A Bigger Bomb Than the Tariff War Is About to Explode in China

 


A Bigger Bomb Than the Tariff War Is About to Explode in China

Executive Summary


The US-China tariff war has entered an unprecedented phase in 2025, with the United States imposing tariffs of up to 145% on Chinese imports and China retaliating with 125% tariffs on American goods345. This escalation marks a dramatic intensification of trade hostilities, with both sides showing little willingness to compromise. The resulting economic fallout is already visible in China’s manufacturing sector, global supply chains, and the broader world economy21316. This white paper examines the origins, current dynamics, and likely consequences of the exploding tariff war, focusing on its impact on China.

Background: The Path to Escalation

 
 
The US-China trade conflict began in 2018 when the Trump administration imposed tariffs on Chinese goods, citing unfair trade practices and intellectual property theft3. While a phase-one agreement was reached in 2020, tensions persisted, and the Biden administration maintained and expanded tariffs, especially targeting high-tech sectors3. In early 2025, the second Trump administration dramatically escalated tariffs, culminating in the current standoff345.

Current State of the Tariff War



  • Tariff Levels: The US now applies tariffs of up to 145% on most Chinese imports; China has responded with 125% tariffs on US goods345.


  • Retaliatory Measures: China has expanded export controls (notably on rare earths), restricted US tech firms, and filed complaints with the WTO815.


  • Exemptions: Both sides have selectively exempted certain products (e.g., US electronics and Chinese ethane) to mitigate supply chain disruptions514.


  • Stalemate: Diplomatic negotiations are stalled, with both sides signaling no intention to de-escalate in the near term21215.

Economic Impact on China


Manufacturing and Exports


  • China’s export-led industries are suffering from plummeting demand in the US and other Western markets, especially in high-tech and green sectors (EVs, batteries, solar panels)21316.


  • Factory activity in China has contracted sharply, with the Purchasing Managers’ Index (PMI) dropping to its lowest point since December 20231316.


  • New export orders have collapsed, and manufacturers are reporting widespread order cancellations and production cuts1316.

GDP and Growth


  • Leading analysts estimate that the tariffs could reduce China’s GDP growth by between 0.7% and 2.4% in 2025, with some forecasts as low as 3.5% annual growth461016.


  • The International Monetary Fund and major investment banks have revised down China’s growth projections, citing both external shocks and weak domestic demand16.

Supply Chains and Global Trade


  • The disruption is prompting firms to reroute trade through third countries and seek exemptions, but these are only partial solutions58.


  • China’s integrated supply chains, especially in Asia, are being affected as US tariffs extend to goods assembled in neighboring countries818.


  • The global merchandise trade volume is projected to fall by at least 0.2% as a direct result of the tariff war3.

Domestic Response and Resilience


  • The Chinese government is accelerating fiscal and monetary stimulus to support affected industries and workers16.


  • Beijing is emphasizing self-reliance, import substitution, and diversification of export markets, but replacing the US as a customer is proving difficult4816.


  • The official narrative stresses China’s ability to “eat bitterness” (chiku)-enduring hardship for a perceived national goal17.

Political and Social Ramifications



  • Public Sentiment: Chinese social media and official statements project defiance, but some experts warn of rising economic stress, potential job losses, and risks of social unrest if the downturn persists111317.


  • Government Legitimacy: Prolonged economic pain could challenge the legitimacy of the Chinese leadership, especially if unemployment rises and growth targets are missed1116.


  • Geopolitical Alignments: China is strengthening ties with Southeast Asia and other regions to offset lost US trade, but these efforts face limitations due to global demand constraints118.

Global Implications



  • World Economy: The tariff war is contributing to global economic uncertainty, with risks of recession in both the US and China, and negative spillovers to Europe and emerging markets21118.


  • Supply Chains: The decoupling of US-China trade is forcing multinational companies to rethink supply chains, raising costs and reducing efficiency worldwide818.


  • Allied Responses: The US is pressuring its allies to reduce economic ties with China, potentially leading to a broader fragmentation of the global trading system418.

Outlook: What Comes Next?



  • No Immediate Resolution: Both sides are entrenched, and a diplomatic breakthrough appears unlikely in the short term21215.


  • Economic Drag: China’s economy will continue to face downward pressure, with manufacturing and export sectors bearing the brunt1316.


  • Policy Responses: Expect further stimulus and structural reforms in China, but these may not fully offset the external shock16.


  • Potential for De-escalation: There are signals from Washington about possible tariff reductions, but Beijing remains skeptical and is demanding the removal of all “unjustified” tariffs as a precondition for talks1112.

Conclusion


The tariff war between the US and China has reached explosive new heights in 2025, with both economies-and the world-facing significant risks. For China, the loss of access to the US market, combined with global uncertainty and domestic challenges, is already causing economic pain. While Beijing is determined to endure and adapt, the longer the standoff persists, the greater the risk of deeper economic, social, and political consequences-both in China and globally21316.

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Citations:

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