Hopes for a sweeping US-China trade deal at this week’s Trump-Xi summit remain low, according to Fidelity's Global Macro Team. Expectations are for both sides to reaffirm the existing trade truce, with limited concrete outcomes and a likely extension of the 2025 Busan deal. We also explain how recent US court rulings complicate the policy backdrop and examine the wider implications for geopolitics, supply chains and the fiscal outlook.
Key points
- The expectations of a comprehensive US-China grand bargain this week are relatively low, given this is the first of several touch points between the two leaders this year.
- We expect both sides to reiterate their trade truce, while the US will likely recalibrate its tariff approach following the recent IEEPA ruling.
- Our base case is that the 2025 Busan deal is extended, with effective tariffs on China unchanged at around 25-30%.
The marquee macro event this week is the much-awaited Trump-Xi Summit on 13-15 May. Alongside the main summit, a few sideline negotiations will also take place, including Treasury Secretary Scott Bessent’s visit to Japan, and the US-China top trade negotiators’ meeting in Korea prior to the Summit.
The expectations of a comprehensive US-China grand bargain are fairly low, as this is the first of several touch points between the two leaders this year. There will be an APEC Summit in Shenzhen, the G20 meeting in Miami, and a potential reciprocal visit to the US by President Xi later this year as negotiations continue.
What do we expect?
Given the array of issues pending discussion, including trade, technology, supply chain controls, and chokepoints (as well as other geopolitical issues such as Taiwan and Iran), we expect the leader-to-leader conversation to be more high-level and broad-based. The preparatory work leading up to the Summit was limited, and we think the actual deliverables may also be modest and focus more on qualitative guidance rather than concrete policy measures.
Our read across the media and official communication indicates that the focus for the bilateral agenda will likely be dominated by geopolitical issues, such as to expedite the resolution in the Middle East and to facilitate the reopening of the Strait of Hormuz. Taiwan issues may also be a topic of discussion, although we have modest expectations of any breakthrough being achieved.
On trade and tariffs, we expect the key message to be reiteration of the trade truce, while the US may work to rebuild its tariff walls after the International Emergency Economic Powers Act (IEEPA) ruling and the upcoming expiry of Section 122. China will likely agree to expand its purchase of US agricultural and energy goods in exchange for some concessions, such as tariff alleviation. The discussions on tech goods exports and rare earth exports control may be more complicated, but we expect stability in the short-term while both countries continue to de-risk their respective supply chains.
Overall, our base case is that the 2025 Busan deal is extended and the current arrangements for technology and supply chain issues remain in place, with US effective tariffs on China unchanged at around 25-30%.
Summit scenarios
| Grand bargain | Busan deal extension (Base case) | Talk breakdown | |
|---|---|---|---|
| Trade and tariffs |
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| Technology and supply chain chokepoints |
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| Other geopolitical agendas |
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In the run-up to the meeting, we also had notable developments last week on the US tariff policy front.
What happened?
The Court of International Trade struck down the 10% global tariffs imposed under Section 122 in a 2-1 ruling last week. These tariffs were introduced as a softer replacement for the IEEPA tariffs, which were invalidated in February, marking yet another setback for the Trump administration’s tariff strategy.
The court ruled that the legal threshold for using Section 122 had not been met, specifically that there was no qualifying balance-of-payments crisis. This reinforces earlier judicial pushback against the use of emergency-style executive powers to impose broad tariffs.
Importantly, this was not a universal injunction. The ruling applies narrowly only to the plaintiffs, so the broader 10% tariffs remain in place for now.
What’s next?
The Trump administration has already appealed and based on precedent, is likely to secure a stay as the case moves through the higher courts. This would likely keep the tariffs in effect during the legal process.
That said, Section 122 measures are temporary. They are capped at 150 days unless extended by Congress and were already set to expire on July 24. The appeal process may well extend beyond that date. By then, we would expect the administration to rebuild tariff walls using more durable legal channels, particularly Section 301 and Section 232. The USTR has already started investigations into structural excess capacities across 16 economies, geared towards recreating the IEEPA tariffs that were struck down by courts. Some existing tariff deals are also being tested, with the US planning to raise auto tariffs on the EU again from 15% to 25%.
In essence, the ruling does not derail the end point of US trade policy. However, the journey to the destination is becoming more volatile and costly as the administration searches for a firmer legal foundation.
Economic implications: boon for the private sector is government’s bane
While the long-term strategy remains intact, the key near-term implication is that if the final ruling invalidates Section 122 tariffs, the government would likely need to refund duties collected under them, even if the tariffs have already expired. This would mirror the refund process now beginning for the invalidated IEEPA tariffs.
The 10% Section 122 tariffs add around 3 to 4 percentage points to the effective tariff rate and have raised roughly US$8bn per month. Over 150 days, that implies around US$40bn in potential refunds, on top of the estimated US$150bn to US$170bn linked to IEEPA tariffs.
For importers and small businesses, this would be a meaningful cash-flow boost, particularly as the economy absorbs the oil shock. Whether businesses pass this buffer to consumers by keeping final prices low is unsure but evidently this is a boost for the private sector. For the federal government, however, it worsens an already challenging fiscal picture.
Tariff collections have already fallen nearly 30% from their October peak to around US$25bn per month in April. The effective tariff rate has also declined to roughly 7%, from a peak tracking rate of around 12%. This is below both Congressional Budget Office (CBO) projections and our earlier estimates.
When combined with refund liabilities, the shortfall versus current projections could exceed US$250bn for the fiscal year, or roughly 0.8-0.9% of GDP. While supportive of growth, this revenue deterioration is unambiguously negative for the fiscal outlook. On our current estimates, the US deficit could widen to above 6.5% of GDP in FY26, compared with the ~5.8% baseline.
Does this matter for the Trump-Xi meeting?
The ruling may weaken the administration’s legal footing at the margin, but it is unlikely to change the political direction of US trade policy. For the Trump-Xi meeting this week, the bigger issue is whether both sides see value in a tactical de-escalation. The court ruling adds legal noise, but not yet a decisive shift in negotiating leverage.
