The Trump-initiated U.S.-China trade war restarted on February 4, 2025, when China’s Ministry of Finance announced a 15 percent retaliatory tariff on certain types of coal and LNG and a 10 percent tariff on crude oil, agricultural machinery, large cars, and pickup trucks. This amounts to $20 billion, which is a fraction of the $500 billion worth of Chinese goods that will be taxed by Trump. China has also imposed export restrictions on some rare earth metals, put several more U.S. companies on its blacklist, and has lodged a complaint to the WTO for a violation of trade rules.
Trump’s basis for imposing tariffs is confusing. It ranges from trade imbalances to the unregulated flow of some fentanyl precursor chemicals from China to the U.S. through Mexico, to arm-twisting ByteDance into selling its international wing, TikTok, to an American company. None of these excuses makes total sense.
Surely, controlling the flow of fentanyl into the U.S. is a customs control issue that would be more effectively done on the buyers’ side, and if the U.S. were serious about combating the opioid epidemic, non-tariff measures would be more powerful. If a collaboration between China Customs and its 100,000 staff and the U.S. Immigration and Customs Enforcement (ICE) with its 20,000 officers cannot overpower the drug cartels and syndicates, no amount of tariffs will bring the opioid crisis under control.
ByteDance, TikTok, DeepSeek and the like are private companies. Similar to corporations in the U.S. donating to the Republican or Democratic Parties, founders, CEOs and senior members of Chinese companies may be members of the Chinese Communist Party. In a world where politics and business seem to be so intertwined, penalizing the whole country for the actions of one company seems to be overkill.
The U.S. trade deficit issue has been one that goes back to Trump’s first term, and despite the various trade restrictions imposed on China, the trade deficit continues. Fundamentally, the appetite of the American consumer is insatiable, and the trade deficit will continue whether it is with China or other trading partners. Trump’s argument is that traders from all other countries are desperate to sell to Americans, and so imposing import duties can become a solid source of government revenue, one that can finance the various projects he has in mind, and to finance the tax cuts he is proposing.
Trump is wrong in this regard because the 10 percent tariff he is imposing is equivalent to a direct increase in the consumption tax on the American consumer.
Consider the goods that are exported by China to the United States. We looked at a fairly disaggregated level (HS 6 digits), and found that the top 15 items make up close to 30 percent of China’s exports to the United States. The largest export in 2023 was mobile phones, amounting to $45 billion or 9 percent of China’s total exports. One can assume that a large portion of this would have been Apple iPhones. Imposing an additional 10 percent tariff may not diminish the typical American consumer’s demand for an iPhone.
One can argue that iPhones are also being produced in India and Vietnam, and so China’s exports of iPhones will decrease as other countries start to replace China. Such an argument is valid, but only in the long run. Why? We looked at the quantity of phones that are exported to the United States. China alone exported about 120 million mobile phone sets in 2023. Compare that to the second and third largest sources of U.S. imports of mobile phones: China leads Vietnam and India by as much as 551 percent and 990 percent, respectively. One can easily conclude that it will be several years before these two countries can become a real threat to China in the mobile phone export business.
China’s second-largest export item in 2023 was laptops and tablets. One can also assume that a sizeable proportion of that is made up of Apple iPads. This category makes up 7 percent of China’s exports, and a similar argument holds. China exported about 84 million units to the U.S., compared to the second largest source, Vietnam, at about 14 million units. This is also the case for the third and fourth export categories, lithium batteries and toy scooters, tricycles, etc.
If one takes China’s top 15 export items (see table below), it ranks as the number one U.S. import source for 13 of the product categories in terms of physical quantity. The lead over the second-largest exporter for many items exceeds several hundred percent.
There is no real substitute for China’s production capabilities.
Despite increasing labor costs in China, many companies continue to remain in China because the productivity of the Chinese worker is higher than in many other low-cost locations like Bangladesh. In addition, China has a sophisticated supply chain ecosystem that is unmatched by any other country. Whether it is to produce baseball caps or mobile phones, over the years since opening up in 1978, China has mastered the art of manufacturing such that more and more of the parts and components making up the caps and mobile phones come from within China.
This is now more prominent in the new “three”: electric vehicles (EVs), solar photovoltaics (PVs) and lithium-ion batteries. China’s share in the global exports of EVs and PVs inputs, for instance, is close to or more than 50 percent. Thus, an assembly plant can be relocated from China to Vietnam, but most significant inputs would still have to come from China. Twelve percent of all parts and components are sourced from China, second only to Mexico. Even if a supplier can be found in Southeast Asia, there is a high chance that it would be a Chinese firm, as some surveys indicate that more than 80 percent of small and medium-sized Chinese firms are considering “chuhai” (going global).
China is not just a factory for the world; it is a factory for the U.S.
Without a real substitute, either domestically or internationally, Americans do not have much choice but to buy from China, at least in the short to medium term. The tariffs imposed on China’s exporters will be paid by American consumers. It is not surprising that researchers from the Peterson Institute for International Economics estimate that a typical American household will pay about $1,200 annually if the tariff on Canada, China, and Mexico is implemented. And this does not factor in the most recent tariff announcement. Research from the same institute found that the tariff imposed on China during Trump 1.0 did not yield any significant increase in government revenue.
If Trump were to escalate the tariff levels, say to 60 percent, this would have an effect on China’s exports. But, it also means the American consumer will have to pay a far higher price for phones and tablets as demand outweighs supply dramatically.
The tariff wars appear to be just optics to increase popularity among voters and show a strong America, which no one doubted in the first place. The effect on China will be minimal, especially in the short term. It will take time for American companies to find or build alternative sources. It is also not sufficient for Chinese companies to consider a +1 strategy, as the reciprocal tariffs that will be imposed by the U.S. would impact all manufacturing-intensive countries. China’s domestic market has to be an important focus of these companies.
