A tentative agreement between the United States and China may be a step back from the worst-case scenario of a complete collapse of trade between the world's two largest economies, but it creates more problems than it solves.

President Donald Trump has hailed the deal, which is still awaiting final approval from both sides, as a "great deal" that will benefit both countries.

While not all the details are known, what has been revealed suggests a deal that will likely hurt both economies and fail to address some pressing issues, such as China's dominance of the rare earths supply chain.

The United States would impose tariffs of 55 percent on imports from China, while China could impose tariffs of 10 percent on its purchases from the United States.

That would still be a sharp increase from the 25 percent tariffs on Chinese imports that were in effect when Trump returned to the White House in late January.

Tariffs at that level would likely be high enough to cause trade to shrink while also raising inflation in the United States and lowering economic growth in both countries.

If Beijing were to stick with 10% tariffs on U.S. energy imports, they would be high enough to ensure that virtually no U.S. crude oil, coal or liquefied natural gas would enter China, eliminating one of the few products that China can buy in large quantities from the United States.

It's also questionable whether the tariffs would be enough to encourage more manufacturing in the United States, or whether they would simply cause some production to shift from China to countries with lower tariffs.

Trump did specifically mention rare earths when discussing the trade deal, saying China would provide the metals found in a wide range of electronics and vehicles "up front."

But the deal does little to address the underlying problems with rare earths, magnets and other refined metals such as lithium and cobalt, which are dominated by Chinese supply chains.

At best, this week's deal is a delaying settlement, insofar as it averts an immediate manufacturing crisis in the United States but leaves open the possibility that Beijing could once again threaten supply if problems arise between the two sides in the future.

China controls 85% of global rare earth refining, a situation that has so far largely benefited Western companies because they can obtain the metals at prices far lower than they would have to pay if they tried to mine and process the elements themselves. (alg)

Source: Reuters