China-U.S. trade conflict risks full-on
economic decoupling
In the wake of the extensive tariffs announced by United States President Donald Trump on April 2, 2025, a broader geopolitical standoff is taking place between the world’s two superpowers.
This has become most evident with the Trump administration’s latest plans to pressure allies into scaling back ties with China. According to reports, America’s trade partners are being threatened with tariffs unless they stop Chinese firms from using their countries as hubs for manufacturing or rerouting goods into the U.S. market.
Mr. Trump has made clear his intent to reindustrialize the U.S. economy. He wants much of American-owned manufacturing presently located in China and worldwide to return to U.S. shores.
About 32 percent of global manufacturing operates in China, with an annual value of $4.97 trillion – the largest concentration of manufacturing globally. The U.S. accounts for nearly 16 percent of world manufacturing, worth $2.5 trillion a year, far below its 28 percent global share in 2001.
To restore lost American manufacturing, on April 2, Mr. Trump issued an executive order declaring a national emergency. The decree sets the foundation for new policies increasing domestic competitiveness, protecting sovereignty and strengthening national security. It blames trade imbalances for having hollowed out America’s manufacturing base, and argues that this has undermined critical supply chains and rendered the defense-industrial sector dependent on “foreign adversaries.”
More specifically, the order blames the U.S.’s manufacturing decline on China for having fueled a large and persistent trade deficit in both industrial and agricultural goods. It asserts that China’s non-market policies have enabled Beijing to become globally dominant in key manufacturing sectors causing the loss of 3.7 million jobs and harming “America’s middle class and small towns.”
In 2024, that bilateral deficit reached $295 billion, up by around 6 percent on the previous year. Even so, it was the lowest trade deficit with China since 2011, as yearly trade gaps were typically between $300-400 billion over that period.
While the U.S. trade deficit has declined, it has grown significantly with other trade partners, especially Mexico and Vietnam. Chinese investments in these countries’ manufacturing sectors have surged in recent years, principally with a view to avoiding U.S. tariffs.
The Great U.S. Tariff Wall
The ensuing trade conflict between the U.S. and China saw the Trump administration engage in tit-for-tat rounds of tariff rises, bringing the total up to 145 percent imposed on China by the U.S. An even higher 245 percent tariff was also mooted by the White House at one point. Recent trade talks in early May, held in Geneva, Switzerland, resulted in both sides reducing tariffs for 90 days: While Chinese tariffs were lowered to 10 percent, the US imposed (only) 30 percent tariffs.
Following a slew of negative economic numbers and consequent financial market turmoil, both sides were keen to de-escalate tensions. A consultation mechanism was also established to further help prevent trade war escalation. According to U.S. Treasury Secretary, Scott Bessent, being the most dovish of Mr. Trump’s economic advisors and who led the talks in Switzerland, “neither side was interested in de-coupling.”
A 25 percent tariff will remain on car, steel and aluminum, while a 20 percent sectoral tariff is being separately imposed on imports of Chinese smartphones, laptops and networking equipment. President Trump later added that the semiconductor sector is currently subject to investigations over national security risks.
Facts & figures: U.S. trade deficit with China
Both electronics and pharmaceuticals are two sectors heavily reliant on Chinese-owned supply chains and facing the prospect of ongoing pressure although not as dramatically as during the “Liberation Day” rounds of tariff hikes in April.
Another of Mr. Trump’s executive orders revokes the de minimis exemption on low-value Chinese parcels. The administration said the measure was instituted to deal with the “unusual and extraordinary threat” arising from the “sustained influx of synthetic opioids.”
From early May, a duty of 120 percent and customs inspections were applied on the declared value of small parcels. The measure effectively wipes out the tax-free, high-speed delivery model employed by Chinese online retailers, which accounted for nearly two-thirds of such 4 million daily shipments into the U.S.
Re-shoring shipping
To enhance reindustrialization, alongside national security, Mr. Trump issued another executive order to rebuild America’s maritime industries and associated skilled workforce. At present, the U.S. constructs less than 1 percent of commercial ships globally, while China produces approximately half.
