The Impending Changes in the Economic Landscape as a Result of the Transformation in US-China Trade Relations
In the past year, the trade landscape between the US and China has significantly shifted as the initially touted wish to remain intertwined economies has given way to steep tariffs and subsequent retaliatory measures.
Just a year ago, former US Treasury secretary Janet Yellen conveyed to her Chinese counterparts in Beijing that the world's biggest economy had no desire to sever ties with the second largest, its major trading partner. However, circumstances have since changed drastically.
In response to US-imposed tariffs of 145% on Chinese imports, China retaliated with a comparable 125% tariff on American goods, as well as restrictions on the export of rare-earth minerals, vital components in various high-tech sectors including defense.
The standoff appears to benefit neither nation, yet the gradual decoupling of their economies has escalated into a rapid unwinding. As a result, bilateral trade in 2024 amounted to $582 billion, with the US importing roughly 73% of its smartphones—valued at $41 billion—from China annually, as well as 66% of its laptops and other goods.
Clearly, the US has grown increasingly dependent on Chinese imports, with China dominating numerous categories, including games consoles, PC monitors, toys, and lithium-ion batteries. Furthermore, the US exports fewer goods to China,reporting a bilateral trade deficit of $295.4 billion in the previous year.
The escalating tariffs have already taken their toll on both economies. The US economy contracted by 0.3% in the first quarter of the year, and consumer confidence waned while imports surged as businesses hurried to stockpile goods before the tariffs took effect in April. Concurrently, Chinese factory output slowed markedly in April as US demand plummeted due to the tariffs, according to Apollo Global Management. Container traffic from China to the US, they reported, had already started to decline significantly, and the repercussions could result in empty shelves in US stores and scarcities for consumers and businesses reliant on Chinese goods within a few weeks.
The trade conflict appears to have ignited a full-blown war, according to Arthur Kroeber of Gavekal Dragonomics, who believes a grand bargain is far from imminent. Trump, it seems, is resolute in curbing US trade with China.
Sup Mitra, director-general of the World Trade Organization, estimates that merchandise trade between the two countries will shrink by 80% as a result of the current tariffs, a decline that would have been more than 90% without the recent exemption for smartphones and other high-tech goods. Bloomberg Economics projects that 100% US tariffs on Chinese imports would virtually eliminate all US imports from China over a medium-term period.
This rapid decoupling has been in progress for several years, accelerated under Trump's presidency. China's share of US imports has dropped eight percentage points to 13.4% between 2017 and 2024, as indicated by US official figures. Today, China accounts for only a third of US imports from Asia compared to half in 2018. US foreign direct investment in China plummeted to $127 billion in 2023, while the annual flow of funds is dwindling, according to Una Galani of Breakingviews. Meanwhile, China's stock of foreign direct investment in the US fell to $44 billion in 2023, a 16% decrease since 2019, while the annual flow of funds has been negative since 2020, suggesting that Chinese investors have been divesting from American projects.
Discouragingly, the International Monetary Fund (IMF) projects that a complete decoupling of China and Western economies could slash 7% from global GDP in the long term, a loss equivalent to about $7.4 trillion, or the size of the French and German economies combined. Developing economies, in particular, would bear the brunt of the trade war's impact. It is hoped that this is an unlikely worst-case scenario.
Donald Trump has persistently expressed the belief that any trade imbalance signifies exploitation of the US, while Scott Bessent, the current US Treasury secretary, seems confident of his nation's victory in the trade war. However, The Economist asserts that optimism might prove misplaced, as the US imports crucial goods such as electronics and antibiotics from China, whereas China exports far less and could more easily replace goods it procures from elsewhere.
Despite China's apparent ability to withstand pain from the trade war, the US stands to suffer heavily. Trump has antagonized allies and weakened the attractiveness of US debt and its currency by bullying China. If America loses this trade war, the consequences will be self-inflicted.
In light of the trade conflict, the US government considers diversifying its sources for key products, such as electronics and pharmaceuticals, featured regularly in the newsletter titled "US Business Strategy Updates." Given the US imports of crucial goods like antibiotics and smartphones from China, personal finance experts warn of potential increases in healthcare expenses and consumer electronics prices due to tariffs, affecting Americans' wallets directly. Under these circumstances, businesses should closely monitor international finance trends and assess the impact of tariffs on their supply chains, as seen in the ongoing decoupling of the US and Chinese business landscapes.
