Trade War: What are the implications of escalating the trade conflict between Washington and Beijing?

Since President Donald Trump took office in January 2025, the world has witnessed an unprecedented escalation in the trade war between the United States and China, transforming it into one of the most prominent and severe economic disputes of the 21st century. The conflict began to evolve on April 2, 2025, known as “Liberation Day,” culminating on April 9, 2025, when Washington imposed cumulative tariffs of up to 145% on a long list of Chinese imports. In response, Beijing quickly raised its cumulative tariffs on American goods to 125% on April 11, expanded its list of unreliable entities, and tightened restrictions on the export of strategic materials, such as rare earth elements, signaling the beginning of a new phase characterized by unprecedented boldness in the economic separation between the world’s largest economies.

Trade Escalation

U.S.-China trade relations are experiencing one of their worst crises ever due to the continual surge in reciprocal tariffs on imports from both sides. The major aspects of this escalation can be summarized as follows:

Continued Trade Imbalance Favoring China: President Trump and his supporters insist that this trade war serves as a tool to restore balance in global trade, which they blame for the loss of millions of jobs in the American manufacturing sector over the past decades. They assert that the current troubles, while seemingly temporary, are starting to yield positive results in employment rates and increased investment flows. Furthermore, Trump has long contended that the U.S. economy suffers due to the trade imbalance with China, which heavily favors the latter. In 2024, U.S. exports to China amounted to 143.5billion,whileimportsfromChinareached143.5billion,whileimportsfromChinareached439 billion, resulting in a substantial trade deficit of $295.5 billion, according to U.S. Census Bureau data. However, merely examining the bilateral trade balance is insufficient to predict the “winning” side in this conflict. The upper hand typically belongs to the country with a surplus, as in China’s case, which sacrifices revenue that is inherently replaceable compared to the U.S., which loses goods and services not produced domestically or produced at high costs. Since money is a flexible asset, its loss can be compensated by reducing spending, seeking new markets, or sharing internal burdens, or even by tapping into national savings.

Washington Imposing High Tariffs: The latest round of the trade war, which intensified again in 2025, saw a strong return to punitive tariff policies; President Trump announced a new tariff package that included an unprecedented increase in tariffs, with an average rate imposed on Chinese goods rising to around 145%, as the White House indicated on April 9, 2025. According to the U.S. administration, the goal of this move was to pressure Chinese President Xi Jinping to return to the negotiation table, despite China’s clear announcement that it “will fight to the end.” The American measures included strategic categories of imports, such as electronics, machinery, and components for green energy. Trump bases his strategy on his belief that China is experiencing a surplus crisis and is trying in every possible way to revive its export-dependent economy at the expense of the U.S. economy.

Beijing’s Response with Similar Tariffs: China’s response was neither less severe nor unexpected; it came swiftly and in line with many analysts’ predictions. China announced tariffs on a range of strategic American goods, including agricultural products, industrial machinery, and energy goods, reaching 125% on April 11, 2025. Additionally, the Chinese Ministry of Commerce included new American companies on its “unreliable entities list” and imposed strict restrictions on the export of strategic minerals such as gallium and germanium, which are key components in semiconductor manufacturing and advanced defense technologies. China’s response also targeted politically sensitive American sectors, including soybean exports, liquefied natural gas, and automobiles, indicating a clear effort to pressure political power centers within the United States. Moreover, Beijing resorted to regulatory tools, such as launching anti-monopoly investigations and reviewing licenses for American companies operating in China, while adding six new American companies to the unreliable entities list and expanding the export control list to include twelve new U.S. entities. Furthermore, China possesses other unannounced tools that seem to be gradually in motion; on April 8, 2025, notable national bloggers published matching lists of potential responses. Although the Chinese foreign ministry refrained from commenting on these reports, it did not deny them, greatly enhancing their credibility. Suggested measures include halting cooperation with Washington on fentanyl issues, investigating profits from American companies’ intellectual property rights in China, and imposing a ban on Hollywood films’ entry into the Chinese market.

Escalation of Mutual Rhetoric on Tariffs: The current escalation in the trade war coincides with an increase in mutual hostile rhetoric between Washington and Beijing. In the U.S. capital, American economic measures are presented as a necessary response to what the administration considers unfair trade practices by China; Washington views tariff imposition as essential to protect the national industry, enhance U.S. competitiveness, and restore economic sovereignty. Moreover, the Trump administration perceives a strategic dimension in curbing Chinese advances in high-tech sectors, with areas like 5G networks, artificial intelligence, quantum computing, and electric vehicles becoming open battlegrounds for geopolitical competition between the two powers. Conversely, the Chinese leadership portrays its responses as defensive and necessary to protect its national economy from what it labels as American “economic bullying.” China’s trade decisions are framed as initial measures to safeguard China’s peaceful rise from external attempts to stifle it. The Chinese government has also employed a nationalist discourse to frame the trade dispute as a “new long march,” calling for unity, sacrifice, and resilience from the Chinese people in the face of what is depicted as unwarranted economic aggression from the United States.