The order states that “rectifying these issues requires a comprehensive approach that includes securing consistent, predictable, and durable Federal funding, making United States-flagged and built vessels commercially competitive in international commerce.” The emergence of a protectionist industrial policy to rebuild American shipping was underscored by the administration’s recent imposition of fees on Chinese-built vessels docking at American ports.
Gold rush for critical minerals in the U.S.
In mid-April, Mr. Trump ordered an investigation into possible new tariffs on all U.S. critical mineral imports. China accounts for up to 80 percent of U.S. imports of rare earths. For at least 15 out of the 35 minerals deemed important for national security, the U.S. is 100 percent reliant on China for imports.
The probe threatens further trade tensions with China, the global leader in minerals and rare earths production. It comes after another U.S. presidential executive order was issued to boost American onshore mineral production. Its stated purpose is to reduce reliance on foreign minerals, create jobs and enhance national security.
Accordingly, the U.S. government will coordinate with private companies to ensure a stable and resilient domestic supply chain for critical minerals, ending “dependence on hostile foreign powers” for such supplies. The new measure also strengthens U.S. minerals security by facilitating licenses for priority mining projects on federal government-owned territory.
China’s countermeasures go well beyond tariffs
China’s response to the Trump administration’s tariff increases has been multifaceted, involving a combination of tariff hikes, export controls, diplomatic efforts and strategic economic policies.
In its latest move, the Chinese government has threatened retaliation against countries that sign trade deals with the U.S. to lower reciprocal tariffs, especially when those deals are seen as targeting trade with China. Beijing has asserted it would “respond resolutely and reciprocally with countermeasures” in safeguarding its sovereign rights.
Otherwise, in responding to the Trump administration’s tariff hikes, China raised tariffs up to 125 percent on imported goods from the U.S. before settling on 10 percent for an interim 90 days. Beijing also filed a formal complaint under the World Trade Organization’s dispute settlement mechanism, arguing the U.S. tariffs violated international trade rules and disrupted the global trading system.
In early April, China added 12 major U.S. high-tech companies to its export control list. According to the Chinese commerce ministry, exporting dual-use items to these firms will be prohibited. The additions are on top of controls imposed on 15 American companies the previous month.
Also in April, the Chinese commerce ministry added six U.S. firms to its Unreliable Entity List (UEL). Placement on this list subjects these companies to trade restrictions and potential investment limitations within China, and expands on the 10 U.S. firms added to the UEL in March.
In a further move, Beijing has initiated anti-monopoly investigations targeting U.S. companies. The investigation follows allegations that several U.S. companies evaded anti-dumping duties by misclassifying products under different tariff codes. If proven, this could result in new duties on the reclassified product models.
China has also encouraged its exporters to diversify markets, reducing dependence on the U.S. and mitigating the impact of tariffs. In supporting this effort, the Chinese central bank has encouraged state firms to make greater global use of the yuan currency in settling trade and expanding cross-border credit.
China tightens its global stranglehold over critical minerals
Beijing has expanded its export controls to include critical minerals such as samarium, gadolinium, terbium, dysprosium, lutetium, scandium and yttrium, as well as a number of other controlled items. These materials are essential for high-tech industries, including semiconductors and batteries.
The new export restrictions require U.S. companies to obtain licenses, effectively limiting their access to these vital resources. China had already placed similar restrictions on other key resources such as gallium, germanium, graphite and antimony.
The measures may adversely affect the global supply of materials used in high-tech products and harm the prospects of Mr. Trump’s reindustrialization campaign. The U.S. defense industry may also be affected by restricted access to these minerals. Such an outcome could hamper America’s long-term competitiveness in sustaining its technological leadership and cutting-edge defense capabilities over China.
Beijing’s strategy to limit supplies of critical minerals sends a clear warning to the U.S. that restricting advanced technology, such as semiconductors, to China can be undermined by tightening the provision of upstream resources essential for these technologies.
