Trade between the world\u2019s two largest economies\u2014a link that defined the world economy<\/a> for two decades\u2014is on life support<\/a>. U.S. tariffs on China now stand at 145%<\/a>; China\u2019s tariffs on the U.S. now stand at 125%<\/a>. And that\u2019s just the baseline, not including additional tariffs on specific goods like steel<\/a> (in the case of the U.S.) or agricultural products<\/a> (in the case of China).<\/p>\n\n\n\n \u201cThe tariff rates are now so high as to be prohibitive of most direct bilateral trade,\u201d says Yeling Tan, a professor of public policy at Oxford University.<\/p>\n\n\n\n Even Beijing recognizes that, with tariffs this high, U.S. goods don\u2019t have a chance. \u201cGiven that American goods are no longer marketable in China under the current tariff rates, if the U.S. further raises tariffs on Chinese exports, China will disregard such measures,\u201d the country\u2019s finance ministry said in a statement<\/a> announcing its new 125% tariffs.<\/p>\n\n\n\n The tariffs are rapidly unwinding a close economic relationship: Chinese manufacturers built products, from lawn chairs and Christmas ornaments all the way to smartphones<\/a> and semiconductors<\/a>, and U.S. consumers and businesses bought them. <\/p>\n\n\n\n Both Washington and Beijing have signaled they\u2019re open to negotiations, even if there are no public signs that they\u2019re talking. Each thinks the other need to move first; on Friday morning, CNN<\/em> reported<\/a> that the U.S., rather than requesting a phone call with Xi, demanded China should instead request a phone call with Trump. <\/p>\n\n\n\n The U.S. may have realized its steep tariffs on China are unsustainable. Late Friday, the White House exempted<\/a> electronic goods like smartphones, laptops and computer processors from U.S. tariffs, including some imposed on China.<\/p>\n\n\n\n The U.S. imported $438 billion worth of goods from China in 2024, compared to $143.5 billion worth of China-bound exports, according to data from the U.S. Census Bureau<\/a>.<\/p>\n\n\n\n Trump\u2019s 145% tariff on Chinese imports is just the baseline. There\u2019s also 25% tariffs<\/a> on steel and aluminum imports, and the looming threat<\/a> of a 25% tariff on any country that uses Venezuelan oil, a set that includes China. And then there\u2019s all the earlier tariffs<\/a> slapped by previous administrations: on Chinese home appliances, solar panels, and EVs. <\/p>\n\n\n\n Beijing, too, has slapped additional tariffs<\/a> on U.S. goods, like heavy machinery, oil, gas, and agricultural products. It\u2019s also imposed a range of other non-tariff barriers; for example, on Friday, Chinese officials said they will reduce the number of U.S. films<\/a> approved for screening in China.<\/p>\n\n\n\n If the current situation persists\u2014145% tariffs on China, 10% on everyone else\u2014both Western and Chinese companies will likely accelerate their drive to set up manufacturing hubs outside of China in countries like Vietnam, India, and Mexico. <\/p>\n\n\n\n The problem is that Trump\u2019s trade hawks want to unwind the \u201cChina plus one<\/a>\u201d strategy. Trump\u2019s now-paused \u201cLiberation Day\u201d tariffs slapped high tariffs<\/a> on countries like Vietnam and Cambodia that attracted Chinese investment. Officials like Trump trade advisor Peter Navarro want governments<\/a> to target Chinese trade as a condition of reducing tariffs. <\/p>\n\n\n\n Vietnam is offering to crack down on Chinese goods traveling through its territory as part of tariff negotiations with the U.S, Reuters<\/em> reports<\/a> citing a government document and an unnamed source. <\/p>\n\n\n\n Then there\u2019s the risk that Trump can\u2019t reach a deal with trading partners, and \u201cLiberation Day\u201d tariffs return. \u201cFactories that have already shifted to connector countries will likely ramp up production to take advantage of the pause, but there might be less new investment for fear of tariffs going up on the \u2018plus one\u2019 countries,\u201d Tan suggests. <\/p>\n\n\n\n China’s steep tariffs also encourage U.S. companies that export to the world’s second-largest economy to consider their own supply chain diversification. On Friday, the China Semiconductor Industry Association affirmed <\/a>that companies did not need to pay tariffs on U.S. chips and chipmaking equipment so long as they were made in a third location.<\/p>\n\n\n\n Trump officials argue China is far more vulnerable to a trade war than the U.S., arguing China\u2019s economy relies on the U.S. consumer. If the U.S. closes its doors, China will have no one to sell to, and the economy will collapse.