely undermined the international economic and trade order.”
The spokesperson expressed hope that the U.S. would take the current round of trade talks as a foundation to “continue working in the same direction with China” and “thoroughly correct its erroneous unilateral tariff hikes.”
2. PRC state media published commentaries where they criticized the U.S. tariff hikes for “artificially severing” mature global supply and industrial chains, “breaking” market-driven free trade rules, and “harming” economic globalization. However, the commentaries also noted that strengthening Sino-U.S. cooperation is in alignment with global expectations and expressed hope that the two sides will respect each other’s core interests and major concerns, resolve issues through dialogue, and inject more certainty and stability into the global economy.
Our take
1. Most mainstream media outlets and commentators have framed the outcome of the Sino-U.S. trade talks in Geneva as a loss for Trump and a win for Xi Jinping, and America caving instead of China retreating. However, a closer look at the trade deal suggests that it was the U.S. that came out ahead.
i) The current Sino-U.S. trade agreement is akin to a short-term ceasefire, not a long-term resolution. The PRC has essentially accepted Trump’s baseline “Liberation Day” measures of 10 percent “reciprocal tariffs” on its imports and a 90-day exemption period while trade talks are underway. Meanwhile, overall U.S. tariffs on Chinese imports are still much higher than Chinese tariffs on U.S. imports during the temporary pause in trade tensions. Trump has also threatened that U.S. tariffs would “go up substantially” (though not back to 145 percent) if both sides cannot reach a longer-term deal within 90 days.
Chinese export firms, already grappling with razor-thin average profit margins of 5 percent to 10 percent, depend heavily on an average export tax rebate of between 8 percent to 10 percent to stay afloat. Should the U.S. maintain its current tariff regime of about 50 percent over the long term or increase tariffs in the event that trade talks break down, these companies confront a dire choice — absorb mounting losses and abandon the U.S. market or exhaust resources in hopes that a negotiated resolution between the two countries can be reached. The plight of Chinese companies puts pressure on Beijing to deliver something tangible over the next three months or face the mass failure of Chinese export businesses and the resulting economic blowback. Time is not on the PRC’s side.
ii) Trump’s “Liberation Day” tariffs and the sharp escalation of U.S. and Chinese tariffs underscore the risks of relying on Chinese supply chains for U.S. importers and manufacturers. The uncertainty and potential cost increases are prompting companies to reassess strategies and operations, with many likely to relocate supply chains to the U.S. and China’s neighbors, or source from domestic suppliers if possible. Over time, this shift will boost demand for U.S. manufacturing, expand U.S. domestic capacity, and bring long-term economic benefits to the United States. By contrast, China’s manufacturing sector and economy will take a hit that cannot be easily reversed.
iii) China’s export sector woes will likely serve as a warning to other countries. To avoid becoming the next target of U.S. “reciprocal tariffs” and protectionism, countries could proactively meet Washington’s trade demands and hasten to reach new trade agreements within the 90-day window. Such agreements, which could include restrictions on the transshipment of Chinese goods through third countries and limits on investment, are likely to reshape the global trade landscape to the PRC’s detriment.
iv) While the recent U.S.-China trade talks have temporarily eased tensions, the Trump administration’s strategic intent is unmistakable — using tariffs to revitalize domestic manufacturing and establish a new global trade system that favors American interests.
Meanwhile, the outcome of the opening round of negotiations between the U.S. and China is far from a victory for the PRC despite its spin, but rather, a challenging new starting point. If the CCP is not able to meet Trump’s demands, it faces renewed trade escalations and even more rapid deterioration of the Chinese economy that could translate into serious political problems for the regime.
2. Beijing will struggle mightily to make substantial concessions to the U.S. within the 90-day tariff pause period. This is so as the CCP is constrained by China’s economic realities, its adherence to ideological orthodoxy, and its overriding concerns about regime stability.
i) In theory, China could narrow its $290 billion trade surplus with the U.S. — driven by $520 billion in exports and $160 billion in imports in 2024 — by redirecting a portion of its $2.6 trillion annual import market toward U.S. goods. Allocating roughly 10 percent of total imports, or $260 billion, to the U.S. could, on paper, mitigate the bilateral deficit and potentially ease Trump’s tariff pressures. However, the complexities of global trade and geopolitics render this approach largely unfeasible.
