US–China tariff talks: Three potential outcomes ahead of truce deadline

Market overview and trade backdrop

US–China trade negotiations are intensifying as the current tariff truce expires on August 12, prompting a new round of talks in Stockholm. Treasury Secretary Scott Bessent is leading the US delegation, with the aim of stabilizing bilateral trade relations before market disruptions reemerge.

Washington is reportedly aiming for a comprehensive trade framework that goes beyond temporary relief. With President Donald Trump signaling that reciprocal tariffs will start at no less than 15%, the stakes are higher than ever. China, meanwhile, is leveraging its dominance in critical minerals and supply chains to gain concessions in return.

Scenario 1: Phase One Plus deal – likely path forward

The most likely outcome is a Phase One Plus agreement, mirroring the 2020 deal struck during Trump’s first term. That agreement focused on China increasing imports of US agricultural and industrial goods, along with limited reforms in intellectual property protection.

This time, additional components could be included:

• Purchase commitments: Particularly US agricultural exports, rare earths, and LNG.
• Fentanyl controls: Beijing may agree to limit precursor exports as a goodwill gesture.
• Reduced oil imports from sanctioned countries: A sticking point, but negotiable.

This framework offers a low-pain compromise for both sides and would allow Trump to showcase success ahead of a potential summit with President Xi Jinping.

Scenario 2: Phase Two deal – the long shot

A more ambitious agreement could address structural reforms in China’s economy, including state subsidies, tech self-sufficiency, and capital controls. While the US has long demanded such changes, Chinese resistance remains strong.

Treasury Secretary Bessent has expressed optimism, but analysts see a very low probability of a Phase Two breakthrough. The timeline is too short, and mutual trust remains fragile. This scenario would also require deep policy shifts that Xi’s administration is unlikely to implement under pressure.

Scenario 3: No deal – re-escalation risk looms

If talks collapse, Trump could reimpose the harshest set of tariffs — dubbed the "Liberation Day" tariffs — reaching up to 50% on some imports. In turn, China may retaliate with:

• Export restrictions on rare earths and strategic materials.
• Technology blacklists, targeting US software and hardware firms.
• Delays in Boeing aircraft approvals or industrial equipment orders.

Such an escalation could wipe out US–China trade volumes, disrupt electronics and EV supply chains, and push inflation higher, even amid a soft global backdrop.

Where reciprocal tariffs might land

The tariff outcome will depend on bilateral trust and Trump’s political calculus. Currently:

• Japan has secured a 15% tariff cap.
• Vietnam, Indonesia, and the Philippines face rates near 19%–20%.
• Countries without a deal may face 25%–50% rates, especially if Phase One fails.

The Trump administration’s focus on reciprocal tariffs remains intact. However, the recent shift to a more dovish tone — likely aimed at securing a Xi-Trump summit — opens the door for compromise.

With both sides under pressure to deliver progress before Q4, a Phase One Plus agreement looks most feasible. It would provide immediate market relief and preserve Trump’s tariff leverage. However, if talks falter, the threat of full-scale tariff escalation remains potent, especially with election-year politics in play.

Investors should monitor the following:

• Statements from the Stockholm meeting.
• Any shifts in US tariff benchmarks above 20%.
• Movement on fentanyl and critical mineral discussions.
• Signals of summit timing between Trump and Xi.