<\/p>\n\n\n\n The White House also now insists Trump\u2019s tariff pause was a deliberate strategy<\/a> to isolate China while opening negotiations to the rest of the world. \u201cYou might even say he goaded China into a bad position,\u201d Treasury Secretary Scott Bessent said Wednesday to reporters; he\u2019s also suggested the U.S. and its allies can work together<\/a> to pressure China on trade. <\/p>\n\n\n\n In truth, China relies less on the U.S. now than it did during the first Trump administration. Less than 15% of China\u2019s exports go directly to the U.S., down from around 19% in 2018. Beijing has also cultivated alternate sources for what it imports from the U.S., such as Brazil and Australia for agricultural products. Australia’s beef exports to China over the past two months are already up 40%<\/a> year-on-year. <\/p>\n\n\n\n \u201cChina has options,\u201d Brown says, noting China\u2019s largest trading partner is now Southeast Asia. \u201cIt is not beholden to the U.S. in ways it once was.\u201d<\/p>\n\n\n\n To be clear, economists do expect China will take an economic hit from Trump tariffs, with banks like Citi<\/a> and Goldman Sachs<\/a> cutting their 2025 GDP forecasts for the world\u2019s second-largest economy. <\/p>\n\n\n\n Yet Beijing is taking a bold stance in its fight with the U.S., with spokespeople saying China will \u201cfight to the end<\/a>\u201d if the U.S. persists in a trade war.<\/p>\n\n\n\n Posturing aside, Beijing could be in a more secure position than the U.S. Trump\u2019s trade war is already crashing stock markets<\/a>, hiking bond yields<\/a>, and sinking the U.S. dollar<\/a>\u2014and that\u2019s before the inflationary effects<\/a> of the tariffs have hit in earnest. <\/p>\n\n\n\n Dexter Roberts, nonresident senior fellow at the Atlantic Council\u2019s Global China Hub, explains that \u201cpeople in China really feel like they can \u2018eat bitterness,\u2019 referring to a Chinese phrase that means to persevere through hardship. \u201cThat plays into their tough stance. I think they believe that, ultimately, if anyone\u2019s gonna blink, it\u2019ll be the U.S.\u201d<\/p>\n\n\n\n Roberts adds that, at least from Beijing\u2019s perspective, the first trade war never really ended. The Biden administration kept Trump\u2019s earlier tariffs on Chinese goods in place. Biden also imposed his own tariffs, like a 100% tariff on Chinese EVs, and\u2014perhaps more annoyingly to Beijing\u2014targeted China\u2019s tech sector with measures like exports bans of U.S. chip<\/a>.<\/p>\n\n\n\n That means Beijing has been on a \u201ctrade war footing\u201d since 2016. China has built trade relationships with other markets, found new sources to replace U.S. commodities, and invested in its own technology companies. \u201cChina has been preparing for a world with less access to the U.S. market for a number of years now,\u201d Tan says. <\/p>\n\n\n\n And a trade war, while painful, might accelerate some of Beijing\u2019s other priorities. \u201cIn an odd way, it sort of fits in with Beijing\u2019s long term goals of transitioning their economy away from its reliance on the West and on exports,\u201d Roberts says. <\/p>\n\n\n\n Still, China can\u2019t easily shift its export markets to other regions like Europe, the Middle East, or Southeast Asia. For one, these regions\u2014even developed markets like Europe\u2014really don\u2019t have the same consumption potential as Americans. Then there\u2019s the risk of blowback.<\/a> \u201cThese countries are wary of facing a surge of Chinese imports diverted from the U.S. market,\u201d Tan warns. <\/p>\n\n\n\n Economists largely agree a full decoupling between the U.S. and China would be extremely painful for both countries. Tariffs over 100% are \u201cabsolutely punitive,\u201d says Iain Osgood, an international relations professor at the University of Michigan. \u201cThere’s a lot of businesses in the U.S. that maybe couldn’t survive that at all. Even big retailers are just going to struggle.”<\/p>\n\n\n\n That could mean that, in the end, the two sides will try to find some way to scale things back\u2014or the U.S. might unilaterally roll back some of its tariffs as the pain starts to hit. Even then, tariffs aren\u2019t likely to be pulled back to the pre-2024 level, let alone the pre-2018 level. Osgood thinks tariffs could be brought back to a relatively more \u201csensible\u201d level, perhaps between 15% and 30%. <\/p>\n\n\n\n Yet the rapid escalation of the U.S.-China trade war raises an uncomfortable question: What does the world look like when its two largest economies refuse to deal with each other?<\/p>\n\n\n\n A world where Beijing and Washington can\u2019t de-escalate could be dangerous. Business relationships due to the presence of companies and foreign nationals really do have a \u201ctempering influence,\u201d Roberts says, even if the idea is sometimes overplayed. \u201cIf you are increasingly isolated, and you don\u2019t have business relations\u2026the likelihood of conflict definitely goes up.\u201d<\/p>\n\n\n\n \u201cAt the end of the day, the fate of the two giant economies will remain intertwined. A collapse of direct bilateral trade will hurt businesses and consumers in both countries,\u201d Tan says. <\/p>\n\n\n\n \u201cIt will be a much more volatile world.\u201d<\/p>\nTariffs and trade<\/strong><\/h2>\n\n\n\n
China holds out<\/strong><\/h2>\n\n\n\n
Deal or no deal?<\/strong><\/h2>\n\n\n\n