Deal or No Deal

According to Treasury Secretary Scott Bessent, the US is formally in bilateral trade talks with 17 countries. He noted this week that talks with Asian trading partners, especially India, are closest to fruition.

The messages from the other side are a bit ambiguous. South Korean officials, serving under an interim government, said they don’t expect a deal at least until June when elections are due. Japanese negotiators suggest they were working on an “interim” agreement, which will defer thorny issues like agriculture trade, currency valuations and joint tariffs on China. Taiwan’s negotiators have adopted a unique position, arguing that massive investments in the US by Taiwanese firms like TSMC should count towards the trade deficit calculations. Vietnam, which is facing a 46% “reciprocal tariff,” has simply said that the two sides “would soon reach a suitable solution.”

China is the elephant in the room looming over these discussions. Some reports suggest the Americans are pushing other countries to adopt higher tariffs on China and stop the transshipment of Chinese goods through their ports. The Chinese have warned that there will be consequences for any country that strikes a deal “at Beijing’s expense.” China is the largest or second largest trade partner of most countries in Asia. Asking these countries to choose between China or America is a nonstarter.

The state of play between the EU and the US is more complex. EU Trade Commissioner Maros Sefcovic held meetings with US Commerce Secretary Lutnick in March, but talks have stalled since “Liberation Day.” The meeting between Italian Prime Minister Meloni and Trump earlier this month broke the ice, but trade policy for the EU bloc is the domain of the European Commission. That means individual countries like Italy or Ireland can’t make a bilateral deal with the US—it all has to go through European Commission President Ursula von der Leyen. She met briefly with President Trump at Pope Francis’s funeral and said they would meet again “at the right moment” once a trade agreement is on the table. The Commission is expected to present a proposal to their US counterparts next week. The trade deal with the UK also seems to have been put on the back burner. UK negotiators set a self-imposed deadline of May 19, but it’s unclear if the Trump administration is on the same page.

In Canada, firms have ramped up efforts to become USMCA compliant to benefit from tariff exemptions. But the US administration is likely to push for a renegotiation of the agreement well ahead of the July 2026 timeframe. This will be one of the key priorities for the Carney government, and we expect to hear more on this in the coming weeks. President Trump and Prime Minister Carney spoke this week and agreed to meet in person “very soon.”

Finally, there’s China. The Trump administration still says China will capitulate, but this is unlikely. Both sides have exempted specific product categories from tariffs. But overall, China has taken an uncompromising stand. It’s crucial for President Xi to maintain a strong stance in negotiations. Moreover, his statesman-like approach is in total contrast to the style of the US president. He has appointed Li Chenggang as his new trade tsar and asked the US to name one of its own so that negotiations can be conducted. President Trump says he expects President Xi to give him a personal call.

But time is not on Trump’s side. According to the Wall Street Journal, CEOs of large retailers have warned Trump that price hikes are coming or there will be shortages. Equity markets have recovered from their recent lows but could easily roll over if there’s no deal in sight ahead of the July 8 deadline when the 90-day pause expires.

What Would a Deal Look Like?

While details are scant at this stage, we can glean that any trade deals will have the following features, in order of importance:

• Lower tariffs: Every country engaged in bilateral talks seems willing to lower their tariffs on imports from the US. Zero-for-zero would be the ideal outcome for markets, but some sectors like agriculture are likely to remain protected, perhaps to a lesser degree.
• Purchase of US weapons and energy: Several countries including Israel, Taiwan, Korea and India have offered to buy more advanced military hardware from the US. The India–US COMPACT (Catalyzing Opportunities for Military Partnership, Accelerated Commerce & Technology) initiative could be a template for other countries. This is an agreement for the long-term sale of defence hardware and co-production of munitions like Javelin anti-tank missiles. Similarly, energy-deficient Asia has a critical long-term need for seaborne LNG, which the US can provide.
• Lower non-tariff trade barriers: Food safety regulations, quota-based procurement systems, licenses and even sales/VAT taxes are being negotiated. Each country’s situation is different, and while there are red lines that each country will not cross, it’s likely that some of these protections will be lowered.
• Rules of origin: Different tariff rates invite trade arbitrage. Chinese goods and components are already rerouted to the US or assembled in countries like Taiwan, Mexico and Vietnam. Rules of origin have precedent in other trade deals like the USMCA and will likely be a key feature of the new trade deals.
• Lower digital services tax: The UK charges 2% tax on revenues generated from certain digital services provided by large tech companies. Rates vary across the euro area. For example, France charges 3%. Canada is set to implement a 3% tax on June 28 this year. This is a key irritant for US tech companies. UK trade negotiators have offered to lower this tax. But this is a contentious issue in the EU, particularly since taxation is the domain of national governments, not the EU Commission.
• Currency pact: Markets have speculated that Scott Bessent is pushing for a weaker dollar during trade talks. But Japan's top currency diplomat, Atsushi Mimura, denied these claims. Taiwan central bank governor Yang Chin-Long also denied that the US asked Taiwan to increase the value of its currency.
• Investment in the US: President Trump has touted Japan’s commitment to invest in Alaska-based LNG projects and TSMC’s expansion of its Arizona-based fabrication plants as his personal achievements. However, it’s unclear if the Trump administration will agree to bring investment into the scope of trade deals.
• Tariffs against China: Some news media have reported that the US wants its trade partners to adopt a common tariff rate on Chinese goods. As noted above, it’s very unlikely that other countries will sign on to this.

So Will Tariffs Come Down?

The formula behind “reciprocal tariffs” is based on the bilateral trade deficit. Even with lower external trade barriers, the US will continue to run a large deficit with Asia, as the deficit is the result of different savings and investment rates.

The formula is arbitrary, however, and the US could easily abandon it for countries that sign a trade deal. While tariffs may not be removed entirely, they will certainly be lower. The direction is towards de-escalation, though the timeline is uncertain.

Even with lower tariffs, businesses will have to navigate a patchwork of bilateral agreements to manage internationally dispersed supply chains. This will mean a higher cost of trade—and a bull market for customs lawyers!