Why in news?

President Donald Trump temporarily suspended most tariffs for 90 days amid a global market crisis, while sharply increasing tariffs on Chinese imports to 125%. This move appeared to shift the broader trade conflict into a direct U.S.–China standoff.

The countries included in the tariff pause will now face a reduced 10% tariff, as the U.S. plans individual negotiations with each nation.

What’s in Today’s Article?

• A Brewing US-China Trade War
• US-China Trade Snapshot
• Escalating Tariff War
• Leverage in the Trade War – A Comparison
• Problems with tariffs

A Brewing US-China Trade War

• A full-scale trade conflict is looming as President Trump threatens over 100% tariffs on Chinese goods, effectively creating a trade embargo.
• This move could spark a dangerous decoupling between the world's largest economies.
• The Critical Questions
  • Will these measures hurt China more than the US?
  • While Trump is open to negotiations with other countries, the long-term impact of this policy gamble is still uncertain.

US-China Trade Snapshot

• Total trade between the US and China stood at $582.4 billion in 2024.
  • US exports to China: $143.5 billion (↓2.9% from 2023)
  • US imports from China: $438.9 billion (↑2.8% from 2023)
• US experiences a trade deficit of approx. $295 billion, around 1% of US GDP, contrary to Trump’s exaggerated $1 trillion claim.

Escalating Tariff War

• Both countries remain unwilling to back down. China vows to “fight to the end” and has imposed retaliatory tariffs.
• Immediate Consequences of Tariffs
  • High costs could make imports from China prohibitively expensive.
  • The US may struggle due to dependence on Chinese goods, including:
    • Critical drug ingredients
    • Rare earth elements (vital for defense tech)
    • High-end consumer products
  • Washington might be forced to find alternative suppliers or reduce consumption.
• US Strategy: Delay with China, Engage the Region
  • The US is prioritizing talks with Japan, South Korea, and others in China’s neighborhood.
  • A negotiation with Beijing may come later, if at all.
• Beyond Tariffs: Core Trade Concerns
  • The main US grievances extend beyond tariffs:
    • Currency manipulation: China keeps the Renminbi undervalued to boost exports.
    • Non-tariff barriers: Restrictions on foreign firms in sectors like consumer banking and high-end manufacturing.

Leverage in the Trade War – A Comparison

• The US imports far more from China than vice versa, giving it nominal leverage.
• Meanwhile, China’s economy still depends heavily on exports due to weak domestic consumption.
• China’s Strategic Advantages
  • Political Stability - Unlike Trump, Xi Jinping faces no elections or significant internal opposition.
  • Economic Planning - China is rolling out a stimulus package combining fiscal and monetary measures.
  • Long-Term Strategy - Beijing can continue fiscal stimulus longer and strengthen domestic consumption, which could absorb surplus if exports dip.
• US Weaknesses and Political Pressure
  • Consumer Impact - Americans rely on Chinese imports for everyday essentials – clothing, shoes, electronics. Tariff costs are passed on to consumers, especially affecting low-income groups.
  • Limited Fiscal Tools - Washington has few options left other than extending Trump-era corporate tax cuts.
• China’s Internal Narrative and Xi’s Image
  • The Chinese view the trade war as US bullying, and Xi cannot afford to appear weak.
  • Domestic rhetoric and nationalism make it harder for China to back down unless the US makes a move first.

Problems with tariffs

• Tariffs: Difficult to Roll Back
  • Tariffs imposed by Trump during his first term remained under Biden and were even increased.
  • Once implemented, tariffs tend to become permanent, making them hard to dismantle politically.
• Little Economic Benefit to the US
  • A major academic study found that Trump’s tariffs did not significantly impact employment.
  • Retaliatory tariffs by China and others hurt American farmers, with job losses in agriculture.
• Global Market Implications
  • A prolonged trade war could push China to redirect exports to new markets.
  • There’s a high chance that China will dump surplus goods in the EU and India, affecting local industries there.