The U.S. and China are set for icebreaker trade talks. Here’s what to expect

The stakes are high for the U.S. and China’s icebreaker trade talks this weekend as the outcome could reset the future of economic relations between the world’s two largest economies.

U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer are scheduled to meet with Chinese lead economic representative and Vice Premier He Lifeng in Switzerland on Saturday.

Analysts say a comprehensive deal is unlikely to come out from a single meeting, however, they are hopeful that a partial rollback of the sky-high tariffs will be on the table.

Both sides have been looking for a pathway to de-escalation, as the economic toll of tariffs have become increasingly difficult to ignore.

The U.S. economy contracted 0.3% in the first quarter this year amid mounting concerns that the economy will slip into a recession with higher inflation and unemployment. And while the Chinese economy grew a better-than-expected 5.4% in the first three months this year, major banks have slashed their full-year growth forecasts for the country to just around 4% — below the government’s target of around 5%.

Trump still might have more to lose, as the Chinese political system grants the country’s leadership a “higher pain threshold” and a “greater degree of control over macro policy support in the short term,” said Dan Wang, China director at political risk consultancy firm Eurasia Group.

Vice Premier He’s main mission will simply be seeking clarity on what Trump wants and assessing whether the U.S. intends to hurt China’s interests, Wang said.

In what appeared to be a confidence boost ahead of the meeting, China released trade data that showed its exports surged 8.1% year on year in April on the back of a jump in shipments to Southeast Asian nations, shrugging off the 21% drop in outbound goods to the U.S.

And on Friday, China’s Commerce Ministry launched a “special operation” to combat the smuggling of strategic minerals, including gallium, germanium, antimony, tungsten and medium and heavy rare earths.

Without naming specific entities, the ministry framed the operation as “a crackdown on overseas entities that had colluded with domestic illegal personnel” to bypass the export control rules it had ratcheted up earlier this year.

“It serves as a useful reminder of the leverage China possesses as the negotiations are set to get underway in Geneva,” said Stephen Olson, a visiting senior fellow at the Institute of Southeast Asian Studies and a former U.S. trade negotiator.

China is the world’s largest producer of several critical minerals crucial to making semiconductors, defense equipment and clean energy. As part of the retaliatory measures against Trump’s tariffs announced last month, China has increased export controls of the metals.

“The sharpest arrow that China has in its quiver would be to restrict U.S. access to critical minerals that can’t readily be sourced elsewhere,” Olson said.

High on Washington’s agenda is securing the removal of China’s export restrictions on rare earths used to make magnets, Bloomberg reported Friday, citing people familiar with the matter.

Another potential pressure point for Trump is China’s vast holdings of U.S. Treasuries, which could pose risks to financial market stability, said Wu Xinbo, director of the Center for American Studies at Fudan University.

Beijing is likely to further trim its nearly $800-billion stockpile of U.S. government debt if it wants to turn up the heat on Trump, said Wu.

Despite market speculation that China might unload its Treasury holdings to hit back at tariffs, a significant sell-off could also backfire. Such a move might strengthen the yuan, undermining China’s export competitiveness, and lead to substantial losses on its dollar-denominated assets.

A partial reversal of tariffs is one of the most likely outcomes of the meeting, according to analysts who remain split on the extent of any adjustments and the pace of de-escalation.

Robin Xing, chief China economist at Morgan Stanley, projects that effective U.S. tariff rates on Chinese goods could be lowered from the current 107% to a terminal rate of 45% by year-end.

Similarly, Tianchen Xu, senior economist at Economist Intelligence Unit, expects the U.S. and China to scale back their mutual weighted average tariff rates of around 50% in the near term.

That’s still elevated compared to the tariff rates of 10.9% on Chinese goods and 16% that China had imposed on American products before Trump returned to office, according to Xu’s estimates.

In recent days, senior U.S. officials have sounded an optimistic tone over the upcoming talks, saying they could ease the trade barriers that Trump raised last month.

“De-escalating, bringing those rates down to where they could, where they should be, I think it’s Scott Bessent’s goal,” Secretary of Commerce Howard Lutnick told CNBC Friday. “And that’s what the president hopes is a good outcome, is a de-escalating world where we go back to each other and then we work on a big deal together.”

During a White House press conference on the signing of a trade deal with Britain, Trump said of the Switzerland meeting, “I think we’re going to have a good weekend with China.”

The U.S. president then said in a post on social media platform Truth Social on Friday, that “80% Tariff on China seems right! Up to Scott B.”

Chinese officials, on the other hand, have struck a firmer tone, reiterating the country’s demand for the Trump administration to cancel all unilateral tariffs on China.

A spokesperson for the Commerce Ministry said Wednesday that “China will not sacrifice principle to reach [a] deal with U.S.,” while repeating that Washington must “rectify its wrongdoing” by removing all unilateral tariffs.

During the upcoming talks, China could still offer some “sweeteners,” such as promises to step up its crackdown on fentanyl flows, said Xu, which could lead to a near-term removal of the 20% fentanyl-related tariffs Trump imposed.

Both sides have sought to temper the economic pain from the exorbitant tariffs, exempting the levies on a range of goods, including consumer electronics, semiconductors and auto parts.

China reportedly exempted import duties on select pharmaceuticals, microchips and aircraft engines from the United States. It has also created a “whitelist” of U.S. goods that will be exempted from extra levies, according to Reuters.

However, attempts to achieve a more comprehensive deal, similar to the Phase One deal signed during Trump’s first term, will likely be “lengthy and unproductive,” said Xu, as both sides have shown little appetite for compromise over respective strategic priorities and economic red lines.

“We severely doubt the possibility of the U.S. and China reaching something close to the Phase One trade agreement reached in 2020—a model that has been discredited in the eyes of senior US officials,” Xu added.

China had alleged it fulfilled the terms under the Phase One trade deal that Trump struck with Beijing during his first presidential term, while claiming the U.S. violated certain mandates in the agreement.

The deal required China to boost purchases of U.S. goods by $200 billion over a two-year period, but Beijing did not meet the targets as the Covid-19 pandemic hit.