Beijing’s ability to make economic concessions to Washington is likely limited by its need to maintain the Communist Party’s power and stability.
The United States and the People’s Republic of China jointly announced a trade deal on May 12. Reached after a weekend of talks in Geneva, Switzerland, the deal saw both sides suspend their respective tariffs for 90 days and establish a mechanism for discussions about economic and trade relations. During the 90 days, the U.S. would lower its tariffs on Chinese imports to 30 percent from 145 percent and the PRC would cut its countertariffs to 10 percent from 125 percent.
Beijing also agreed to walk back non-tariff countermeasures imposed since April 2 (“Liberation Day”) against the United States. Meanwhile, President Donald Trump signed an executive order on May 12 to reduce the “de minimis” tariff targeting low-value packages to 54 percent from 120 percent, a move that grants some reprieve to big Chinese e-commerce companies like Shein and Temu.
China gained a measure of breathing space with the tariff ceasefire, but its trade problems with the U.S. are far from resolved. The Chinese Communist Party’s preoccupation with security, control, and ideology also makes dim prospects for a longer-term Sino-U.S. trade deal.
Who came out ahead?
Most mainstream media outlets, commentators, and scholars have framed the May 12 U.S.-China trade deal as a “loss” for President Trump and a “win” for Chinese leader Xi Jinping. But this narrative falls apart on closer scrutiny.
For one, post-“Liberation Day” U.S. tariffs are still three times higher than Chinese tariffs during the 90-day pause. Before the bilateral trade talks from May 10 to May 11, the PRC was calling for the removal of all U.S. tariffs on Chinese imports. Moreover, the threat of escalating U.S. tariffs has not ended; Trump told reporters at the White House that the China tariffs “would go up substantially” — albeit not up to 145 percent — if a longer-term deal cannot be reached after the pause period.
After factoring in pre-April 2 tariffs, the current U.S. tariff rate on Chinese imports is estimated at around 50 percent. Should the U.S. maintain its current tariff regime of about 50 percent over the long term or increase tariffs should trade talks break down, Chinese export companies will come under immense pressure. Chinese export firms, already struggling 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 survive. Faced with steep U.S. tariffs, those companies increasingly have to choose between absorbing growing losses and abandoning the U.S. market, or exhausting resources in hopes that a negotiated resolution between the two countries can be reached. Either way, Beijing could find itself dealing with mass business failures even as Sino-U.S. trade tensions have temporarily been eased.
Meanwhile, the continuation of Trump’s tariffs will sway U.S. importers and manufacturers to cut their over-reliance on China. The uncertainty and potential cost increases associated with tariffs are prompting companies to reassess strategies and operations. Many U.S. companies are likely to relocate supply chains outside mainland China 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, while China’s manufacturing sector and economy will take a hit that cannot be easily reversed.
Finally, other countries looking to minimize the impact of U.S. tariffs could proactively meet Washington’s trade demands and rush to reach new trade deals during the 90-day tariff pause. Such deals, 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 America’s benefit and the PRC’s detriment.
Can a longer deal be reached?
The CCP will find it very difficult to accede to U.S. demands and come to a longer-term deal during the 90-day tariff pause because it is constrained by China’s economic realities, its adherence to ideological orthodoxy, and its overriding concerns about regime stability.
On paper, 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. By allocating about 10 percent of total imports, or $260 billion, to the U.S., Beijing could shrink the bilateral trade deficit and give President Trump a reason to ease tariff pressures on China.
However, the complexities of global trade and geopolitics make it hard for China to simply import more U.S. goods. Redirecting $260 billion in imports to the U.S. would mean that China must slash 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.
Meanwhile, acute domestic demand weakness in China makes it difficult for Beijing to just import more from the United States. 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.
Beijing will also find it nearly impossible to meet U.S. demands for China to curb its export reliance. The CCP’s legitimacy in the post-Mao era is forged on economic performance, and China’s economic performance has hinged on exports and being the “world’s factory.” A shift away from exports necessitates structural reform, and the impact of structural reform on economic performance would jeopardize the CCP’s political foundation.
Finally, the CCP will encounter existential problems if it meets Trump’s demand to “open up” China, which the latter said was the “biggest thing” that both sides are discussing. For instance, full market liberalization could ignite domestic industry clashes, amplifying economic instability.
Liberalizing state-owned enterprises would also imperil 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.
Beijing’s ability to make economic concessions to Washington is likely limited by its need to maintain the Communist Party’s power and stability. If the CCP cannot make substantive compromises, then a more permanent resolution to Sino-U.S. trade conflict will be unattainable.
