By Reshma Kapadia

Tumbling cargo volumes, crippling economic uncertainty, and earnings warnings such as Apple's projection of a $900 million hit from tariffs are dialing up pressure on government officials to dial back the trade war.

While that would offer markets at least a short reprieve, analysts say that countries are signaling that they have their own cards to play. The result is that a fundamental resolution of President Donald Trump's concerns over trade isn't likely to come soon, if at all.

That isn't a good sign for the global economy.

Political strategists say Trump needs to secure some wins. The expectation is that the U.S. will unveil trade pacts, possibly with India or Japan, in the near term, and that it will reach some sort of deal with most countries before the 90-day pause on so-called reciprocal tariffs ends July 8.

"I would be surprised if tariff rates are where they are now, you know, within a few weeks from now," White House economic advisor Stephen Miran said regarding China in a Bloomberg TV interview on Friday.

Analyst caution that negotiations may not alleviate the economic uncertainty the administration's approach has unleashed. Beacon Policy Advisors told clients in a note that while these agreements would reduce the risk of higher tariffs, they would do little in getting at the fundamental problems -- like the imbalance in trade -- the U.S. has said it wants to address.

And the negotiations could underscore the growing view that other countries have ways to push back against pressure from the U.S. Take Japan, one of the countries the U.S. has signaled could be in the first round of deals to be announced. In a televised interview, Japan's Finance Minister Katsunobu Kato noted that the country holds more than $1 trillion in Treasury debt.

"The comment is a reflection of the U.S. potentially overplaying its hand in trade negotiations, as other countries have cards to play too," said Jens Nordvig, head of the macro research consulting firm Exante Data, via email.

Though Kato's remarks didn't move the bond market much, they are likely to feel growing concerns that foreign investors could lighten their U.S. holdings, even at the margins, as the Trump administration tries to reorder the global economy. Sales of Treasury debt would send bond yields higher, putting a brake on the U.S. economy, though Kato didn't threaten to do so.

Chinese officials said they are "currently evaluating" comments and messages from the U.S. on potential trade talks, according to a spokesperson for the Chinese Commerce Ministry. "If you want to fight, we will fight to the end; if you want to talk, our door is wide open," the spokesperson said, reiterating earlier comments. "If the U.S. wants to talk, it should show sincerity to talk and be prepared to act in correcting its erroneous actions and canceling unilateral tariffs."

China's security czar, Wang Xiaohong, has been trying to assess what the Trump administration wants in terms of measures to address the flow of fentanyl into the U. S. -- one factor Washington has cited in imposing its tariffs -- and could possibly visit the U.S. or a third country to meet with Trump officials, according to a Wall Street Journal report. China had tried to pre-empt the trade escalation months ago with proposals regarding fentanyl, but geopolitical analysts said they were largely rebuffed by the Trump administration.

The Chinese embassy in Washington, D.C., didn't immediately respond to a request for comment.

While China wants a deal, TS Lombard's head of research, Rory Green, says China is nowhere near a pain point, economically or politically. "By controlling the narrative and setting out a hawkish position, they now have political space to slowly begin engagement with the U.S." he said. "Beijing will utilize its leverage and engaged in prolonged difficult negotiations. It is probably in China's interest to see shortages in the U.S."

While a quick deal to lower tariffs can't be ruled out, analysts are skeptical about a meaningful agreement. Beacon Policy Advisors analysts sees a possibility the U.S. could take a three-step approach to China, starting with a mutual de-escalation of current tariffs. Next, negotiators could revisit Trump's Phase One trade deal -- the U.S. says China has violated the terms -- and that the U.S. could then push for China to address the trade imbalances that Washington has called out.

"There may not be significant reductions in U.S. tariffs on China beyond the initial wave of lowering, which is likely to result in them dropping to between 50 and 65 percent." Beacon said in a note to clients.

Nicholas Borst, head of China research for Seafarer Capital Partners, said in an interview that Chinese companies have resigned themselves to higher tariffs, with many using a level of 60% as a basis for planning. So far, Beijing hasn't aggressively ramped up efforts to support the economy, apparently preferring to wait until the economic damage hits with its full force. But Borst says Beijing still has levers to pull, including pushing state-owned enterprises to buy some of the excess exports meant for the U.S. to try to cushion the hit.

While China's risk is high in this trade war, Will Denyer, Gavekal's chief U.S. economist, told clients in a note that Beijing could be in a stronger position than the U.S. Not only was it not fighting on multiple fronts, it has diversified away from overreliance on exporting to the U.S. Its trade with emerging markets will likely continue without disruption.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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May 02, 2025 13:28 ET (17:28 GMT)

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