The United States and China have sharply raised tariffs on each other’s imports over the last week, raising the prospect of a long and painful trade war between the world’s two largest economies.
Even as investors rallied to his decision to pause “reciprocal” tariffs on imports from dozens of countries on Wednesday, President Donald Trump raised tariffs on Chinese goods to 145% - an increase of nearly 50% in a day, and his fourth tariff action against Beijing since January. President Xi Jinping has not backed down either, retaliating by raising China’s tariffs on U.S.-made goods to 84% and imposing new curbs on critical resources. (Trump said on Wednesday that the tariff rate on China would be 125%, but a White House official, speaking on condition of anonymity to explain policy, said on Thursday the actual rate would be 145%.)
Further escalation
The intensifying financial hostilities represent a potentially significant threat to the United States and global economies, regardless of the delay in higher tariffs for other trading partners. Officials in both Beijing and Washington have, for years, prepared for a major clash between the two superpowers. Some economists say further escalation could push the U.S. into a recession - potentially as much as Trump’s original tariff proposal would have.
Treasury Secretary Scott Bessent said on Wednesday that “everything is on the table” in responding to China, and lawmakers in Congress have begun pushing measures designed to increase financial pressure on Beijing.
The two nations have become increasingly interlinked over recent decades - with Americans dependent on cheap consumer imports and Chinese exporters reliant on the vast U.S. market. Their trade relationship spans iPhones (made in China), soybeans (grown in the U.S.) and financial instruments that anchor the U.S. economy. Combined, the countries represent more than 40% of global GDP. The consequences of an all-out trade war would be global.
China accounts for about 14% of U.S. imports. The new tariffs are now so high that the overall U.S. tariff rate rose slightly on Wednesday, despite simultaneous duty reductions on imports from other countries, according to Ernie Tedeschi, a former Biden administration official now at Yale University’s Budget Lab.
“Everyone is breathing a sigh of relief today, but if we’d just started with 100-plus percent tariffs with the world’s two largest economies, we’d be saying we’re in a global trade war the likes of which we have not seen in decades,” said Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center. “If these tariffs were to stay on at this level … the recession risks are still high, in part because there’s still so much uncertainty.”
Jason Furman, a Harvard University economist and former Obama administration official, said Trump’s tariffs are “now higher and more inflationary” than those unveiled on April 2.
De-escalation remains possible
There are signs that de-escalation is still possible. On Wednesday, Trump appeared to express sympathy for the Chinese position, saying Xi wanted to reach an agreement but that Beijing wasn’t sure how to proceed. He called Xi “a friend of mine” who understood how to strike a deal.
“China wants to make a deal. They just don’t know how quite to go about it,” Trump told reporters. “They don’t know quite how to go about it, but they’ll figure it out.”
Later in the day, Trump said he did not believe further tariff hikes would be needed: “I don’t think we’ll have to do it more.”
As of Thursday afternoon local time, Beijing had not retaliated.
“We will not sit and watch the destruction of international trade rules,” said Lin Jian, spokesman for China’s Foreign Affairs Ministry. “If the U.S. insists on launching a tariff or trade war, China will fight to the end.”
Easing tensions
Some experts warn that Trump and Xi may be unable to ease the tensions inflamed by rapid new trade barriers. Many officials close to the Trump administration are pushing for actions that could deepen, not calm, economic hostilities.
Economists and bipartisan policymakers have long accused China of unfair trade practices, including intellectual property theft and undercutting labor and environmental standards.
Sen. Rick Scott, R-Fla., a close Trump ally, has pushed legislation requiring stockbrokers to label firms linked to Chinese entities with investor warnings. Secretary of State Marco Rubio, during his time in the Senate, championed restrictions to block Chinese firms and their subsidiaries from U.S. exchanges. Investor Kevin O’Leary, who has spoken with Trump, has called for tariffs of 400% on China.
“There’s not a high enough tariff for me. I don’t think we should buy anything from China,” Scott said in an interview. “I think they get it - they understand that China wants to destroy us, destroy our allies, destroy our way of life.”
Top Trump advisers such as Bessent and Stephen Miran, chair of the White House Council of Economic Advisers, have said they believe China is in a more vulnerable position than the U.S. - suggesting a willingness to escalate beyond import duties.
Beyond tariffs
“We might end up with escalation that goes beyond tariffs,” said Eswar Prasad, a Cornell University professor and former head of the IMF’s financial services division. “As of today, many of the scenarios considered completely unrealistic are looking more likely.”
Beijing has further retaliation options. China could move to offload large U.S. Treasury holdings, which could disrupt the bond market and raise the cost of U.S. debt. It could sell hundreds of billions in mortgage-backed securities, pushing up interest rates. It could also restrict exports of pharmaceuticals, semiconductors, critical minerals and other resources vital to the U.S. economy, said Adam Posen, president of the Peterson Institute for International Economics.
“They can create shortages of things we really need and can’t switch away from anytime soon,” Posen said.
He added that China could also cut off tourism to U.S. cities.
“Essentially, China does not have to engage in the tariffs game with Trump,” he said. “They can deprive us of things we need directly - either for households or for our everyday lives.”
China cannot afford to back down in what it views as an attack on Chinese manufacturing, said Wang Yiwei, an international relations scholar at Renmin University in Beijing.
“When no common ground exists between ‘the great rejuvenation of the Chinese nation’ and ‘make America great again,’ decoupling becomes the underlying reality, and tensions will only escalate,” Wang said, referencing a favorite slogan of Xi and Trump’s campaign message.
Yet Trump may not be seeking further confrontation. Hawkish voices in the administration believe China is weak and that the U.S. should seize the moment to intensify financial pressure, according to Michael Pillsbury, a China expert at the Heritage Foundation. But Pillsbury said Trump’s recent comments suggest a desire to cool tensions.
“The super-hawks are saying, ‘China is down now; we really have to finish this off.’ I oppose that approach,” Pillsbury said. “Trump is right: The Chinese don’t know exactly how to get out of this situation. We need to find a back-channel way to help them see what they should do next.”