The U.S.-China Tariff War: How Trade Tensions Are Reshaping the Global Economy
- ISCRO MSU
- May 3
- 11 min read
Written by Esha Varchasvi (Research Lead), Arjun Tholakapalli, Daniel Schneider, Sri Harshita Boddu, Brendan Furnari
EXECUTIVE SUMMARY:
Introduction: From Tariffs to Trade War
Tit-for-Tat Goes Global: Reactions to U.S. Trade Policy (Global response to US tariffs)
From Soybeans to Semiconductors: The cost of retaliation (China's retaliation measures)
China's Strategic Recalibration: Reform, resilience, and risk (Policy shifts in China to counteract tariffs)
Shifting Gears: How firms are diversifying to mitigate risk (Reshoring, alternative suppliers)
Tariff Shock: The Hidden Costs to U.S. Importers (US imports and pricing trends)
Ripple Effects: How Key U.S. Sectors Are Weathering the Tariffs (Industries and products affected)
Semiconductors, EVs and Solar: The Frontlines of Tech Warfare (Technological disruptions and policy adjustments)
Conclusion: From Conflict to Realignment
Introduction: From Tariffs to Trade War
Since 2018, trade relations between the United States and China have undergone dramatic shifts marked by escalating tariffs, retaliatory actions, and sweeping policy adjustments on both sides. Initiated by the Trump administration, tariffs under Sections 232 and 301 targeted a wide range of Chinese imports in response to national security concerns and alleged unfair trade practices. China responded, imposing tariffs on over $50 billion worth of U.S. exports, directly impacting industries such as agriculture, automotive, and aerospace.
Over the next seven years, these tit-for-tat policies transformed the global trade landscape. U.S. businesses faced rising costs due to higher import duties, while inflationary pressures echoed through sectors dependent on Chinese goods, particularly technology and manufacturing. Meanwhile, American farmers endured reduced access to Chinese markets, leading to falling commodity prices and longer-term uncertainty.
This period has also resulted in broader global shifts. Countries and corporations began diversifying supply chains, reshoring manufacturing, and reevaluating trade dependencies. The consequences of the U.S.-China trade conflict extend beyond bilateral tensions, reshaping international trade flows and prompting strategic adjustments from the European Union to East Asia.
Tit-for-Tat Goes Global: Reactions to U.S. Trade Policy
China responded swiftly and proportionately to the Trump administration’s tariffs, using a tit-for-tat approach. When the U.S. imposed steel and aluminum tariffs under Section 232 in March 2018, China retaliated on April 2, 2018, by levying tariffs on 128 U.S. goods worth $3 billion. These included 15% duties on fruit, nuts, and wine, and 25% on pork and aluminum scrap (NPR, Quartz). In response to the first two parts of U.S. Section 301 tariffs (July–August 2018), China imposed 25% duties on $50 billion worth of U.S. exports, targeting key goods such as soybeans, corn, beef, and airplanes (USDA Foreign Agricultural Service) . It is also important to note that the 25% tariff on U.S. soybeans, China’s largest agricultural import from the U.S., caused U.S. soybean exports to China to collapse and domestic prices to fall nearly 20% by late 2018. (Federal Reserve Bank of Kansas City, page 7, United States Department of Agriculture).
Since 2018 and escalating again in 2025, the United States has implemented a series of tariffs targeting Chinese imports, citing unfair trade practices, intellectual property theft, and a desire to rebalance the trade deficit. These tariffs, recently reaching as high as 145% on certain Chinese goods, have provoked not only a robust retaliatory response from China, but also a significant ripple across the global trade system. The global response has included retaliatory tariffs, policy shifts, reshoring efforts, and diplomatic realignments, especially among U.S. allies like Japan, South Korea, and the European Union
In direct response to the U.S. tariffs, China imposed extensive countermeasures, including Tariffs of up to 125% on key U.S. exports, including agricultural and technological goods (Yale Budget Lab, 2025), Suspension of exports of critical minerals and rare earth magnets, which are essential for electric vehicles, defense systems, and clean energy technologies, and the inclusion of 12 U.S. companies on its Export Control List, which effectively blocks Chinese firms from doing business with them (Holland & Knight, 2025).
