Trump-Xi call on tariffs and trade leaves plenty of problems

Investors shouldn’t get their hopes up about the talks President Donald Trump and Chinese leader Xi Jinping held on Thursday.

The two spoke by phone to discuss rare earths and trade, defusing a tit-for-tat that had put into question the fragile truce reached in mid May. Having the world’s two largest economies on talking terms, with both leaders inviting the other for a visit and sending top officials to meet their counterparts again on trade, was a near-term positive.

It reduces the risk that the levies could return to the trade-paralyzing levels seen before the May agreement. But geopolitical strategists saw little that meaningfully reduces the uncertainty hanging over businesses.

Markets rose after the call on the notion that Trump would back down on the tariffs when they become too disruptive, but ended lower.

“From an investor perspective in the short-term because there’s the view he will flip on his worst impulses, but it doesn’t work for the economy or businesses and ultimately that uncertainty will lead to a slowdown, which in theory will be reflected back into the market,” said Stephen Myrow, managing director at the independent research firm Beacon Policy Advisors. He previously held various roles in the State and Defense Departments.

The call was aimed at breaking an impasse sparked by differing interpretations of what the two sides agreed on in the May talks in Geneva. The U.S. says China hadn’t lifted restrictions on the sale of rare-earth minerals, including magnets crucial for automotive and industrial use.

And Beijing complained that the U.S. violated the deal with further restrictions on access to artificial-intelligence chip technology and electronic design automation software. The State Department’s plans to revoke Chinese students’ visas, announced after the truce, added to China’s concern.

The way the two governments presented Thursday’s discussion added to skepticism any real progress was made. “China has been seriously and earnestly executing the agreement,” said a readout on the call by Beijing, which stressed that Trump had initiated the conversation. “The U.S. side should acknowledge the progress already made, and remove the negative measures taken against China.”

Trump, meanwhile, described the call and his relationship with Xi positively. He said Chinese students were welcome in the U.S.— a week after the State Department said it would look to “aggressively” revoke their visas—and noted that issues around critical minerals were complicated.

“I think we are in very good shape with China and the trade deal. We were straightening out some of the points related to rare earths and magnets,” he told reporters during a meeting with German Chancellor Friedrich Merz. “We have the deal and just want to make sure everyone understands what the deal is.”

But executing the agreement isn’t easy. “The off-ramp on tariffs was much easier than for export controls.” said Myrow. “It’s a lot harder to release the chips they want versus reducing tariffs.”

Support for restricting China’s access to technology is much broader than for tariffs, he pointed out. “These strategic supply chain choke points are the crux of the issue and we basically have a gun pointed at each other’s heads.” Myrow said. “The mistake many in the Trump administration make is they think they have China over the barrel economically. While they have a lot of economic leverage, they underestimate China’s ability to weather political pain.”

Most analysts expect export controls to stay in focus. Michael Hirson, head of China research at 22V Research, said he is watching whether the U.S. gives China any assurances about future U.S. export restrictions. Many in U.S. national security circles are calling for increased controls to shore up the U.S.’s position in artificial intelligence competition heats up from the likes of China’s DeepSeek and Huawei.

Investors and companies now looking to the next meeting between high-level U.S. officials and their counterparts may want to lower their expectations. “The divide is wide and perceptions are deeply entrenched. This is going to take a while,” said Everett Eissenstat, a partner at Squire Patton Boggs who served as deputy director in the National Economic Council during the first Trump term.

Write to Reshma Kapadia at reshma.kapadia@barrons.com