China’s import decisions are deeply intertwined with strategic economic and political interests. For instance, of China’s $500 billion in oil imports in 2024, $100 billion came from Russia, reinforcing the “no limits” Sino-Russian partnership while securing Russian demand for Chinese goods. Similarly, $70 billion in imports from Saudi Arabia are linked to Chinese solar firms’ regional investments. Redirecting $300 billion in imports to the U.S. would necessitate slashing purchases from key partners like Russia and Saudi Arabia, disrupting carefully calibrated political, economic, and military relationships. Such a shift carries profound implications and is practically untenable, underscoring the limits of economic rebalancing in the face of geopolitical realities.
ii) China’s economy is contending with acute domestic demand weakness, rendering the creation of a $300 billion incremental market for U.S. goods highly improbable. Even if Beijing could stimulate 2 trillion yuan in new domestic consumption, intense competition among Chinese firms would likely dominate this market, leaving scant opportunity for U.S. companies to secure a meaningful share. Banking on a consumption-driven solution to narrow the U.S.-China trade deficit remains, in effect, an unattainable aspiration.
iii) China’s status as the “world’s factory,” forged over 46 years of labor-intensive growth and technological advancement, underpins the CCP’s legitimacy in its post-reform era. Exports remain a linchpin of economic growth, with official 2024 data attributing 30 percent of GDP expansion to net exports — a contribution likely understated due to statistical adjustments. U.S. demands for China to curb its export reliance effectively call for structural reforms that would jeopardize the CCP’s political foundation.
Xi Jinping’s “dual circulation” strategy, introduced in 2020 to bolster domestic demand, has delivered negligible progress after five years. China’s manufacturing cost advantage, rooted in low labor costs, faces erosion if wages rise, a trend already pushing low-end production to Southeast Asia. U.S. calls for reciprocal market access in sectors like telecommunications, finance, and logistics directly challenge the CCP’s grip on public discourse and elite interests, making such concessions politically untenable. As trade tensions escalate, China’s export-driven model confronts existential pressures with no easy resolution in sight.
iv) Trump’s call for the opening up of China is difficult for Beijing to achieve. For one, the CCP cannot allow state-owned enterprises to operate independently under market-driven standards and free from government interference because doing so would threaten the Party’s control. In 2023, SOEs held 445 trillion yuan in assets, non-financial SOEs accounted for 379 trillion yuan, and administrative assets totaled 64 trillion yuan — a combined 900 trillion yuan. These entities are pivotal to the CCP’s command over societal resources and secure the loyalty of 90 million state-affiliated personnel.
Many SOEs depend on monopolistic privileges and government support to sustain profitability, rendering them ill-equipped to compete with more agile private firms in an open market. Ceding control over SOEs would unravel the economic bedrock of the CCP’s regime, threatening its political stability. With the Trump administration likely to bring up SOE reform during subsequent trade talks, Beijing will face the profound challenge of balancing economic reform with regime preservation.
v) China’s economy is besieged by a confluence of crises, including a protracted real estate downturn, escalating financial vulnerabilities, soaring youth unemployment, cash-strapped local governments, and widespread bureaucratic inertia, often termed “lying flat.” Amidst these challenges, the Xi leadership is prioritizing regime stability over all else, casting a shadow over prospects for meaningful concessions in the U.S.-China trade conflict.
Adopting World Trade Organization (WTO)-compliant reforms would expose the CCP to existential risks:
- Full market liberalization — Opening markets could ignite domestic industry clashes, amplifying economic instability.
- Ceding SOE control: SOEs, though less efficient than companies in the private sector, are the regime’s loyal economic pillars and critical to its authority.
- Shifting from export reliance: Exports remain the Chinese economy’s primary growth engine. Absent a robust domestic demand alternative, reducing dependence risks precipitous collapse.
Far beyond a dispute over tariff rates, this trade war serves as a crucible for U.S. efforts to press for political reform in China. For the CCP, economic concessions are inseparable from threats to regime stability, rendering substantive compromise virtually unattainable. As tensions persist, Beijing faces a delicate balancing act to safeguard its political foundation amid mounting economic pressures.
2 Decoding the latest rumors involving CCP elite politics
Bo Xilai’s son claims his mother is innocent
May 10
Bo Guagua, son of former CCP Politburo member and Chongqing Party boss Bo Xilai, posted on X ahead of Mother’s Day that his mother Gu Kailai is “a modern day Dou E, frail in body but strong in spirit, inheriting the unyielding resolve of her grandfathers who were imprisoned during the Cultural Revolution. She is truly a heroine among women!”
Gu Kailai was convicted of murdering British businessman Neil Heywood and was given a suspended death sentence in August 2012.