China controls around 70% of global rare earth processing capacity (Mining Technology), giving it significant leverage in high-tech supply chains. These retaliatory moves are not only punitive but also strategic, targeting sectors where the U.S. is highly dependent on Chinese exports, such as clean tech and semiconductors.
From Soybeans to Semiconductors: The Cost of Retaliation
One of China’s most significant levers is its demand for U.S. agricultural products. In recent waves of tariffs, China has placed: 15% tariffs on key U.S. staples like wheat, corn, cotton, and poultry. China has also placed 10% tariffs on soybeans, beef, pork, dairy, fruits, and vegetables (China Briefing, 2025).
This matters because in 2017, China was the largest buyer of U.S. soybeans, importing over $12 billion worth annually. By 2019, that figure had dropped to under $3 billion(USITC). This not only hurt U.S. farmers (especially in the Midwest) but also pushed China to strengthen trade ties with Brazil and Argentina, diversifying its sources. As a result, U.S. agricultural inventories have risen, prices have dropped, and farm bankruptcies spiked. This demonstrates how tariff wars can disproportionately affect export-dependent sectors.
China’s Strategic Recalibration: Reform, Resilience, and Risk
In response to U.S. pressure, China has pursued reforms such as
1: Import Substitution- China accelerated its "Made in China 2025" agenda, focusing on becoming self-reliant in critical sectors like Semiconductors, Artificial intelligence, Aerospace, and green energy technologies.
2: Overcapacity Risks- While boosting self-reliance, China is now overproducing goods like electric vehicles and solar panels, leading to a need to dump excess goods into foreign markets, a move that may trigger further trade disputes (The New Yorker, 2024).
3: Consumption-Led Growth- Some Chinese policymakers are advocating for shifting the economy toward domestic consumption and social spending, to reduce export dependence. However, this transition is gradual and faces internal resistance (Reuters).
Shifting Gears: How Firms Are Diversifying to Mitigate Risk
The uncertainty surrounding U.S.-China trade has prompted many U.S. companies to diversify supply chains:
Reshoring: Firms like ABB have announced $120 million in U.S. manufacturing expansion to reduce reliance on Chinese inputs (Reuters, 2025).
Nearshoring and a “China +1” Strategy: Companies are increasingly turning to Vietnam, Mexico, India, and Malaysia to hedge against future tariffs or geopolitical disruptions.
Digital Manufacturing Platforms: Xometry and similar platforms are helping firms find domestic or regional suppliers more efficiently (Axios, 2025).
The effects of the U.S.-China trade war have reverberated globally. Other nations have taken measures to insulate their economies or actively intervene: Japan, South Korea, and China met in early 2025 to form a joint response strategy against U.S. tariffs. This trilateral meeting emphasized enhancing regional trade and technological cooperation (Reuters, March 2025). In addition, European Union officials criticized the U.S. tariffs as "illegal under WTO rules" and have debated enacting countermeasures or tariffs on U.S. digital services and autos (Wikipedia, Trump’s Liberation Day Tariffs, Reuters).
The bottom line is that the U.S.'s unilateral tariffs have resulted in countries exploring the possibility of alternative trade arrangements that reduce dependency upon the U.S. markets. The global response to U.S. tariffs on China highlights the complex, cascading nature of modern economic policy. While one stated aim is to increase U.S. manufacturing employment by reshoring manufacturing activities that were shifted overseas and punish unfair practices, the tariffs have provoked strategic countermeasures from China, trade diversification by global firms, and diplomatic friction with key allies. As supply chains shift and nations realign, the long-term effects of this trade war will likely redefine global commerce for years to come.
Tariff Shock: The Hidden Costs to U.S. Importers
Recent tariff hikes on Chinese imports are raising costs across key U.S. industries, especially in technology, automotive, and telecommunications. Products such as lithium-ion batteries, electric motors, and telecom equipment are among the most affected, adding financial pressure on companies that rely on Chinese imports for essential components.
