What the US-China tariff rollback means for the American economy

If you thought the U.S. economy was breaking up with China, well, think again. “Neither side wants to decouple," Treasury Secretary Scott Bessent said Monday in announcing the temporary agreement that dramatically lowered tariffs. The U.S., he said, was seeking “a long-lasting and durable trade deal" with China.

The reset steers the U.S. economy back on a more familiar path as the major consumer of goods, and lowers risk of recession, economists say. The new agreement also temporarily abandons an attempt to use tariff shock therapy to restore America’s status as a manufacturing powerhouse.

The official tariff rate on Chinese goods was raised to 145% during April’s tit-for-tat trade fight. The 90-day reprieve takes the tariffs importers will effectively pay to about 35%, according to UBS  economists’ calculations. That removes the threat that trade between the two countries could grind to a virtual standstill, massively driving up costs for import-dependent businesses and, in the worst case, driving them out of business.

Coming on the heels of last week’s trade agreement with the U.K., the underlying message is that President Trump aims to deescalate a punishing trade war that was putting the U.S. economy at risk, said former Bank of America chief economist Ethan Harris.

“These two deals are legitimately good news," he said.

Economists polled by The Wall Street Journal in early April had upped the chances of recession in the next 12 months to 45%, largely on worries over the brutal impacts of an all-out trade war with China. Many economists had assumed that the tariffs on Chinese goods were simply too high for the U.S. economy to weather, and that tariffs would come down as a result. But the outside chance that wouldn’t happen soon enough to avoid severe damage had them worried.

On Monday, after that threat eased, Oxford Economics cut its recession probability to 35% from better-than-even odds previously. Oxford also increased its full-year GDP forecast by 0.1 percentage point to 1.3% in 2025, saying tariffs, supply-chain stress and uncertainty will all lead to the economy growing below its potential.

“Good things are in the pipeline for the economy next year from deregulation, fiscal stimulus, and less policy uncertainty," Oxford chief economist Ryan Sweet said in a research note.

UBS said lowering the China tariffs could imply around 0.4 percentage point additional growth this year.

Nationwide chief economist Kathy Bostjancic said she now thinks the U.S. will cap the year with modest growth thanks to the trade-fight deescalation, up from her earlier prediction of economic stagnation.

Even when Trump’s tariff spat with China escalated in early April, Pantheon Macroeconomics U.S. economist Samuel Toombs reckoned the economy would probably be able to weather through it, and put the odds of a recession over the next year at about 1 in 3. Now he thinks it is more like 1 in 5.

Still, he estimates that tariffs could end up adding about 1 percentage point to the Federal Reserve’s favored measure of inflation this year, excluding food and energy items, making the central bank more reluctant to cut interest rates in the face of an economy he still expects to slow. He recently pushed his timing of the next rate cut to the Fed’s July meeting from its meeting in June.

The U.S. economy still faces headwinds. The eventual tariff rate against China and other countries looks as if it will still be substantially higher than it was before Trump took office. That could cut into companies’ profit margins while pushing up the prices consumers pay for imported goods.

Even the newly negotiated, lower tariff on imports from China “is a massive adjustment," said Michael Wieder, co-founder of Lalo, which makes baby products and imports 90% of its stock from China. “No business is out of the woods yet because of this cost."

“This pause is definitely helpful in making sure we can bring goods over—but it impacts profitability," he said.

Continued uncertainty on tariffs could make businesses reluctant to invest in new plants and equipment, or to add workers. Economists are also concerned the U.S. faces risks from other recent White House moves, including the immigration clampdown, government funding cuts and layoffs and the resumption of student debt payments.

Thus far, the tariffs’ main economic impact has been a surge in imports by businesses seeking to get ahead of expected price increases. In the first quarter, U.S. gross domestic product contracted at a 0.3% annual rate.

“Trade policies are evolving and are likely to continue shifting, even as recently as this morning," Fed governor Adriana Kugler said in a speech Monday. “Still, they appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels, and the uncertainty associated with these tariffs has already generated effects on the economy through front-loading, sentiment, and expectations."

Some economists also said lower tariffs on China is likely to mean less reshoring of manufacturing jobs to the U.S., and lower tax revenue from tariffs.

“It suggests that both sides are feeling economic pain from tariffs and that a climbdown was mutually beneficial," ING chief international economist James Knightley said in a note to clients.

Write to Harriet Torry at harriet.torry@wsj.com and Justin Lahart at Justin.Lahart@wsj.com