China/U.S. Trade Talks Into the Autumn
· Our baseline (Figure 1) remains that a U.S./China deal will be reached (most likely in Q4), but a moderate probability exists of no deal being done this year and China being stuck with 30% tariffs – the worst-case scenario of still higher tariffs is now less likely with Trump in a more deal focused mood and we drop this scenario from 15% to 10%.
China will likely agree an extension to the August 12 deadline, but what are the prospects of a trade deal this year?
Figure 1: U.S./China Trade Scenarios
| Baseline—65% | Downside —25% | Worst Case—10% |
| Eventual U.S./China Trade Deal | No Deal with 30% Overall U.S. Tariffs | Super High Tariffs |
U.S./China eventually reach a deal, after rocky negotiations. Trump desire for pre midterms success and rare earth minerals, plus China drought drive a reduction in overall tariffs to 15-20% by the U.S. Strategic restrains on U.S. exports are reduced marginally in some areas.
Xi could ask Trump for understanding on Taiwan reunification, but U.S. likely to keep the strategic ambiguity policy.
Risk of 2026 trade tensions, as U.S. watches implementation closely.
2025 China growth: +4.8%2026 China growth +4.5% | U.S./China fail to compromise sufficiently to agree a Q4 2025 trade deal. Trump sees political advantage in keeping China under pressure with other trade deals agreed and a desire to reshore production. 30% overall tariffs remain from the U.S.
Trade deal could eventually be agreed in 2026, but less likely in H2 2026 with U.S. mid-terms.
2025 China growth: +4.6% 2026 China growth +4.0% |
Failure to reach agreement leads to breakdown in negotiations. Trump seeks to penalise and pressure China, with the threat of further tariff increases and in stepwise fashion in 2026. This is more like 2018-19 than the April 2025 quick penal escalation in tariffs. U.S./China trade becomes difficult and hurt China growth and U.S. supply chains.
2025 China growth: +4.5% 2026 China growth +3.00-3.50%
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Source: Continuum Economics
Reports suggest that the U.S./China will likely agree an extension to the August 12 deadline for higher tariffs to kick in. U.S. commerce secretary Lutnick has suggested a 90-day extension, though China likely wants a shorter extension to avoid other trade deals being concluded to corner China. China is also currently stuck with 30% tariffs (10% reciprocal and 20% “fentanyl”) compared to the recent EU and Japan deals at 15% (here) and would likely want some relief sooner rather than later.
The extension not only reflects the Trump administration focus on getting other deals done, but also the difficulties of the current negotiations. China feels that they should be rewarded for a lower fentanyl tariff after taking actions and being congratulated by President Trump. However, the Trump administration likes to pressure before a deal is done and a reward of lower than 30% tariffs appear unlikely at this stage. Additionally, differences are likely to exist over the headline tariff, with China likely to aim for 15% but the U.S. likely to be aiming for 20%.
Furthermore, Japan and the EU have promised to buy more U.S. imports and invest in the U.S. China needs more food imports and could increase purchases of agricultural products, but does not want to become too dependent on the U.S. (here). China could in theory also switch LNG gas purchases and oil to the U.S., given that current China counter tariffs have stopped imports of U.S. energy goods. However, China wants to avoid strategic dependency on the U.S. in any areas. Even so, China could eventually agree to purchases of U.S. imports. Investment in the U.S. is less of an issue, both as Japan deal largely involves loans and some China companies and sovereign wealth fund will likely invest in the U.S. in the coming years.
One potential complication is if Trump imposes secondary tariffs on Russian exports, with a new deadline of 10-12 days. This could leave China oil and other imports from Russia leading to still higher tariffs on China, which would upset China but would likely cause them to temporarily stop imports from Russia.
The other complication is that China negotiations have a strategic element. Most in the Trump administration want to sustain strategic competition with China to slow/stop the rise of China. China would like to stop or partially reverse this process. Trump seems keener on trade deals than strategic competition, with the President having eased restrictions on some high-end semiconductor chips to China. The other dimension is Taiwan. President Xi could ask Trump for understanding on Taiwan reunification in exchange for a trade deal, but the U.S. likely to keep the strategic ambiguity policy and reject this idea. Xi may decide to ask for this directly with Trump, which raises the stakes for the expected bi lateral meeting at the APEC meeting in S Korea Oct 31 to Nov 1.
Our baseline (Figure 1) remains that a U.S./China deal will be reached (most likely in Q4), but a moderate probability exists of no deal being done this year and China being stuck with 30% tariffs – the worst-case scenario of still higher tariffs is now less likely with Trump in a more deal focused mood and we drop this scenario from 15% to 10%.