US-China: A Temporary Truce

A TEMPORARY trade truce of sorts was the outcome of a 100-minute meeting between US President Donald Trump and his Chinese counterpart, Xi Jinping, at Busan in South Korea. China has agreed to reduce the restrictions on the export of rare earths to the US. In turn, Trump has reduced tariffs on China to 47 per cent from the current 57 per cent.

There were signs of such an outcome in the days ahead of the meeting. China agreed to buy soybean from the US, something it had stopped completely. China had begun purchasing soybean from Argentina and Brazil in a tit-for-tat response to Trump’s tariffs. Earlier this month, Trump had threatened to impose a further 100 per cent tariff on China.

The outcome was an­nounced by Trump with his usual bombast when he told reporters after the meeting, “I guess on a scale from 0 to 10, with 10 being the best, I would say the meeting was a 12.” Earlier, before the meeting, he alluded to the “G2” meeting together on his social media platform.

In many ways, the behaviour of the two sides was reminiscent of the Game of Chicken but with a twist: both sides blinked, even if temporarily. While Trump was reckless to impose tariffs on China, and other coun­tries as well, he did not think through the consequences. China imports close to 60 per cent of the world’s soybean output with Brazil, US and Argentina being the key suppliers. In September this year, China did not import any soybean from the US. This led to a panic situation in the US where soybean-producing states in the American Mid­west are among Trump’s most ardent supporters. Reuters reported that these farmers are losing from $200 to $300 per acre. This hit Trump’s political base directly.

In turn, China is now sitting on a huge inventory of goods that it exports to the US and other parts of the world. The world is increasingly wary of buying from China given its mercantilist behav­iour: imports are discouraged by Beijing from even its closest trading partners even as it racks up trade surpluses across the world. In 2024, China had a trade surplus of $361 billion with the US. Even with ASEAN countries, which are a mere entrepôt for Chinese goods, creating major trade imbalances across the world, China had a trade surplus of $190 billion in 2024.

These imbalances are no longer an economic issue but a political problem. Across the world, industrial production is uncompetitive given the scale and subsidies that China has showered on its manufac­turers. The backlash against globalisation was in no small measure due to the ‘China effect’.

Trump tried to ‘solve’ this problem with a hammer. All that it did was to create great uncertainty for the global economy. Instead of a negoti­ated settlement to smooth these imbalances, he simply targeted trade deficits with all his trading partners. These included India and Brazil, among other countries.

The difference between Trump’s approach to China and other countries is that China has great leverage over the US. The supply of rare earth minerals was China’s ‘nuclear option’ against the US. These rare earths, virtually a large swathe of the Periodic Table, are essential for manu­facturing magnets and other end-products that are required for key defence items, for example, the F-35 fighter jet.

The other problem for the US is that a large number of items that it consumes are manufactured in China. Earlier in the year, when it became obvious that trade frictions would intensify between the two countries, importers in the US built up large inventories to ensure that price shocks due to de­mand and supply mismatches did not hit US consumers. But if the tariffs were to continue, the next year could be brutal. The cost of imported items would rise even as the US labour market is not in the pink of health. The slew of job losses in technology compa­nies coupled with the weak hiring that has been reported through the year would push the US economy in a difficult corner with job losses and ris­ing prices, not exactly a happy situation for a central bank. But there, too, Trump has tried to browbeat the US Federal Reserve into lowering interest rates, the same approach he has tried with tariffs and trade.

Where does this leave a country like India? In one word, as always, hopeful of a trade deal with the US. In recent days and weeks, both the Indian establishment and Trump himself have made emollient noises that a trade deal is coming. After the reduction of tariffs on China from 57 per cent to 47 per cent, India would be the country subjected to the highest tariffs by the US, at 50 per cent.

Trump’s grouse against India is a combination of mul­tiple factors. He believes that Indian purchases of Russian oil ensure that the Russian war machine continues to chug along in Ukraine. There are indications that India’s public sector (and private sec­tor) oil refiners have reduced their purchases of Russian crude, to an extent. But a drop-dead reduction in these oil purchases—which amount to approximately 34 per cent of India’s oil purchases—is unlikely. Kpler, the global oil and energy analytics and tracking platform, noted that in October, India’s purchase of Russian oil was around 1.8 million barrels per day (mbd), an increase of 250 kilo barrels per day (kbd). India is unlikely to undertake a precipitous shift in its sourcing of oil, something that will roil In­dian markets and its economy.

It is interesting to note that Trump, let alone Xi, did not mention any reduction of Rus­sian oil purchases by China. China is a large buyer of Russian oil. Trump has no leverage against China to force its hand on this issue. If Russian oil was indeed a pressing issue, the US would do something to ensure that its European partners ended their purchases of Russian en­ergy completely. Instead, Ger­many and the Netherlands are seeking an exemption from tariffs and restrictions on pur­chases of Russian energy.

What should be India’s approach towards Trump and the US? The first thing is to get a trade deal where the additional 25 per cent tariff imposed on India as a puni­tive measure for purchasing Russian oil is ended. But India cannot rest there. The US is no longer a close partner that India imagined it to be. India should try to diversify its ex­port markets. There are signs that the process is already on. Recently, a senior min­ister from Andhra Pradesh travelled to Australia to sort out the problems of shrimp exports from that state to Aus­tralia. A positive beginning has been made on that front as Andhra shrimp farmers were hit hard due to Trump’s tariffs.

A trade ‘deal’ with Trump is not a deal in the usual sense of the word. It is subject to random whims and additional tariffs on wholly different products and items (generic pharmaceuticals are one po­tential target) and for wildly unrelated reasons. These can range from not nominating the man for the Nobel Peace Prize to more substantial rea­sons. The best thing to do for India under the circumstances is to avoid direct confrontation with Trump even as it quietly works its way around the ob­stacles thrown in its way.