While the larger-than-expected reduction in reciprocal tariffs and the 90-day freeze offer a temporary respite in US-China tensions, the 10% tariff floor and slow progress with other trading partners indicate that the broader trade environment remains challenging.
The US and China agreed to reduce the reciprocal tariff rate by 115 percentage points for 90 days, a bigger cut than anticipated, though it affects only about 6.5% of US imports.
The new combined fentanyl and reciprocal US tariff rate on these Chinese goods stands at 30%, while China’s tariff rate on US goods is now 10%.
As a result, we have slightly revised upward our GDP forecast and lowered inflation expectations. We continue to anticipate the Federal Reserve will maintain its policy stance until December 2025.
Many Chinese goods remain unaffected by the tariff reduction
The Trump administration announced that the US and China had agreed to reduce reciprocal tariffs by 115 percentage points for 90 days, a larger reduction than expected. However, due to various exemptions and carve-outs for certain products—such as consumer electronics, auto parts, and semiconductors—only about half of Chinese imports to the US were subject to the full 145% tariff level, leaving the rest unaffected by this deal. Since imports from China account for just over 13% of total US imports, the deal significantly reduces tariffs on only roughly 6.5% of US imports.
Prospects for broader tariff deals
The outlook for US-China trade has improved somewhat with this 90-day freeze, but progress on trade negotiations with other countries has been slow, and the 10% tariff floor appears to be a persistent obstacle.
President Trump expressed optimism that the US and China would reach a comprehensive deal within the 90-day period. He also stated that, even if a deal isn’t reached, tariffs on China would not revert fully to the previous high levels of 145%, instead remaining at a combined reciprocal and fentanyl tariff rate of 30%.
In contrast to this temporary truce with China, trade talks with other partners have proceeded sluggishly. So far, only one deal with the UK has been reached, a country with which the US runs a trade surplus and which was never subject to tariffs exceeding 10%.
The US-UK trade deal did not reduce US tariffs on UK imports below 10%, suggesting that this level may be a firmer tariff floor than previously thought. Moreover, key US allies such as Japan and South Korea have maintained a firm stance, refusing to accept deals that do not include reductions in auto tariffs.
Updated trade and macroeconomic scenarios
Our current forecasts include aggressive, baseline, and benign scenarios:
- Under the baseline scenario, reciprocal and fentanyl tariffs against China will remain at the current 30%. Sector-specific tariffs on items like semiconductors, copper, timber, and lumber are expected to continue or increase, except for pharmaceuticals where recent executive orders aim to lower prices. Country-specific tariffs are expected to remain at 10%, avoiding scheduled increases.
- The benign scenario assumes successful negotiations reduce reciprocal tariffs below 10% for several trading partners, the US ends fentanyl tariffs on China, Canada, and Mexico, and all sector-specific Section 232 tariffs are rolled back. This scenario would maintain tariffs above recent historical lows but would not result in a major shift in global trade patterns.
- The aggressive scenario assumes tariffs revert to their previous high “Liberation Day” levels. Sector-specific tariffs would continue to be implemented, and exemptions under USMCA for Canada and Mexico would lapse, raising tariffs to 25% on all imports from North America. This scenario is most likely to push the US economy into recession, with GDP contracting around 1.4% year-over-year by Q4.