Intersection of Tariff Crisis and the TikTok Deal: The TikTok application issue has become emblematic of the increasing overlap between economy, technology, and politics amid the ongoing trade war. Developments related to TikTok reflect a shift from a traditional trade dispute to an attempt at economic decoupling. Beijing halted U.S. efforts to force Chinese company ByteDance, the owner of TikTok, to sell its operations in the United States to American entities. However, the fate of the deal remains uncertain amid mutual escalations; China has yet to approve the U.S. plan for ByteDance to retain a minority stake in the new company. Notably, ByteDance representatives informed the White House on April 3, 2025, that Chinese authorities would not endorse the deal unless tariff negotiations imposed by the Trump administration were opened.

Trump Exempting Electronic Imports from Tariffs: In a subsequent move, President Trump exempted smartphones, computers, and other technical devices and components from reciprocal tariffs, considering that the high tariffs imposed on China threaten technology giants like Apple, which manufactures iPhones and most of its other products in China. The guidelines also include exemptions for other electronic devices and components, such as semiconductors, solar cells, flat-panel televisions, USB drives, and memory cards. White House Deputy Press Secretary Kush Dasai stated these exemptions were granted because Trump wanted to ensure companies had time to shift production back to the United States, adding that Trump has made it clear, “America cannot rely on China for the manufacturing of critical technologies such as semiconductors, chips, smartphones, and laptops.”

Implications of the Escalation

This phase has already sparked significant volatility in financial markets; global stocks have lost trillions in value, and factors like currency depreciation, shifts in capital flows, and increasing risks of supply chain fragmentation have become the norm. Consequently, the primary outcomes of this trade escalation can be summarized as follows:

Direct Shocks to the Global Economy and Markets: Immediately following the announcement of the reciprocal tariff imposition, profound disruptions occurred in global financial markets; the value of global stocks plummeted significantly, amounting to trillions of dollars, while markets experienced drastic currency fluctuations and major changes in capital flows, alongside rising fears of global supply chain disintegration. These disruptions align with former U.S. Treasury Secretary Janet Yellen’s warnings that a collapse in trade relations with China would be “catastrophic,” as evidenced by sharp fluctuations in stock, bond, and commodity indexes, before markets saw some stabilization following Trump’s decision to freeze the imposition of additional tariffs on countries that did not reciprocate for 90 days. Oil prices also dropped to their lowest levels in four years on April 9, 2025, amid escalating fears that the protracted trade war would lead to reduced global demand and lowered economic growth rates. Given that the United States and China together account for about 43% of the global economy, according to the International Monetary Fund’s estimates for 2025, any substantial deterioration in their growth or entry into an economic recession will have wide-ranging repercussions affecting economies worldwide due to slowed global trade and decreased international investment.

Disparate Impact on the U.S. Economy: The imposition of high tariffs on Chinese goods has resulted in a noticeable rise in import costs, particularly regarding intermediate and consumer goods like electronics, machinery, clothing, and furniture; this will directly impact end consumers, contributing to inflationary pressures and reducing Americans’ actual purchasing power, thereby undermining the Federal Reserve’s efforts to control inflation and manage prices. In defending this policy, Trump expressed his willingness to bear internal burdens to achieve the intended goals of the tariffs, stating, “Sometimes, medicine needs to be taken to fix something.” On an industrial level, American manufacturers are expected to suffer from increased input costs and supply chain disruptions, diminishing the competitiveness of American products in global markets; capital and intermediate goods constitute about 43% of total imports from China, meaning that a disruption in the flow of these goods to the U.S. market could lead to a slowdown in the manufacturing sector, potentially resulting in job losses in the short term. The agricultural sector, particularly soybean and pork producers who lost access to the Chinese market due to retaliatory tariffs, will also incur significant losses. The most decisive factor in determining the duration of Trump’s tariff impositions seems to be the extent of their internal economic impact; JPMorgan has forecasted that the United States may enter a recession in 2025, while 92% of economists surveyed by Bloomberg News believe these tariffs increase the likelihood of a significant economic slowdown.

Expectations of China’s Ability to Absorb Tariff Shocks: While some estimates suggest that American tariffs could inflict substantial damage on the Chinese economy, these effects vary in size and severity; according to Citigroup’s estimates, China is likely to lose approximately 2.4% of its GDP this year due to these tariffs. In contrast, Bloomberg Economics data indicate that annual growth may decline by around 3%, particularly due to potential job losses in heavily export-reliant regions. Nevertheless, the nature of China’s economy, which is based on centralized decision-making and control over financial sectors, allows for the absorption of a significant portion of these shocks; the government’s ability to redirect and mobilize resources internally has enabled faster and more flexible responses to the repercussions, making the crisis’s short-term effects less severe. To address these challenges, the Chinese government quickly began implementing a set of stringent stimulus policies, including increased spending on infrastructure projects, tax reductions, and support for small and medium enterprises. The state also promoted the “dual circulation” model, focusing on enhancing domestic consumption as an alternative growth driver, and reducing reliance on external markets. While these policies have successfully alleviated some of the crisis severity, China’s economic growth rates still face noticeable slowdowns, and local and foreign investor confidence remains hesitant and uncertain due to ambiguous prospects for trade relationships with the United States.

