The Trump administration recently introduced hefty tariffs in an attempt to reduce the trade imbalance the United States has with several countries. The move was expected as it was one of the promises made during his election campaign, however, it was quickly reversed with a 90-day pause for all countries except China. In a tit-for-tat escalation, China increased tariffs on US goods to 125% in response to US tariffs which have now reached a total of 145% on Chinese imports. Escalating tensions between the United States and China reflect the rupture in the bilateral trade relationship which has serious implications for global trade with fears of recession. Beijing has downplayed the adverse effects of US tariffs, stating it will not hike tariffs on the United States further. Both national leaders aim to project strength and Beijing suggests it has alternative tools beyond tariffs to respond. In recent years there have been decoupling efforts by all major economies amid escalating tensions between the United States and China. If the situation worsens it would take a heavy toll on the export-oriented developing economies and risk long-term inflationary pressures in sectors like consumer goods, automobiles and critical technologies.
As soon as Trump announced multifront tariffs, global stock markets declined sharply amid investor disquiet. Asian markets were among the worst hit with Hong Kong’s Hang Seng dropping 13.22%, Taiwan’s index declining 9.7% and Japan’s Nikkei falling 7.83%. Chinese markets suffered significant losses, with the Shanghai Composite down 7.34% and the Shenzhen Composite declining 9.66%. Indian markets Sensex and Nifty 50 also fell sharply after the announcement. In the West, US markets declined considerably, with the S&P 500, NASDAQ and Dow all falling by more than 5%, while Europe’s STOXX 50 slipped 5.34%, reflecting a global wave of investor concern and uncertainty triggered by the tariff move. The upheaval wiped out trillions from stock markets and caused US bond yields to spike sharply, stoking fears over rising borrowing costs and inflation. These developments appear to have caught Trump’s attention amid growing concern over the fallout from his tariff policy. However, soon after Trump’s announcement to pause global tariff hikes, global markets surged despite the fact that investors remain cautious amid the ongoing tensions between the United States and China. Several US lawmakers have expressed their concerns over Trump’s move with prominent Republican hawks like former National Security Advisor John Bolton also criticizing Trump’s decision to increase tariffs.
In the current context, escalating tensions between the United States and China, if not resolved through negotiations, will have consequences ranging from inflation to market volatility, weakened investor confidence and a potential slowdown in global economic growth. Manufacturing sectors such as automobiles and electronics will be greatly impacted as these depend heavily on cross-border supply chains, imported raw materials and the manufacturing capabilities of Asian markets, and are therefore highly vulnerable to increased tariffs and logistical disruptions. Moreover, experts have warned that if Trump moves ahead with his plan of imposing tariffs, US consumers will face price rises that would significantly impact middle and lower-income groups. Strategically, Trump’s tariff policy seeks to reduce the trade deficit, promote domestic manufacturing and boost employment within the United States. However, this approach seems to overlook the services sector which has remained a critical pillar of the US economy and has maintained a substantial trade surplus.
China over the years has tried to diversify its markets and has significantly reduced its exports to the United States from 21% in 2017 to nearly 14% in 2024. A significant portion of consumer electronics, home appliances and clean energy components are from China, and for Beijing, the United States has been its biggest export market. The United States also imports nearly 70% of its rare earth elements from China which is critical for US sectors like defense, automobiles, semiconductors, renewable energy and electronics. Rare earth elements are critical for US companies like Intel, Microsoft, Apple and Tesla. If tensions escalate China could apply stricter measures on export controls, which Beijing has already done on several key rare earth elements. Although the United States maintains strategic stockpiles to offset short-term disruptions and volatilities, the long-term implications remain alarming, especially considering the fact that China also has overwhelming control of the processing infrastructure of rare earth elements. The current escalation of tensions when analyzed in conjunction with the ongoing technological rivalry highlights how interdependence in global trade is increasingly becoming a battleground for strategic dominance, with the United States and China using both economic leverage and supply chain control. The Trump administration later exempted key tech products like smartphones and chips from steep China tariffs to ease industry concerns.
Amid escalating tensions, Beijing is actively working to strengthen trade ties with ASEAN and the European Union, aiming to accelerate its market diversification in anticipation of prolonged tensions with the United States. At the same time, China is positioning itself as a defender of global trade norms, as demonstrated by its complaints against the United States at the World Trade Organization. It hopes to rally the support of other countries, especially the Global South nations that share concerns over Washington’s unilateral trade approach, potentially reshaping the global economic order in its favor. Meanwhile, the United States continues its efforts to isolate China by pursuing alternative trade agreements with its trade partners and maintaining a confrontational stance through persistent tariff measures against China.
As evident from the negotiating position of the United States, what plays to Washington’s advantage is the geopolitical reality that only a few countries are willing to antagonize the Trump administration, especially given Trump’s assertive and unpredictable approach. Most countries seek favorable trade deals with the United States. Also, for many Southeast Asian countries facing growing security concerns with regard to China and European countries grappling with the threat from Russia, the United States remains the most reliable military partner capable of providing credible security guarantees. These countries continue to be wary of over-reliance on any single power and this trend will likely intensify with the challenges posed by the Trump administration’s protectionist and confrontational approach. As a result, the trade war is not just confined to tariffs or economic policy but is intertwined with broader strategic considerations. Moreover, in a prolonged trade war, both the United States and China will suffer and they will eventually seek de-escalation as evidenced by recent overtures and both sides will explore mechanisms to resolve divergences, even amid overt criticism.
Security concerns and economic interests are inseparable, particularly for countries navigating a complex geopolitical environment shaped by great power rivalry. At a time when the neoliberal assertion that economic interdependence reduces the likelihood of conflict is increasingly challenged, the Trump administration is prioritizing addressing trade imbalances and resorting to using tariffs as a tool for diplomatic leverage. The upcoming midterm elections in the United States may ultimately serve as a referendum on Trump’s protectionist agenda, reflecting whether US voters view his confrontational approach positively, especially as forecasts show that Trump’s tariff policy will negatively impact inflation rates.
