The US and China could be heading for a long standoff in their trade war, risking collateral damage for economies and markets the world over.
On Friday, China announced sweeping retaliatory tariffs of 34% tariff on all US imports — showing that Beijing isn’t taking President Donald Trump’s tariffs lying down. The world’s second-largest economy also announced fresh export bans on rare earths.
On Monday, Trump hit back with a fresh threat of an additional 50% in tariffs on China — on top of a total 54% he announced since taking office — if Beijing doesn’t withdraw its retaliatory tariffs.
On Tuesday, the row between the world’s two largest economies intensified, with China’s Commerce Ministry calling Trump’s latest threat “a mistake on top of a mistake.”
“If the US insists on its own way, China will fight to the end,” said a spokesperson in a statement. The ministry vowed countermeasures if more US tariffs are put in place.
Treasury Secretary Scott Bessent responded on Tuesday, calling the escalation a “big mistake” in a CNBC interview.
“What do we lose by the Chinese raising tariffs on us? We export one-fifth to them of what they export to us, so that is a losing hand for them.”
Bessent described tariffs as a “melting ice cube” because they would generate revenues as factories are built in the US, which would then bring in payroll taxes.
The intensifying spat between the world’s two largest economies contributed to a worsening market rout globally. European and Asian stocks made a partial recovery on Tuesday, with Wall Street set to open higher.
“Unlike the previous two rounds, in which the tit-for-tat tariff response was more restrained, targeting some specific categories of US imports, this time, Beijing announced a plain, simple and blanket tariff hike,” wrote Nomura economists on Monday.
Households hammered
The trade war will be painful for Americans — and for everyone else.
“Near-term pain all around (US included!) is guaranteed if the US does not dial-back on blanket tariffs as industries are hit by margin squeeze and households are hammered by acute affordability woes,” wrote Vishnu Varathan of Mizuho in a Monday note.
Some consumers are already snapping up essential items to beat price inflation that’s likely to set in as importing companies pass on the cost of tariffs to consumers. Others are slowing purchases of luxury items, Business Insider reported last week.
Meanwhile, many are witnessing their investments slump due to a historic global stock rout as markets sound the alarm on a potential economic downturn.
“Needless devastation by way of collateral damage all around will be hard to avert as aggregate demand slumps accentuated by a sharp drop in demand for capital goods as uncertainty paralyzes investments,” wrote Varathan.
Analysts are not expecting a quick resolution, with those from the Eurasia Group citing “mismatched negotiation styles” between Trump and Chinese leader Xi Jinping.
The “US and China are stuck in an unprecedented, and expensive, game of chicken, and it seems that both sides are unwilling to back down,” wrote economists at Nomura in a note on Tuesday, adding that “the worst might be yet to come” for the financial markets of both countries.
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Beijing’s cards
China’s countermeasures — which exceeded expectations — likely reflect the country’s perception that the US’s latest tariff move is extreme. Beijing probably views Washington’s efforts to target Chinese exports through third countries as “comprehensive and malicious,” wrote analysts at Eurasia Group, a risk consultancy, in a Friday note.
Nomura’s economists expect tensions between the two mega economies to “worsen significantly,” particularly as they’re already competing in high-tech sectors including AI and robotics.
And there’s no guarantee that Xi wants a deal under the current, poor state of negotiations.
“Strong, symmetric, tit-for-tat tariff retaliation is a precondition for Beijing to come to the negotiating table. President Xi Jinping cannot engage in talks from a position of relative weakness,” wrote the Eurasia Group analysts.
Even though the US has significant leverage from its status as the world’s largest economy and consuming market, China has its own cards.
“The bluff Beijing is calling is evident. Imports substitution is simply not an option for the US. Not right now,” wrote Varathan.
Trump has made it clear that he wants manufacturing jobs back in the US.
That won’t be an easy transition, with challenges including long lead times to construct manufacturing facilities and extensive supply chains located elsewhere.
Trump doubled down on his new tariffs on Sunday night, saying they are necessary to rectify America’s trade deficits with other countries.
“I don’t want anything to go down, but sometimes you have to take medicine to fix something,” Trump told reporters.
April 8, 2025 — This story has been updated to include Trump’s and Bessent’s statements, the Chinese Commerce Ministry’s latest responses, and new comments from Nomura.