Reorganization of European Supply Chains: The ongoing rise in tariffs between the United States and China has placed European companies before direct challenges, especially those reliant on manufacturing in China or exporting to U.S. markets. These companies have faced significant increases in costs and supply chain disruptions, negatively impacting vital sectors such as the European automotive industry, which relies heavily on Chinese rare earth metals, or those betting on continued access to the U.S. market. In this context, it is conceivable that some European countries may lean towards strengthening their ties with Beijing, despite ongoing trade tensions between the two sides. This possibility is reinforced by the intensification of global trade disputes coinciding with Spanish Prime Minister Pedro Sánchez’s visit to China, making him the first European leader to take this step following Trump’s imposition of wide-ranging tariffs on Washington’s trading partners, chiefly China and the European Union. During his visit, Sánchez expressed his conviction that Trump’s trade policies should prompt Europe to seek new partners and alternative markets, necessitating a reevaluation of its stance towards China. However, replacing alternative trade agreements for the U.S. market remains complex given the sheer size of the American market, which is valued at 18.8trillionin2024accordingtoWorldBankdata,whiletheEuropeanUnionrankssecondatabout18.8trillionin2024accordingtoWorldBankdata,whiletheEuropeanUnionrankssecondatabout10 trillion, trailed by China at a value of $7 trillion.

Impact on the United States’ International Standing: For Chinese President Xi Jinping, the damage inflicted on the U.S. by Trump’s policies presents a strategic opportunity to enhance Chinese influence globally; as Washington appears less committed to the rule-based international order it helped establish, Beijing seeks to position itself as a more balanced and amicable alternative in trade and investment relations, particularly with countries representing 85% of the global economy outside the American sphere, which could bring the Chinese dream of surpassing the U.S. as a dominant economic power closer to realization.

Possibility of Both Parties Engaging in Trade Negotiations: Despite Trump’s attempts to pressure Beijing to come to the negotiation table, current circumstances suggest that this trade war may end with a significant reduction in bilateral trade between the two largest economies in the world, owing to the lack of a clear agreement between the two sides on the terms for negotiation. While the Chinese Communist Party’s political protocol requires preliminary groundwork on lower levels before President Xi engages in direct talks, Trump prefers to finalize deals personally and directly with his counterparts. It is noteworthy that both countries have enormous incentives to reach an agreement that would at least calm the trade war; while the Chinese Ministry of Commerce states it is open to “dialogue and consultation,” Trump has expressed interest in discussing a deal with Xi, describing his Chinese counterpart as a “smart man” who wants to make a deal but does not know how. Furthermore, estimates from Goldman Sachs reveal that about 36% of U.S. imports from China are difficult to replace with alternative suppliers, even amid high tariffs; this indicates limited U.S. capacity to immediately liberate itself from dependence on the Chinese market. Conversely, China’s dependency on the American market is significantly lower, as it accounts for only 10% of its imports, which explains the Chinese leadership’s hesitation to make rushed concessions or submit to Trump’s bargaining demands.

Strengthening Resilience in Chinese Economic Movements: In a calculated step, the Chinese central bank allowed the yuan to depreciate against the U.S. dollar on April 8, 2025, which could mitigate the impact of U.S. tariffs on Chinese exports; this depreciation enables lowered prices for Chinese products in dollars, enhancing their competitiveness in global markets. Nevertheless, economists warn that this strategy carries risks, primarily the possibility of capital flight from China due to declining confidence in the local currency. Concurrently, Beijing maintains diverse and ample markets to redirect its exports should the American door close almost completely. This is attributed to the proactive strategy it has pursued in strengthening commercial partnerships, whether with the European Union, ASEAN, the African Union, or Latin America, a policy reminiscent of its approach during the first phase of the trade war with Washington in 2018 and 2019. Furthermore, Beijing continues to expand its external economic influence through the Belt and Road Initiative, investing in infrastructure, enhancing digital connectivity, and providing financing.

Potential Exploitation by Transit Countries to Export Chinese Products to the U.S.: Since the United States now imposes an average tariff of 145% on all imports from China and only 10% on goods from numerous other countries, there exists a significant incentive for Chinese producers to exploit alternative routes to evade tariffs by shipping goods through a third country; this would sharply reduce the tariff values on which Trump relies to fund his agenda.

In Conclusion: The trade war between the United States and China has transformed from a bilateral economic dispute centered on tariffs and trade imbalances into a comprehensive strategic confrontation with increasingly far-reaching implications for the international system. As both sides continue to adopt rigid stances, the damages inflicted on the American and Chinese economies deepen, impacting not only these two economies but also the institutional frameworks of the global trading system; the current trend reflects not merely an escalation in economic competition between the two powers but the potential for systematic decoupling that may undermine the foundations of the trade system established after World War II.