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This week, we’re trying a new format for the newsletter, giving a few hot takes on several different hot topics of the week. Let us know your thoughts! 

A Trade Breakthrough… of sorts

Negotiations in Geneva between Scott Bessent and Chinese vice premier He Lifeng yielded a breakthrough last week, with both sides agreeing to drop their “reciprocal” tariffs by 110% as they appear to chart a path back from an outright trade war. 

The announcement was good news for Washington, Beijing and the world economy. Their previous standoff - in which the US levied a 145% tariff on China and China responded with 125% tariff on the US - represented a virtual severing of trade between the world’s two largest economies, which together account for around 43% of global GDP and have bilateral trade of more than $600bn. Stock markets cheered with the Nasdaq rising to more than 4% to comfortably erase its Liberation Day losses, while the Hang Seng in Hong Kong jumped 3%. 

But let’s be clear: Trump has blinked, again. The president started this standoff with China, and appears to have backed down without securing anything beyond a relaxation of China’s recently-imposed retaliatory measures, such as tariffs and export controls on rare earth minerals. Almost nothing remains of his market-rocking Liberation Day tariff package, which he junked most of in mid-April after US bond markets started to wobble. The upshot is clear: Trump talks a big game on trade threats, but can’t follow through on the economic self-harm they entail.

Clearly, the Geneva talks were the opening salvo to longer term trade discussions between the two. The US will no doubt look to secure some kind of deal in which China agrees to buy more US soybean (etc.) exports in exchange for deeper and longer-term tariff relief, but the historical record on this is not encouraging. 

Under the first phase of what Trump in 2019 branded a “historical trade deal” between the Washington and Beijing, China agreed to increase its purchases of certain US goods and services in 2020 and 2021 by at least $200 billion over 2017 levels, with total purchases of US exports in 2020 and 2021 to reach just over $502 billion. This would have represented a significant improvement in the goods trade imbalance between the two.

But that didn’t exactly happen. China only met 58% of its purchase commitments of US goods and services. The goals were unrealistic, and their implementation was significantly blown off course by the pandemic. Worse still, as this study by the Peterson Institute of International Economics (PIIE) argues, Chinese importers were never going to be able to meet these targets because they were starting from a lower base due to the trade war. According to PIIE analysis, the trade war and phase one agreement left US exports to China c. $40bn below where they would have been by the end of 2021.

Source: Peterson Institute of International Economics

The risk this time is that both sides again feel compelled to make non-credible commitments, as Trump has an incentive to sell a “big deal” to the US electorate and China knows this. Whatever deal follows is unlikely to resolve the underlying, structural imbalances in the US-China trade relationship, and Trump has battered the US economy and torched his own credibility in the process. 

Trump in the Middle East

Trump’s visit to the Middle East was also seismic, for different reasons. His trip - which took him to Saudi Arabia, Qatar and the UAE - was insight into the administrations shifting diplomatic priorities. 

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Firstly, it is telling that Trump again chose Saudi Arabia as the first overseas visit of his administration. He clearly has an affinity to the Mohamed bin Salman school of leadership: pomp and ceremony, large ostentatious real estate projects, and big ticket investments. He attended a US-Saudi Investment Forum in Riyadh with a coterie of US billionaires including Elon Musk, Mark Zuckerburg, and Sam Altman, positioning himself as Dealmaker in Chief. Some $700 billion of deals was announced over the course of the trip, ranging from a $90 billion investment in AI from Saudi Aramco to an order for 160 Boeing jets from Qatar Airways. 

Geopolitically, the trip was significant for who he did and didn’t meet. Trump met with new Syrian leader Al Sharaa, who until December had a $10m US bounty on his head, was unthinkable only a few months ago, and led to Trump pledging to lift sanctions on Syria, in a major economic win for Al Sharaa’s new government. Meanwhile, Israeli PM Netanyahu did not get a visit, in a sign of deepening frustration with Israel’s apparent lack of interest in pursuing a political solution to the ongoing Gaza conflict both in the White House and in European capitals. It should concern Netanyahu that Trump cut a deal directly with the Houthis in Yemen to stop attacks on US ships in the Red Sea, going behind the back of the Israelis. 

Trump’s Pharmaceutical Nothing-Burger

Trump on Sunday night announced his “most important and impactful truth ever issued”, pledging to slash US drug prices by between 59 and 90%. The idea was to force drug makers to sell to the US at “most favoured nation” prices - i.e. at the lowest price charged to other developed countries. 

Pharmaceutical shares plunged ahead of the full announcement but swiftly recovered once the (limited) details of the plan actually came out. While the US does pay much higher drug prices than other developed countries, in effect subsidising the global development of new medicines, the market was unconvinced that Trump would be able to actually action his plans. 

Trump tried to cut drug prices in his first term, with little success, and was blocked by US courts. The Biden administration got legislation through Congress to negotiate prices of 10 major drugs for Medicare users, but was sued by Merck and other pharma companies with litigation still ongoing. 

Trump’s current efforts are likely to encounter similar resistance if he uses executive orders to increase direct-to-consumer sales, impose export controls or import more drugs from other developed nations, given the strength of the US pharmaceutical lobby. So while Trump may this time be right that the US is getting ripped off, it remains unclear what is going to be able to do about it.