Will the U.S. enact a free trade agreement with China?
The probability of Trump enacting a new free trade agreement with China before January 20, 2029 is extremely low, as current policy focuses on temporary truces and tariff reductions rather than a formal FTA, and the administration views China as non-compliant with existing deals.
Analysis
Current developments indicate the Trump administration is prioritizing the extension of a temporary trade truce and negotiating tariff-reduction frameworks instead of establishing a comprehensive free trade agreement. Recent agreements, such as the May 2025 deal and the November 2025 Kuala Lumpur arrangement, are explicitly defined as temporary measures to de-escalate tensions, with no breakthrough on major structural issues like rare earths or forced labor. The administration has publicly concluded that China is cheating on existing trade terms, leading officials to avoid signing new binding agreements that could be easily violated.
The administration's broader trade strategy rejects traditional comprehensive free trade agreements in favor of bilateral deals and reciprocal tariffs, a pattern evident in their handling of USMCA and recent deals with the EU and Japan which are not formal FTAs. Persistent friction points, including unresolved export control disputes over rare earths and the elimination of the de minimis entry for Chinese goods, create significant structural barriers to a formal pact.
The market currently prices the 'Yes' outcome at 24%, which appears to overestimate the likelihood of a formal agreement by potentially conflating tariff reductions with a free trade pact. Given the administration's explicit focus on truces over FTAs and its skepticism regarding China's compliance, the market is likely mispricing this event, and the true probability is significantly lower than the current price suggests.
Arguments
For
- Both sides have demonstrated willingness to reduce tariffs and extend truces to maintain economic stability
- China has agreed to suspend export controls on rare earth minerals as part of recent deals
- The administration seeks to conclude trade deals by August 2026, creating a potential window for negotiation
Against
- Recent agreements are explicitly temporary measures, not comprehensive free trade agreements
- The administration views China as non-compliant and avoids new binding agreements
- Significant structural barriers like rare earth disputes and de minimis elimination remain unresolved
- The administration's trade strategy explicitly rejects traditional comprehensive FTAs in favor of bilateral tariff deals
Key drivers
- Administration focus on temporary trade truces rather than formal FTAs
- Public conclusion that China is cheating on existing trade deals
- Strategic shift toward bilateral deals and reciprocal tariffs over comprehensive agreements
- Unresolved structural barriers regarding rare earths and export controls
Risk factors
- Unexpected diplomatic breakthrough resolving rare earth and forced labor disputes
- Significant deterioration in relations forcing a desperate comprehensive deal
- Misinterpretation of tariff reduction frameworks as a formal free trade agreement
- Pressure from US business sectors demanding full market access normalization
Scenarios
Best case
A sudden diplomatic breakthrough resolves all structural barriers including rare earths and forced labor, leading Trump to sign a formal FTA to secure a major economic legacy before his term ends.
Most likely
The US and China continue to extend the temporary trade truce and negotiate incremental tariff reductions on specific product categories, but no formal free trade agreement is enacted before January 20, 2029.
Worst case
Relations deteriorate sharply due to China's non-compliance, leading to the collapse of the current truce and the imposition of new, higher Section 301 tariffs, making any agreement impossible.
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