Scenarios
Most likely: The U.S. and China to increasingly decouple across a large swath of economic sectors
The Sino-U.S. trade war is set to expand into a structural decoupling of the U.S. and Chinese economies although both sides will be prepared to roll back on measures which cause excessive financial market turmoil or precipitate significant negative short-term economic outcomes. This will still increasingly affect various sectors, from resource to industrial to economic.
Essentially, the two superpowers are focused on cutting their long-term economic interdependence and are aiming for self-sufficiency in the short to medium term. The end result will be the emergence of two separate economic blocs.
China had started implementing policies to that effect earlier this year, including halting shipments of U.S. liquefied natural gas (LNG). Up until then, the U.S. was China’s fourth-largest supplier of LNG. China will instead import LNG from Russia. Moreover, several large U.S-based LNG projects underwritten by two of the largest Chinese state energy companies have been frozen.
A similar story applies to China’s imports of coal. A 15 percent tariff on all U.S. coal imports has effectively stopped all trade in this commodity with China, which turned to Russia and Indonesia instead.
The measures are part of Beijing’s plan to cut energy linkages with the U.S., and for Beijing to rely only on its closest strategic partners in maintaining energy flows.
Washington has likewise boosted its economic decoupling efforts in the technology sector. It has blocked U.S. chipmaking firm Nvidia from selling certain microprocessors used in artificial intelligence applications to China. This is in spite of the newly banned chip being specifically designed to get around an earlier prohibition, imposed by the previous U.S. administration, on another more powerful Nvidia chip being sold to China.
The U.S. Commerce Department has described the measure as safeguarding national security and stated that it would be in force for the indefinite future. The recent emergence of DeepSeek – a Chinese generative AI innovation – has likely elevated concerns that even less powerful chips could lead to further breakthroughs among China’s AI sector and to them outcompeting their U.S. counterparts.
The U.S. and China are set to become increasingly polarized; emerging into two separate technological spheres, with each country dominating their respective systems.
Basically, the previous tentative policy of only erecting barriers around specific areas of trade while seeking cooperation in other spheres has come to an end. Washington and Beijing are preparing the ground for a seismic decoupling of their economies across every area of trade and industry.
The question will be the extent and speed by which this decoupling will also cut across capital markets, including the willingness of both governments to allow private and state sector players to hold investments in each other’s assets.
Any financial markets divorce, which may erupt at a given point from the real economy decoupling, is likely to have far-reaching consequences entailing parallel financial systems reshaping global capital flows.
Less likely: The U.S. and China negotiate a grand bargain to patch up their differences
President Trump has indicated a desire to end his trade showdown with China as demonstrated during the trade talks in Switzerland. In turn, Chinese President Xi Jinping has already made known his preference to negotiate subject to certain conditions being agreed to by the U.S. side.
Far from decoupling their economies, Mr. Trump is ultimately only concerned with striking a good trade deal, one achieved through tough positioning at the outset, but nonetheless oriented toward an equitable trade balance. Tariffs are merely one part of a broader strategy to strengthen American manufacturing, alongside expected corporate tax cuts, deregulation and lower energy costs – all aimed at boosting exports, particularly to China and other countries with persistent trade surpluses with the U.S.
While Mr. Trump and his advisors continuously talk of “reindustrialization,” they may still recognize the complexities and timescales involved in realistically achieving that ambition. This includes long-term structural challenges such as re-skilling a workforce for an advanced manufacturing economy. These skills may be abundant in China’s vast cutting-edge manufacturing sector, but fall short across the U.S.
Presently, there are reports of cancellations by businesses worldwide of cross-border transactions, especially over the second quarter of this year. It comes amid concerns over U.S. tariffs weakening global growth, with a recent poll showing a near 50 percent chance of a U.S. recession within a year. Corporate decision-makers are growing anxious over what will happen to their long-established and expansive international supply chains; they will demand clarity from policymakers on both sides in the very near future.
In light of an unfolding economic debacle, both Presidents Trump and Xi will understand the imperative to begin negotiating a grand bargain before trade tensions cascade into full-blown global recession harming the political interests of both leaders.
This report was originally published here: https://www.gisreportsonline.com/r/trump-trade/
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