U.S.-China Trade Agreement 2025

U.S.-China Trade Agreement 2025

Why in News? 

Recently, after a high-level dialogue between the United States and China, both countries announced a 90-day temporary trade truce to ease trade tensions. This decision was taken in the backdrop of global recession concerns and a supply chain crisis.

Key Terms of the 2025 US-China Trade Agreement

On May 12, 2025, after a high-level meeting in Geneva, the United States and China reached a 90-day temporary trade agreement, putting aside trade tensions.

• Tariff Reduction: The US lowered tariffs on Chinese imports from 145% to 30%, while China reduced tariffs on US goods from 125% to 10%.
• Suspension of Non-Tariff Restrictions: China will suspend non-tariff measures imposed on the US, increasing the possibility of cooperation in sectors like services, technology partnerships, and digital trade.
• Bilateral Dialogue Mechanism: Both countries agreed to establish a permanent dialogue mechanism to ensure ongoing communication on sensitive issues like trade, technology, and intellectual property.
  • Scott Bessent and Jamieson Greer from the US, along with He Lifeng from China, will oversee the trade negotiations and monitoring process.
• Alternative Meeting Venues: It was also decided that meetings can be held alternately between the US and China or in a third country, ensuring consistency and neutrality.

US-China Trade Tariff War 2025

• Fentanyl Dispute: Starting on February 1, 2025, the US imposed new tariffs on China, citing that the supply of fentanyl from China was responsible for the rising overdose cases in the US. This health crisis was turned into an economic pressure tool.
• Liberation Day: On April 2, President Donald Trump declared “Liberation Day,” on which the US imposed an additional 34% tariff on goods imported from China.
• US Trade Deficit: The US trade deficit reached 1.2 trillion dollars, which the US trade representative cited as the reason for implementing tariff policies.
  • After 2020, the trade deficit increased by over 40%, forcing the US to adopt tariffs as a strict strategic measure.
• Retaliatory Tariffs: In response to the US’s aggressive policy, China also imposed heavy tariffs on US products, which differed from the calm reactions of most other countries, escalating tensions between the two countries.
  • The US imposed tariffs up to 145% on Chinese goods.
  • China imposed tariffs of 125% on US goods, resulting in price increases, inflation, and a supply chain crisis.
• China’s Non-Tariff Weapons: China also imposed several non-tariff restrictions, including a ban on exports of rare earth minerals, regulatory investigations, and punitive actions against US companies.

This tariff war increased global market instability, reduced trade confidence, and prompted many multinational companies to reconsider their supply chain arrangements.

Key Reasons Behind the 2025 US-China Trade Agreement

• Impact on Consumers: The primary aim of tariffs was to protect domestic producers, but the burden largely fell on ordinary consumers.
  • Due to high tariffs on imported goods, prices increased, impacting the monthly budget of every household.
  • Consumers are a broad group, whereas producers are limited—this imbalance made tariffs politically unpopular.
• Inflation and Economic Pressure: Tariff policies unexpectedly raised the Consumer Price Index (CPI) in the US.
  • Big retail brands like Walmart also faced increased costs, leading to supply chain issues and stock management challenges.
• Economic Contraction: In the first quarter of 2025, the US saw a decline in its Gross Domestic Product (GDP), signaling the start of an economic contraction.
  • If negative growth continued for two consecutive quarters, the US could face a recession.
• Stagflation: The US economy faced a complex crisis in 2025—rising inflation on one side, and slow economic growth on the other.
  • This situation is called stagflation, which is considered the most dangerous combination for any economy.
  • Due to tariffs, employment and industrial production stagnated. This made it difficult to balance inflation control and economic growth.

Trade Relations Between the US and China

• Trade Figures:
  • In 2024, total trade between the US and China reached 582.4 billion dollars, with US exports decreasing to 143.5 billion dollars, while imports from China increased to 438.9 billion dollars.
  • As a result, the US trade deficit increased by 5.8%, reaching 295.4 billion dollars.
• Benefits from Trade:
  • United States:
    • A 2019 study found that increased trade with China raised the average purchasing power of American families by $1,500 between 2000 and 2007.
    • The 2023 US-China Business Council report noted that exports to China supported over 1 million US jobs, about 0.5% of the workforce, demonstrating deep economic ties.
  • China:
    • Trade with the US has fueled China’s economy, growing it more than five times since 2001, making it the world’s second-largest economy.
    • Trade has played a key role in China’s growth, lifting millions of people out of poverty and advancing economic prosperity.
    • China’s industrialization and pace of innovation have made it a dominant force in the global market.
• US Imports from China:
  • The US imports smartphones, computers, batteries, auto parts, toys, furniture, and plastic items from China.
  • Additionally, consumer goods such as water heaters, hair dryers, and video monitors are also imported.
• US Exports to China:
  • The US exports vital goods like soybeans, semiconductors, natural gas, crude oil, vehicles and parts, and medical devices to China, which are critical for China’s manufacturing and development.
  • The growing share of exports to China has boosted the US manufacturing sector and employment.

Wider Impact of the US-China Trade Agreement on India

• Relief from Chinese Dumping: The tariff agreement between the US and China will benefit India by reducing the dumping of cheap and uncontrolled Chinese goods in the Indian market. This will relieve Indian manufacturers and domestic industries from competitive pressure.
• Control Over Global Inflation: The pressure on the global supply chain caused by tariff disputes is expected to ease, bringing stability to the prices of raw materials and technological products. This will directly impact India’s import costs and inflation rates. Since India imports large quantities of energy, electronics, and machinery, this stability will help in price control.
• Foreign Investment: Global investors may now look towards India as a risk-free option. India’s “China+1” strategic position could attract investors, particularly in the IT, electronics, and auto sectors, where India is emerging as a reliable production hub.

Capital Flows: As global uncertainty decreases, the flow of foreign capital into India’s stock markets and bond markets may increase. This will boost market stability and investor confidence. This agreement could reactivate capital flow.