Trump Announces a Trade Truce With China

Reuters
By Yuval Rosenberg and Michael Rainey

Good Wednesday evening. Here's your fiscal update.

Trump Announces Deal Easing Trade Tensions With China

President Donald Trump announced Wednesday morning that a deal easing trade tensions with China is "done," pending final approval from him and Chinese President Xi Jinping.

In a post on his Truth Social site, Trump said the agreement calls for China to supply rare earth minerals and magnets up front. In exchange, the United States will allow Chinese students to continue attending American colleges and universities.

"WE ARE GETTING A TOTAL OF 55% TARIFFS, CHINA IS GETTING 10%. RELATIONSHIP IS EXCELLENT!" Trump wrote. Those rates remain higher than before Trump returned to the White House, but they are lower than the 145% and 125% tariffs that the United States and China had imposed on each other earlier this year in what became a de facto trade embargo. Trump's 55% figure refers to 30% tariffs applied by Trump recently in addition to duties that were already in place. The deal reportedly may also involve the easing of a U.S. ban on exports of jet engines and ethane, used in manufacturing plastics, to China.

The deal was worked out over two days of negotiations in London, led on the U.S. side by Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick and U.S. Trade Representative Jamieson Greer. It is more of a framework that will set the stage for further talks and, potentially, closer cooperation between the world's two largest economies. "President XI and I are going to work closely together to open up China to American Trade," Trump wrote in a follow-up post. "This would be a great WIN for both countries!!!"

Lutnick said that the "handshake" deal reinstates the terms of an agreement reached last month to lower tariff rates on each side. That truce was followed quickly by renewed tensions, as each country accused the other of violating the agreement.

"Both sides have now demonstrated that they know where the other's weak points are," Dan Kritenbrink, who served as assistant secretary of state for East Asian and Pacific Affairs in the Biden administration, told the Associated Press. "They demonstrated that they both have leverage and tools they can use to inflict damage on the other."

He added that the Chinese know that their dominance in rare earths gives them "incredible leverage over the United States in the global economy ... and they're not afraid to use it."

The Wall Street Journal reports that China is placing a six-month limit on export license for rare earths, with sources indicating that "Beijing wants to retain its chokehold on the critical minerals to give it valuable ammunition for future negotiations."

Bessent says further pause on other tariffs is likely: The treasury secretary said at a Wednesday hearing of the House Ways and Means Committee that it is "highly likely" that a 90-day pause on some tariffs imposed by Trump will be extended for countries that are negotiating "in good faith."

Poll: 53% of Voters Oppose GOP Tax-and-Spending Bill

A majority of voters, 53%, oppose the Republican package of tax and spending cuts, according to the results of a Quinnipiac University poll released on Wednesday.

As Senate Republicans debate changes to the legislation - and the House makes additional tweaks to the version it passed in an effort to keep the bill on track to pass via a simple majority in the Senate - the Quinnipiac poll found that just 27% of voters back the package. A fifth of voters offered no opinion.

Democrats are nearly universally opposed to the bill, with 89% against it and 10% not offering an opinion. Republicans largely favor the bill, with 67% supporting it. More than half of independents, 57%, oppose the legislation.

Medicaid cuts in the package are particularly unpopular. "Nearly half of voters (47 percent) think federal funding for Medicaid should increase, 40 percent think it should stay about the same, and 10 percent think federal funding for Medicaid should decrease," Quinnipiac said in a news release. Even among Republicans, just 18% say federal funding for Medicaid should decrease while 21% say it should increase and 56% say it should stay about the same.

The poll also found that President Trump's approval rating has slipped to 38%, down from 41% in an April 9 survey.

Inflation Muted in May, Easing Worries About Tariffs - for Now

Consumer prices rose just 0.1% from April to May, a decrease from the 0.2% monthly inflation rate recorded from March to April, the Labor Department announced Wednesday. On an annual basis, the consumer price index rose 2.4%, a tenth of a percentage point higher than a month earlier.

Prices for groceries and some imported goods moved higher, but the increases were largely offset by declines in the prices of gasoline, travel services and rent.

A measure of core prices, which leaves out volatile food and fuel prices, rose 0.1% on a monthly basis, down from 0.2% a month earlier. On an annual basis, the core index rose 2.8 % for the third straight month.

Few signs of tariff-related pressures yet: While the prices of some items affected by President Trump's dramatic tariff increases rose, including toys and appliances, other items such as new cars and clothing saw price reductions. The data suggests that the tariffs, some of which have been suspended or reduced, are having little effect on prices overall so far, outside of a few items.

Still, economists and retailers see the potential for pricing pressure to emerge, assuming Trump doesn't retreat from his threatened tariffs, especially those directed at the country's biggest trade partners, Canada, Mexico and China.

Sarah House, an economist at Wells Fargo, told the Associated Press that the May consumer price report does not provide an "all clear" as far as inflation is concerned. "You can point to seeing tariffs in this report, but the more important message is that you're seeing inflation soften enough elsewhere that overall, price pressures continue to subside for the U.S. consumer," she said.

One reason that inflation continues to soften is that the economy appears to be slowing. Ironically, one driver of the slowdown is the very threat that tariffs pose to growth, making businesses more reluctant to hire and consumers more hesitant to spend freely. Officials at the Federal Reserve have warned that the tariffs could cause stagflation, a combination of a slowing economy and rising prices.

**Pressure building? **The key question is what lies ahead, both with respect to inflation already in the pipeline and new inflationary pressures that could emerge if Trump pursues an aggressive line on tariffs. Samuel Tombs of Pantheon Economics told The New York Times that although tariffs appear to have added "microscopic" price pressure in May, these results are "entirely in keeping with past evidence showing that retailers usually take at least three months to pass on cost increases to consumers."

A recent analysis by the Federal Reserve of New York suggests that pricing pressure is already in play; it found that a significant share of the businesses surveyed reported passing along higher costs to consumers during the month of May. "Consistent with textbook economics, tariffs generally resulted in higher prices to customers," the Fed analysts wrote. "Indeed, roughly half of businesses reported raising prices of goods directly subject to tariffs."

Perhaps worryingly, a significant number of service-sector businesses reported raising their prices, as well. Although many cited rising wage and insurance costs as the reason for their price hikes, "it is possible that in some cases, businesses were taking advantage of an escalating pricing environment to increase prices," the Fed analysts said.

The bottom line: The U.S. economy has avoided significant damage from Trump's tariffs so far, but a new round of inflation and possibly recession could be in the cards if the president's new import taxes remain in place indefinitely.

Deficit Nears $1.4 Trillion for First Eight Months of Fiscal 2025

The federal budget deficit was $316 billion in May, according to the latestmonthly Treasury statementreleased Wednesday. Outlays totaled $687 billion during the month, while revenues came to $371 billion.

For the first eight months of the fiscal year, which began last October, the budget deficit totaled nearly $1.4 trillion. Cumulative outlays equaled $4.8 trillion, while cumulative revenues came to $3.4 trillion.

Interest costs were a major contributer to the deficit in May, totaling $92 billion during the month and $776 billion so far this fiscal year. Outlays for interest, which are expected to total more than $1.2 trillion in fiscal 2025, were larger than for every other program except for Medicare and Social Security.

Driven by President Trump's tariffs, gross customs duties were up significantly, rising to $23 billion, up from $6 billion a year ago.

The fiscal year deficit so far is 14% larger than the deficit recorded at the same point a year ago.

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