U.S.-China Trade Tensions Escalate: Another Prolonged Trade War?

The first blows have been exchanged between the United States and China, raising concerns over whether this will remain a short-lived trade dispute with limited economic consequences or mark the beginning of another prolonged and painful trade war, reminiscent of former President Donald Trump’s first term.

New Tariffs and Retaliation

At 12:01 AM ET on Tuesday, the U.S. imposed a new 10% tariff on all Chinese goods being shipped to America. In response, China announced a 15% tariff on certain U.S. imports, including specific types of coal, liquefied natural gas, crude oil, agricultural machinery, and large displacement cars and pickup trucks, which will take effect on Monday.

There is still a possibility that Trump and Chinese President Xi Jinping may agree to postpone these measures to allow further negotiations, similar to how Mexico and Canada delayed the implementation of U.S. tariffs on their goods.

Clark Packard, a research fellow at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, stated, “If no such agreement is reached, this could escalate significantly.” Since no talks were scheduled between Trump and Xi on Tuesday, this outcome seems unlikely. Trump told reporters, “I’m in no rush.”

The best-case scenario would be for both nations to avoid further escalation, such as imposing additional tariffs, but no decision has been made yet.

Limited Economic Impact – For Now

Trump has imposed tariffs on all Chinese goods, partially linking them to China’s alleged role in supplying fentanyl and other illicit drugs to the U.S. As a result, American consumers could see price hikes on various products, including electronics, toys, and apparel—some of the top imports from China last year, according to federal trade data.

However, it’s not just consumer goods that could become more expensive. Many imports from China consist of raw materials like rubber, plastics, and chemicals, which U.S. businesses rely on to manufacture finished products sold in stores and online. “Increasing the cost of those imports will make it harder for businesses,” Packard explained.

If U.S. firms can shift supply chains to other countries that face lower tariffs, price increases may not be as drastic. On the other hand, Chinese businesses could suffer losses and job cuts due to declining orders from U.S. buyers. Similarly, American exporters facing China’s new tariffs could also experience financial strain and potential layoffs.

According to data from S&P Global Market Intelligence, the U.S. exported approximately $23.6 billion worth of goods to China that now fall under the latest tariffs in 2024. Had China imposed a uniform 10% tariff on all U.S. exports, the impact would have been much greater—surpassing $130 billion last year.

From Bad to Worse?

Economists at Morgan Stanley do not expect Trump to stop at the current 10% tariff rate on Chinese goods, especially given his campaign promise to raise tariffs up to 60%.

In a note to clients on Tuesday, they stated, “We still anticipate the U.S. will impose additional tariffs on China later this year as part of its broader trade policy goals.” This would likely provoke further retaliation from China.

There is also growing concern that the U.S. may not only face a trade war with China but a three-front trade war. This scenario could unfold if Trump proceeds with plans to impose 25% tariffs on Mexico and Canada after the March 1 deadline, prompting both nations—and China—to retaliate with higher tariffs on American goods.

Such a situation could quickly turn disastrous for the U.S. economy.

If Canada and Mexico impose a 10% tariff on all U.S. goods and China implements a 5% tariff across the board, economists at Citibank estimate that the U.S. economy would shrink by 0.8% this year and by 1.1% next year, assuming the tariffs remain in place.

However, China’s economy is expected to contract less than that of the U.S. in both years. Meanwhile, Canada and Mexico could experience even greater economic damage than the U.S., according to Citibank’s estimates.