While a cessation in hostilities is welcome, businesses have a lot of ground to make up, and few expect any further progress

The trade war with China is over; long live the trade war. That is the message from Donald Trump as the US president promotes a pact with Beijing that has both settled the frayed nerves of traders across the world’s financial markets and put those same traders on notice that the battle will continue for years to come.

This week the White House is expected to publish details of a first- phase deal that cuts the import tariffs from 15% to 7.5% on more than $100bn of Chinese imports as soon as the agreement is implemented. The deal is expected to be signed on Wednesday, although Trump said on Friday it might be “shortly thereafter”.

Meanwhile, China has agreed to spend at least $200bn a year on US produce, which cheered American farmers, who have been effectively locked out of China’s vast food market for more than 18 months.

And since 1 January, China has paved the way for an agreement that will cut tariffs on more than 850 products, from frozen pork to semiconductors. Calculations by Bloomberg showed that the tariff cuts will affect almost $400bn (£309bn) of foreign goods sold to China annually, out of its total import bill of $2tn. In addition, tariffs that Trump and trade representative Robert Lighthizer threatened to impose on mobile phones, laptops and other hi-tech products made in China will no longer apply.

As a truce, it works to calm an increasingly volatile situation ahead of what is expected to be a bruising election year. But it leaves much of the new high-tariff infrastructure in place. For instance, a 25% levy by the US on $250bn of Chinese goods – mostly parts for goods assembled in US factories – remains in effect.

Across the spectrum of imported goods, the average tariff on Chinese goods will fall to 19.3% – which is more than six times what it stood at before the trade war began in 2018, and still seven percentage points higher than a year ago, according to the Washington-based Peterson Institute for International Economics.

David Dollar, a China expert at the Brookings Institution thinktank in Washington, says the main benefit of the first-stage deal is that it puts an end to the almost monthly escalation of tariffs seen last year.

There’s been a lot of disruption and pain, and there hasn’t been a lot of progress on the most important issues Scott Paul, Alliance for American Manufacturing

He says the momentum for at least a temporary cessation of hostilities was huge after Trump realised his campaign was costing US businesses billions of dollars.

“The trade war with China has been a sobering experience for the White House,” he says. “Trump’s staff believed tariffs would be a win-win and there would be a boost for domestic firms as well as a hit to China, but the first thing just didn’t happen. For the past year, US manufacturing has been in recession and shedding jobs, despite the president’s tweets to the contrary.”

Caterpillar, the world’s largest manufacturer of construction and mining equipment, has seen profits squeezed both directly and indirectly by the trade war. For more than a year, the company’s US-made diggers were slapped with a 40% tariff by Beijing, and at the same time the firm was coping with a 25% tariff on parts made in China and destined for US assembly plants. The China tariff has fallen back to 15% since last summer, boosting Caterpillar’s share price, but the firm’s international business, considered a bellwether for the global economy, has yet to recover its 2017 value.

General Motors, Ford, electric-car maker Tesla and tech companies Apple and Microsoft – which were caught by tariffs on semiconductors – have also been hit during the past year and only recently began, with the prospect of a truce, to recover sales.

Facebook Twitter Pinterest Electric carmaker Tesla was among US firms hit by tariffs this year. Photograph: Aly Song/Reuters

“It’s incredibly disappointing the last three years has built up to this agreement, and there’s no clear path forward after this,” Scott Paul, president of the Alliance for American Manufacturing, said last month. “There’s been a lot of disruption and pain, and there hasn’t been a lot of progress on the most important issues.”

A deal that forces Beijing to buy US soya beans is expected to benefit farmers who have struggled to find alternative markets for their produce following an effective blockade by the Chinese against US exports.

London-based firm Llewellyn Consulting says the cumulative effect of tariff increases by both countries has probably knocked a full percentage point off US GDP growth, and the same amount off China’s stuttering economy, quoting data from the American Action Forum, which monitors the effects of tariffs worldwide.

John Llewellyn, who heads the consultancy and is a former chief economist of the Organisation for Economic Co-operation and Development, believes the increased tariffs, combined with Trump’s use of import restrictions and his attacks on the World Trade Organization (which seeks to reduce tariffs), could be having an even bigger effect.

“Trump’s systematic attack on the post-second-world-war international order – which is more than ‘ordinary’ protectionism – may be having greater effects than history-based calculations would suggest,” he says.

“I’d be surprised if there is much progress on a second-stage deal ahead of November’s presidential election. And I don’t expect the US to start a fresh trade war with Europe – with so many potential unintended consequences – in an election year.”

James Knightley, global chief economist at ING bank, was one of the first to argue, last week, that a deal with China may allow Trump to turn his gaze towards Brussels. Tariffs the president has already imposed on Europe have, according to credit analysts Euler Hermes, affected UK businesses more than firms in any other EU country except Germany.

Facebook Twitter Pinterest William Wemyss, of Edinburgh distiller Wemyss Malts, says US tariffs have hit his business. Photograph: Callum Bennetts/Maverick

Scotch whisky was one of the hardest hit products, after the US president targeted single malt whisky for a 25% tariff. William Wemyss, boss of independent Edinburgh distiller Wemyss Malts, says: “You have to have the US in your sights because it is the single largest consumer of Scotch whisky by a long way.” After producing blended whiskies for a decade, Wemyss released the first cases of a new single malt last year, but has delayed sending any to the US following the October tariff rise.

“In the short term it is easy to mitigate the problem by sending cases to alternative markets and letting the dust settle,” he adds. “But if the situation persists, it is going to be bad news for the whole industry.”

Mary Lovely, a trade expert at the Peterson Institute, says small- and medium-sized firms there are the hardest-hit, especially by a 25% tariff on intermediate goods such as power cables and components.

Many bigger companies have kept a low profile in the debate over tariffs after saving themselves tens of millions of dollars by exploiting arcane waiver rules. “There are exemptions,” Lovely says, “but it is only the largest companies that can afford expensive lawyers to get the necessary certificates.”

Trump will boast that his deal also includes concessions from China over intellectual property disputes and some other running sores related to the way Beijing treats foreign firms. One example is an agreement for cases to be escalated to a national court – taking power away from regional administrators, who tended to side with local firms.

“There is very little in the agreement that could not be achieved by partnering with allies that were also concerned about the same issues,” says Lovely.

What happens now

What will this week’s deal achieve?

Donald Trump has spent the last 30 years arguing that China has used protectionist tariffs, quotas and biased rules to hobble foreign competition. He is expected to say that China has made concessions in a first-stage deal that will end some of these unfair practices. The World Bank says global trade growth will improve modestly in 2020 as a result – to 1.9%, up from 2019, when the rate of expansion slowed to 1.4%, the lowest since the 2008-09 financial crisis.

What tariffs will remain in place?

Washington is maintaining tariffs on $370bn of the $550bn-worth of products it imports from China each year. Thus, approximately two-thirds of US imports from China will remain covered by the administration’s tariffs.

What will the next phase of the peace deal look like?

Trump’s trade advisers, Peter Navarro and Robert Lighthizer, want to press on and force China to end the state subsidies that allow it to remain a provider of ultra-cheap manufactured goods. But experts believe they will make little progress this year towards a second- or third-stage deal while Trump is focused on his re-election.