U.S. and China announce yearlong trade ceasefire

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Presidents Donald Trump and Xi Jinping announced a handshake agreement for China to pause planned restrictions on rare earth mineral exports and resume soybean purchases from U.S. farmers in exchange for lower U.S. tariffs on Chinese products and continued export of advanced U.S. technology to Chinese firms.

While companies with operations in both countries will welcome the news, it remains to be seen how long the peace will last. The announcement, which is not legally binding, follows similar temporary trade-war de-escalations that began in May but have been repeatedly undermined by rhetoric or actions on both sides. Many, including U.S. Trade Representative Jamieson Greer, have accused China of violating the “Phase One” agreement it similarly made with Trump during his first term. According to nongovernment sources, China bought less than 60% of the total U.S. goods it pledged to purchase in exchange for lower U.S. tariffs as part of that January 2020 agreement. Greer’s agency initiated a Section 301 trade investigation into what it called China’s “apparent failure to comply with the Phase One trade agreement” just six days before Trump and Xi announced their new pact.

What impact the temporary de-escalation with China will have on that investigation remains unclear; the Trump administration reportedly agreed to pause other action taken by the U.S. Trade Representative from a separate Section 301 investigation into Chinese shipbuilding practices. Trump’s tariffs on products from China and other Asian countries, which he used to create leverage for trade frameworks (see below), rely on the International Emergency Economic Powers Act (IEEPA), and his administration’s novel read of its powers to extend to tariffs. The Supreme Court will hear arguments on challenges to that use of the law Nov. 5. If a majority of justices decide Trump overstepped either by letter of the law or the Constitution in implementing those tariffs, the administration’s Section 301 investigation into China’s adherence to the Phase One agreement could provide a backstop for continuing the current increased tariff regime on China.

Xi also agreed to step up effort to combat the trafficking of fentanyl and its precursors into the U.S., according to a social media post by Trump.

Details of the arrangement with China remain undefined until the administration publishes a framework and takes any executive action necessary, such as an executive order or proclamation lowering the fentanyl-driven tariff rate, as Trump promised. According to Trump, the informal agreement is meant to last a year and will then be subject to renegotiation.

Other Asian agreements

During his trip to Asia Trump also met with leaders of Japan, South Korea, Malaysia, Cambodia and Vietnam to reiterate prior trade frameworks announced by the administration over the summer, which include purchase agreements for aircraft and other U.S. exports. Timing and enforcement of those purchases were not laid out in the fresh wave of announcements released by the White House.

The Trump administration also issued memorandums of understanding on technology cooperation with South Korea and Japan, including around critical mineral supply chains — one of the leverage points China used in its negotiations with the U.S.

Notably, announcements with Malaysia and Cambodia included commitments from those countries not to implement digital services taxes or similar measures seen by the administration as disproportionately targeting U.S. companies. Announcements for Japan, South Korea, and Vietnam did not. (See our story on France’s DST elsewhere in this issue.)

Senate disapproves of tariffs, in largely symbolic votes

A slim majority of senators voted in favor of resolutions to effectively overturn most of the administration’s tariffs (those issued using IEEPA), with a handful of Republicans joining Democrats in votes that took place on Oct. 28, Oct. 29 and Oct. 30.

However, Republicans in the House of Representatives have temporarily changed that chamber’s rules to disallow votes on such resolutions of disapproval through March. Trump has also threatened to veto any effort to undo the tariffs he has imposed, effectively raising the threshold for legislation to overturn the duties to a two-thirds majority in both chambers. Because the resolutions relate to ending the states of national emergency Trump declared to enact the IEEPA tariffs, the Senate can vote again to overturn those tariffs in six months.

Fed warns tariff inflation could still be coming

On the home front, the Federal Reserve lowered its federal funds rate again on Oct. 29, to a range of 3.75% to 4% from 4% to 4.25%, noting softness in the labor market. But Fed Chairman Jerome Powell said tariff-related inflation has started to work its way into the economy and could rise over the winter and early next year. Powell has previously said the central bank would have been more aggressive in lowering rates earlier this year if not for tariffs and the price inflation the Fed still expects them to cause.

“The base case is that it will come, and that it will probably increase further, but it is that it will be a one-time increase,” Powell said during a press conference following the Federal Open Market Committee’s decision to lower the central bank’s benchmark short-term lending rate to private banks. “[B]asically, you’ve seen goods prices increasing, and that’s really due to the tariffs. And that’s due — that’s compared to a longer-run trend of very, very mild deflation in goods. So that’s moving inflation up.”

The Fed chair went on to note that if not for tariffs, the rate of price increases in the U.S. would be close to the Fed’s 2% inflation target.