Surprise! There’s a new trade deal between the United States and you guessed it, China. Both countries have agreed to significantly reduce trade tariffs, however many wonder for how long the deal will last? Most macroeconomists see this as a positive development in the current global trade environment. Recall that back in early April 2025, President Trump announced a major new trade policy involving many countries, notably China.

There are several reasons for the large U.S. trade deficits experiences during the last decades. One obvious reason is the fact that disposable household income remains higher in the U.S. than in many of our trading partners, creating greater demand for U.S. imports than U.S. exports. In addition, the savings rate of U.S. households remains relatively low compared to demand for investment dollars, creating a need for foreign sources of investment funding through a positive balance on U.S. balance on capital and financial account. Finally, a relatively strong dollar, compared to currencies such as the Chinese yuen, makes foreign made products cheaper for U.S. consumers.

The fact that that both countries agreed to cut tariffs, at least for the next 90 days, from the previous level of 115 percent, is likely to increase U.S. imports from China. Under the new deal, a 30 percent tariff will be imposed on Chinese exports to the U.S, while a 10 percent tariff applied on goods moving in the opposite direction. If this new deal lasts beyond the 90-day trial period, it would not only be a major boost for the global economy, but also for U.S. consumers who would see lower prices on the many products imported from China. However, relief is still tempered by the fact that economic uncertainty remains extraordinarily high as policy trajectories have become much less stable. There is still a bumpy road ahead.

 

Discussion Questions:

  1. Discuss some of the macroeconomic explanations why the United States is experiencing such a large trade-deficit with China. Explain how do the spending and saving decisions of U.S. households impact the trade-deficit. 
  2. Discuss if US consumers be made better or worse off if US businesses could not import so many goods from China, and the advantages and disadvantages of using tariffs.