On Monday, Treasury Secretary Scott Bessent announced that the United States and China were walking back from an all-out trade war. The leaders of each country have recognized that immediately imposing very high tariffs on the goods traded between the two nations would do grave damage to their respective economies. 

According to the preliminary agreement, the U.S. would reduce tariffs on Chinese imports to 30% from 145%. In return, China would lower its tariffs on U.S. goods to 10% from 125%.

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Equities soared on the news. Financial markets also understood that the punitive tit for tat tariffs were doing great damage not only to the two globally dominant economies but also to the economies of the world. Still, important questions remain unanswered. What does each country want to accomplish in the next round of talks? What can realistically be achieved? And what long-term challenges will remain? 

In the tariff negotiations, the U.S. has several goals. Most importantly, President Donald Trump wants to reduce the large U.S. trade deficit with China. Each year, China exports dramatically more to the U.S. than it imports from the U.S. Trump also wants China to stop its chemical companies from supplying Latin American drug cartels with the chemicals that are used to produce fentanyl. That drug has killed hundreds of thousands of Americans and caused immense social upheaval in many communities.

Other American goals include protecting American intellectual property from being stolen or extorted by the Chinese government or its businesses. The U.S. will also try to get China to lower its non-tariff barriers against American goods and services. Trump wants a level playing field so that American companies such as Apple, Amazon, Starbucks, and Disney can have the same market access that Chinese companies such as TikTok, Temu, and SHEIN have in the American domestic market. 

It is also a paramount goal of the U.S. to maintain a clear lead in Artificial Intelligence technology. The U.S. wants to deny China access to Nvidia’s most advanced accelerated computing semiconductor platforms. An ancillary goal of U.S. policy is to prevent China from purchasing the advanced lithography technology of the Dutch company ASML, and to deny China access to the semiconductor fabrication technology of Taiwan Semiconductor, the global leader in semiconductor manufacturing. 

China also has important objectives in the negotiations.

Beijing desperately wants unfettered access to U.S. markets for its manufacturing industry. Put simply, China exports or its economy withers. The Chinese economy is much weaker than most realize. China is plagued by deflation, exorbitant debt levels, and a demographic implosion. Chinese industry produces dramatically more than its population can consume. Chinese factories are closing in the face of America’s tariffs and because of increasing competition from emerging economies such as India, Indonesia, and Bangladesh. 

Another U.S.-China point of conflict is the fact that China signs agreements but does not abide by them. China has systematically violated the terms of the World Trade Organization Treaty. And China never lived up to its commitments in the trade armistice negotiated during the first Trump administration.

China also wants U.S. technology, especially the technology fundamental to AI. Access to U.S. commercial aerospace technology is also a fundamental goal for China. China demands that it be treated with respect by the U.S. and that issues that divide the two countries be resolved by negotiations, not trade wars and unilateral actions. Above all, over the long term, China wants to push the U.S military out of the waters of East Asia and the countries that are adjacent to China. 

It is clear that the economic and political objectives of the U.S. and China are incompatible. This point requires emphasizing. It underlines why the long-term trajectory of U.S.-China relations is negative.

But there are also some stark economic contrasts between each nation. After all, China has a very high domestic savings rate. Consumption accounts for only 40% of economic activity in China. There is no social safety net in China. The people save to avoid destitution as they age. In contrast, the U.S. has a very low domestic savings rate, which is exacerbated by the large structural fiscal deficit of the federal government. In contrast to China, the U.S. is a consumption-based economy. Household consumption accounts for almost 70% of economic activity. Given the structures of the two economies, balanced trade is not possible. Consequently, trade friction will continue. 

The tension between the countries regarding technology will also not be resolved by negotiations. For the U.S., superiority in AI and semiconductor fabrication technology are central to the national security of the nation.

But there are areas where the two countries can compromise and defuse, for now, the tensions that divide them. China can crack down on its chemical companies that supply the global drug cartels. China is an authoritarian dictatorship run by Xi Jinping, the chairman of the Chinese Communist Party. There are no rights in China. If the Chinese security services start closing down factories, seizing bank accounts, and disappearing chemical industry executives, things they can do very easily, Beijing will be able to put a big dent in America’s fentanyl problem. China can also offer the U.S. unfettered access to rare earths and industrial magnets.

The U.S. could respond to such an effort with reciprocity on the technology side of things. The U.S. could allow China to purchase Nvidia’s H20 semiconductor technology, for example. The H-20 is outdated but remains superior to the technology available in China. China has demonstrated that it can work around restrictions on U.S. AI technology. The U.S. can offer low-end Nvidia technology as a sign of good faith.

In the long run, however, the U.S. and China are destined for trade friction and ultimately for an economic ‘divorce.’ Given the fundamental differences between the two economies regarding savings rates and personal consumption, balanced trade is not plausible. Theft of intellectual property and commercial espionage is central to the Chinese Communist Party’s long-term ambitions. China continues to resent how it was treated by Western countries from the 1800s until it became an economic powerhouse in the late 20th century.

Ultimately, national security considerations dictate that economic and political relations between the two countries will be fundamentally divisive. The U.S. military will not be expelled from Asia. If push comes to shove, the U.S. will defend Taiwan, Japan, and the Philippines. The U.S. may lose that conflict, but national security demands it be fought if necessary.

As an extension, China recognizes that economic decoupling is inevitable. It has already directed its industrial and national defense sectors to develop alternatives to imports from the U.S.. 

LET’S BRING UNIVERSAL SCHOOL CHOICE TO THE FINISH LINE

The Trump administration should do the same. The tariff rollbacks provide the U.S. with a window to prepare for full decoupling. The administration should quietly inform American businesses to leave China. And it should be made clear to American importers of Chinese goods to find alternatives to Chinese-sourced products. 

Make no mistake, what is happening this week is just a trade truce. A total decoupling is, albeit on a longer timetable than appeared to be the case a month ago, still inevitable.

The writer owns stock in Nvidia.

James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X here. He can be reached at [email protected]