To understand the impact, duty rates from January 2025 were recalculated with a 20 percent point increase, reflecting changes announced in March. To illustrate these impacts, the graph above compares the original duty rates to the recalculated rates for selected high impact commodities. The analysis highlights significant cost increases for telecom switches, solar cells, and lithium-ion batteries. Rising duties on electric motors and touchscreens are also impacting industries such as automotive manufacturing and clean energy development, adding strain on companies reliant on Chinese imports.
The Federal Reserve Economic Data (FRED) Import Price Index for China shows that overall import prices remained stable at 99.6 in March 2025, as shown above. Since the index measures base prices without including duties, its stability suggests that Chinese exporters are not lowering prices in response to the U.S. tariff changes. As a result, American companies are absorbing the full cost of the increases, placing added strain on industries already facing global supply chain challenges.
This analysis highlights the financial strain that rising tariffs are placing on US importers. As trade data for April and May becomes available, the broader effects on pricing and business operations will come into sharper focus.
Ripple Effects: How Key U.S. Sectors Are Weathering the Tariffs
Trade tensions between the United States and China can have wide-ranging impacts across multiple sectors. As tariffs escalate, industries that rely heavily on cross-border trade between the U.S. and China are particularly vulnerable to sudden shifts in supply chain dynamics. The following section will focus on the crude oil, machinery, and agricultural sectors. From fluctuating oil prices triggered by supply-demand imbalances to rising production costs in the machinery industry and the immense impact on agricultural exports, these developments demonstrate the effects of tariffs on U.S. industries.
The crude oil sector has experienced notable volatility due to the tariff escalations. For context, the United States imports for crude oil and petroleum products from China was 5.79 million barrels in 2024 according to U.S. Energy Information Administration (eia). Demand concerns are fueled by the uncertainty created by the rising tensions between the U.S. and China. On the other hand, OPEC+ announced the decision to hike output by 411,000 barrels per day. As a result of the surplus created by decreasing demand and increasing supply, the WTI oil price decreased by 4.91% on April 10, 2025 (Oilprice). Goldman Sachs analysts forecast oil prices to continue to decline to $55 per barrel in December 2026. (Reuters)
The machinery industry has faced increased operational costs due to tariffs on imported components essential for manufacturing. U.S. imports from China of machinery, nuclear reactors, and boilers are $85.1B in 2024, making up 19% of total Chinese imports. Notable imported items include parts and accessories of typewriters and calculating machines ($6.58 billion), taps, cocks, valves, and similar appliances for pipes and tanks ($3.51 billion), air or vacuum pumps and compressors ($3.40 billion), and air conditioning machines ($2.79 billion) (Trading Economics). The increase in tariffs leads to a higher cost of imported machinery components and an increase in overall operational expenses for a manufacturer. Manufacturing firms are currently in a stalemate, waiting to make drastic changes due to the global economic uncertainty. They will likely reassess their supply chains and production strategies moving forward.
The agricultural sector will also see a significant impact as China’s retaliatory tariffs target the agricultural sector which is facing profound effects. In 2024, U.S. agricultural exports to China totaled $12.84 billion, with soybeans being a significant component of these exports (Reuters). To understand the potential effects, we can look back between mid-2018 and the end of 2019 where U.S. agricultural exports to China decreased by nearly $26 billion due to such tariffs (USDA). When U.S. exports decline, pressure is applied to U.S. farmers to decrease their prices on products such as soybean and corn. Also, China may turn to alternative suppliers such as Brazil and Argentina, taking market share from the U.S. making it potentially difficult for U.S. farmers to reclaim in the future.
The U.S.-China trade tensions create obstacles for the automotive industry as well, particularly for Electric Vehicles. As of April 3, China no longer exports heavy rare earth metals and heavy rare earth magnets that are crucial elements for EV cars. Furthermore, Beijing makes up about 90% of the world’s supply of these resources (NYPost). At a larger scale, weakening a trading relationship with China, a critical supplier, impacts the future outlook for the automotive industry's EV movement. As a result, major car companies may transition to EV manufacturing at a slower rate. This is also just one example of the massive impact the trade war has on the technology industry. In the next section, we will take a more specific look at technological disruptions.