Dou E is a character from a Yuan Dynasty play. An innocent widow, Dou E was tragically wronged, sentenced to death after being framed for a crime she did not commit, and was posthumously vindicated.
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Bo Guagua’s post, which appeared to clear his mother’s name, drew widespread attention and sparked public debate. Some commentators speculated that since his post coincided with the perceived weakening of Xi Jinping’s grip on power, Bo was trying to provoke the CCP authorities into overturning the case against Gu Kailai.
Bo Guagua has made similar efforts to defend his father and mother on social media. Taiwanese media reported that Bo said during his engagement ceremony in Taiwan on Nov. 23, 2024, “Family is for small righteousness, the nation is for great righteousness; the country comes first, and we must uphold greater justice. My father and mother led by example — with passion, resilience, endurance of humiliation and hardship, sacrificing for the people and the greater good.”
Zhao Leji squeezed out?
May 11
Overseas Chinese self-media commentator Cai Shenkun wrote in a post on X that Zhao Leji, a Politburo Standing Committee member and chairman of the National People’s Congress Standing Committee, is expected to step down early at the upcoming Fourth Plenum of the 20th Central Committee, citing insider information.
Cai claims that Xi Jinping is removing Zhao because the latter is “relatively young” and holds “considerable influence in the Party” having previously headed the Central Organization Department and elevated a large number of mid-to-low level cadres. Cai added that he heard that Zhao’s family members have been investigated under unclear circumstances, but that he cannot confirm the accuracy of the information.
Backdrop
Rumors and speculation about high level personnel reshuffles at the CCP Fourth Plenum have recently been circulating. Those rumors and speculation appear to be built on the assumption that Xi Jinping is “losing power.” We have been debunking “Xi losing power” rumors and warning about the negative impact of the narrative in previous newsletters (for example, see here and here).
Going by previous dates of plenary sessions, the Fourth Plenum of the 20th Central Committee is expected to be held in October this year.
Our take
1. Cai Shenkun’s “insider information” about Zhao Leji possibly being replaced at the Fourth Plenum, as well as other rumors about high level personnel changes, cannot entirely be ruled out. But these developments have a low probability of happening barring the breakout of intense factional struggle in the CCP elite. Outside of tumultuous periods like the Cultural Revolution, the CCP Politburo has seen very few changes to its membership from Central Committee to Central Committee since the 1990s. The few notable exceptions include:
- Jiang Zemin era:
- 1992 — First vice premier Yao Yilin withdrew from the Politburo Standing Committee before the 14th Party Congress due to health issues and the rise of the Jiang faction.
- 1995 — Beijing mayor and Politburo member Chen Xitong was investigated for corruption.
- Hu Jintao era:
- 2007 — Vice premier and Politburo Standing Committee member Huang Ju died of pancreatic cancer.
- 2012 — Chongqing Party secretary and Politburo member Bo Xilai was investigated for corruption.
- Xi Jinping era:
- 2017 — Chongqing Party secretary and Politburo member Sun Zhengcai was investigated for corruption.
We previously wrote that Zhao Leji is aligned with the Jiang faction and displayed “two-faced” behavior when he headed the Central Commission for Discipline Inspection in Xi’s second term. Zhao was also mysteriously absent from key Two Sessions meetings in March. While Xi Jinping could be subtly probing Zhao and placing him on notice, more drastic action may not be forthcoming if Xi is prioritizing the preservation of regime security. After all, removing an active Politburo Standing Committee member, regardless of the reason, is a politically destabilizing act. Likewise, reshuffling the Politburo and its Standing Committee at the Fourth Plenum without publicly acceptable reasons will hurt the Xi leadership politically.
2. Bo Guagua’s defense of his parents could be part of the remnant Jiang faction’s attempt to undermine Xi Jinping in the public discourse. The recent rumors and speculation about Xi “losing power” and the “Objective Evaluation of Xi Jinping” article from back in 2022 have made it easier for the Jiang faction to muddy the waters about the actual state of elite factional dynamics in the mainland and steer the overseas public discourse against Xi. The pervasive circulation of the aforementioned narratives also gives undue weight to Bo Guagua’s social media posts about his parents, making his points seem important and relevant to present-day CCP elite politics when they would have been slammed for being revisionist and outrageous only a few years ago.
Meanwhile, it cannot be ruled out that the rumors about Zhao Leji could have been spread by those associated with the pro-Xi, anti-Jiang camp. Those rumors partly counter the narrative of “Xi losing power” and suggest that Xi Jinping is dominant enough to break established Party norms and remove a sitting Politburo Standing Committee member and Jiang faction lieutenant.
