Thu May 1

The global costs of the US-China tariff war are mounting. And the worst may be yet to come

Written by Kai He, Professor of International Relations, Griffith University

The United States and China remain in a standoff in their tariff war. Neither side appears willing to budge.

After US President Donald Trump imposed ^[1] massive 145% tariffs on Chinese imports in early April, China retaliated with its own tariffs of 125% on US goods.

US Treasury Secretary Scott Bessent said ^[2] this week it’s up to China to de-escalate tensions. China’s Foreign Ministry, meanwhile, said the two sides are not talking ^[3].

The prospect of economic decoupling between the world’s two largest economies is no longer speculative. It is becoming a hard reality. While many observers ^[4] debate ^[5] who might “win ^[6]” the trade war, the more likely outcome is that everyone loses.

A convenient target

Trump’s protectionist agenda has spared few. Allies and adversaries alike have been targeted by sweeping US tariffs. However, China has served as the main target, absorbing the political backlash of broader frustrations over trade deficits and economic displacement in the US.

The economic costs to China are undeniable. The loss of reliable access to the US market, coupled with mounting uncertainty in the global trading system, has dealt a blow to China’s export-driven sectors.

China’s comparative advantage lies in its vast manufacturing base and tightly integrated supply chains. This is especially true in high-tech and green industries such as electric vehicles, batteries and solar energy. These sectors are deeply dependent on open markets and predictable demand.

New trade restrictions in Europe ^[7], Canada ^[8] and the US ^[9] on Chinese electric vehicles, in particular, have already caused demand to drop significantly ^[10].

The EU and China could set minimum prices on Chinese-made electric vehicles in a deal to remove EU tariffs. Matthias Schrader/AP

China’s GDP growth was higher than expected ^[11] in the first quarter of the year at 5.4%, but analysts expect the effect of the tariffs to soon bite. A key measure of factory activity this week showed a contraction ^[12] in manufacturing.

China’s economic growth has also been weighed down by structural headwinds, including industrial overcapacity (when a country’s production of goods exceeds demand), an ageing population, rising youth unemployment and persistent regional disparities. The property sector — once a pillar of the country’s economic rise — has become a source of financial stress. Local government debt is mounting and a pension crisis ^[13] is looming.

Negotiations with the US might be desirable to end the tariff war. However, unilateral concessions on Beijing’s part are neither viable nor politically palatable.

Regional coordination

Trump’s tariff wars have done more than strain bilateral relationships; they have shaken the foundations of the global trading system.

By sidelining the World Trade Organization and embracing a transactional approach to bilateral trade, the US has weakened multilateral norms and emboldened protectionist tendencies worldwide.

One unintended consequence of this instability has been the resurgence of regional arrangements. In Asia, the Regional Comprehensive Economic Partnership ^[14] (RCEP), backed by China and centred on the ASEAN bloc in Southeast Asia, has emerged as a credible alternative for economic cooperation.

Meanwhile, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) continues to expand, with the United Kingdom joining late last year ^[15].

Across Latin America, too, regional blocs are exploring new avenues for integration, hoping to buffer themselves against the shocks of resurgent protectionism.

But regionalism is no panacea. It cannot replicate the scale or efficiency of global trade, nor can it restore the predictability on which exporters depend.

Looming dangers

The greater danger is the world drifting into a Kindleberger Trap ^[16] — a situation in which no power steps forward to provide the leadership necessary to sustain global public goods, or a stable trading system.

Economist Charles Kindleberger’s account ^[17] of the Great Depression remains instructive: it was not the presence of conflict but the absence of leadership that brought about the global economy’s systemic collapse.

Without renewed global coordination, the economic fragmentation triggered by Trump’s tariff wars could give way to something far more dangerous than a recession – rising geopolitical and military tensions that no region can contain.

The political landscape is already fraught. The Chinese Communist Party, for instance, has long tethered its legitimacy to the promise of eventual unification with Taiwan. Yet the costs of using force remain prohibitively high.

Taiwanese President Lai Ching-te’s recent designation of China as a “foreign hostile force ^[18]” have sharpened tensions. Beijing’s response has been calibrated ^[19] – military exercises intended more as a warning than a prelude to conflict.

However, the intensifying trade war with the US may become the final straw that exhausts Beijing’s patience, leaving Taiwan as collateral damage in a US-China final showdown.

Tensions between China and Taiwan have increased since Lai Ching-te’s election last year. Ritchie B. Tongo/EPA

A role for collective leadership

China alone is neither able nor inclined to assume the mantle of global leadership. Its current focus is more on domestic priorities – sustaining economic growth and managing social stability – than on foreign policy.

Yet, Beijing can still play a constructive role in shaping the international environment through its cooperation with Europe, ASEAN and the Global South.

The objective is not to replace American hegemony, but to support a more multi-polar and collaborative system — one capable of sustaining global public goods in an era of uncertainty.

Paradoxically, a more coordinated effort by the rest of the world may ultimately help bring the US back into the fold. Washington may rediscover the strategic value of engagement — and return not as the sole leader, but as an indispensable partner.

In the short term, other states may seek to gain an advantage from the great power standoff. But they should remember that what begins as a clash between giants can quickly engulf bystanders.

In this volatile landscape, the path forward does not lie in exploiting disorder. Rather, nations must cautiously advance the shared interest in restoring a stable, rules-based global order.