Semiconductors, EVs and Solar: The Frontlines of Tech Warfare
In October 2022, the United States introduced stringent export controls on advanced semiconductor technologies to China, aiming to curb Beijing's access to cutting-edge computing capabilities and critical manufacturing equipment. These measures had an immediate impact: U.S. semiconductor exports to China plummeted by 50.7% in the first eight months of 2023, dropping from $6.4 billion to $3.1 billion compared to the same period in the previous year (USCC). This sharp decline in trade flows reflects growing tensions and the strategic importance of semiconductors in the global technological race.
In response to these restrictions and growing geopolitical uncertainty, U.S. firms and policymakers have turned their focus toward diversification and reshoring. The CHIPS and Science Act of 2022 allocated $52.7 billion to support domestic semiconductor manufacturing and research, aiming to reduce reliance on foreign—particularly Chinese—suppliers (Reuters). This move is part of a broader strategy to build more resilient supply chains and secure national interests in critical technology sectors.
The electric vehicle industry has also been directly impacted by evolving U.S.-China trade policy. As of September 27, 2024, the United States imposed a steep 100% tariff on EV imports from China. This decision targets what the U.S. views as unfair state-supported industrial practices by China and is intended to safeguard American manufacturers from distorted competition.
For companies like Tesla, which depend heavily on the Chinese market not only for sales but also for essential components, these tariffs pose significant challenges. The resulting cost increases could pressure Tesla to reevaluate and restructure its supply chains (Reuters).This may include boosting domestic production or seeking alternative sources for parts outside of China to mitigate the impact of the tariffs and maintain competitiveness in the U.S. market.
The renewable energy sector is likewise seeing shifts due to evolving trade dynamics between the U.S. and China. Effective January 1, 2025, tariffs on Chinese-made solar wafers and polysilicon will double from 25% to 50%, while tungsten products—integral to renewable energy technologies—will face a new 25% tariff, up from zero (AP). These moves are designed to address concerns about China's dominance in the global clean energy supply chain and to bolster the competitiveness of U.S.-based manufacturers.
By increasing the cost of importing key Chinese components, these tariff hikes aim to encourage domestic investment in solar and wind technology production. The broader goal is to foster a more self-reliant clean energy ecosystem in the United States, enhancing both economic security and long-term energy resilience in the face of global supply chain disruptions.
Conclusion: From Conflict to Realignment
The U.S.-China trade war has left a lasting imprint on global economies. American tariffs sparked widespread inflationary pressures, disrupted key industries, and forced companies to reconsider their dependence on Chinese manufacturing. In turn, China responded with retaliatory tariffs and internal policy adjustments to mitigate the impact, particularly targeting politically sensitive U.S. sectors like agriculture and energy.
As these dynamics evolved, third-party nations—such as Japan, South Korea, and EU member states—have played increasingly strategic roles, adapting their own trade relationships and supply chains to the new global reality. Across sectors—from semiconductors to electric vehicles and renewable energy—the push for supply chain diversification and industrial self-reliance has intensified (WSJ).
Looking ahead, the path forward for U.S.-China trade remains uncertain, shaped by competing goals of economic security and global competitiveness. While reshoring and diversification efforts are underway, these shifts demand significant investment, time, and coordination across industries. Moreover, policies like the CHIPS and Science Act and rising tariffs on clean energy and EV imports reflect a broader pivot toward economic self-reliance and strategic risk management (USCC). Rather than signaling a complete separation, the U.S.-China relationship is entering a new phase, driven by selective interdependence and strategic global positioning.
In this evolving trade shift, efficiency is no longer the only priority. National security, technological leadership, and resilient supply chains are now key drivers of policy. Understanding these shifts is essential for anticipating future trade dynamics and adapting to a world where economics and strategy are increasingly inseparable.
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