China-US Trade War, explained
Tariffs, chips and the AI arms race
February 2, 2025
Tariff is a tax on goods bought from other countries, paid by the foreign party.
In January 2018, US President Donald Trump introduced tariffs on solar panels and washing machines imported from China, which eventually started a trade war.
A trade war is an attempt to damage your opponent economically by reducing their income from trade.
In March 2018, Trump pushed for tariffs on another $50-60 billion of goods imported from China, as well as introducing some tariffs on other countries.
When they came into effect, China introduced similar tariffs in response.
Trump's administration announced further tariffs and the war escalated over the next 18 months, with average tariffs increasing from 5%-10% to above 20% both ways.
The reasons for putting tariffs on China:
Unfair trading practices: China was accused of giving their companies an unfair advantage thorough subsidies and tax breaks. This allowed Chinese goods to be sold abroad cheaper than they are sold at home, outcompeting local producers.
Intellectual property theft: the US accused China of stealing corporate secrets from US companies, including military technologies or copyrighted materials.
Currency manipulation: the US was concerned about China's interventions to support or devalue its currency (yuan/renminbi) to affect the competitiveness of its exports.
There are also ways that tariffs in general can be useful:
Increased income: assuming the volume of imports stays the same, the country that raised the tariffs would increase its earnings as it is now collecting more tax revenue.
Protected industry: higher tariffs make foreign products cost more, allowing local firms to gain an advantage and potentially grow.
Political deal-making: tariffs or other sanctions could be lifted in exchange for other benefits.
However, tariffs could also decrease the volume of trade, increase prices, create economic losses and cause retaliation.
US trade with China greatly expanded in the 21st century, with US imports of Chinese goods growing by over 500% between 2000 and 2018.
Effects of the trade war
Reduced trade: both imports from and exports to China fell by about 20% by 2020.
Cost passed on to consumers: the tariffs have mostly resulted in the costs of the goods increasing proportionally, not the exporters' profit margin decreasing. That was true for both the US and China.
Minor economic damage: the trade war is estimated to have cost the US around 0.2%-0.4% of the GDP.
Slowed industry: by 2020, manufacturing activity dropped to its lowest level since 2009, as volumes of orders fell, raising factory unemployment.
No decreased deficit: trade deficit with China did decrease marginally, but the overall US trade deficit grew.
Other beneficiaries: countries like Vietnam and Mexico have benefited from US importers looking for alternatives to Chinese goods, or by simply reselling Chinese supplies.
By 2020, the trade war has been mostly described as a failure for the US.
In January 2020, China and the US signed the Phase One Agreement, a deal that paused the tariff war.
As part of the deal, China agreed to:
Change its intellectual property regulations to better defend the interests of US firms
Not use any currency manipulation to affect its trade with the US
Pledge to buy and extra $200 billion in US goods by 2022 to counteract the trade deficit
In the following 2 years, China bought 58% of the extra $200B promised, citing the global pandemic.
The deal did stop tariffs from escalating further, but China and the US continued to engage in trade war through other measures.
President Biden kept the existing tariffs in place for over 3 years, and began raising them again in 2024.
The focus was on targeted tariffs, particularly on batteries, solar panels and electric cars, sensitive industries where China was gaining market share at low prices.
Another weapon in a trade war is export restrictions.
Export restrictions are meant to damage the industry of another country by disallowing it access to key imported components, like high-tech electronics or rare minerals.
Semiconductors (or chips) are tiny components that control the flow of electricity and form the basis for all modern computers.
Semiconductors can be found in almost any electronics and China has long been successfully mass-producing basic chips for devices like washing machines.
As part of Made in China 2025 policy, the country aims for a 70% self-sufficiency in semiconductors by this year.
However, developing Artificial Intelligence technologies requires access to the most advanced chips.
Because of that, the US has been actively trying to disrupt China's semiconductor industry to maintain its technological dominance.
US introduced a number of measures to do so, while also boosting its domestic semiconductor industry.
Export ban: US banned the exports of advanced chips used for AI training to China and cooperated with allies like Japan and the Netherlands on joining in. The US also banned sales of related manufacturing equipment.
Entity list: some Chinese companies, most notably Huawei, got added to a list of companies further restricted from accessing US technologies.
Investment: US invested heavily in supporting domestic chip manufacturers and attracting global leaders like TSMC to build factories in the US.
China also introduced a number of non-tariff measures to pressure the US and retaliate against their sanctions:
Export controls: China required local firms to obtain special licenses for exporting critical minerals like gallium and germanium to the US (China controls almost 90% of the global supply in those).
Export bans: by 2024, China introduced a complete ban on exports on gallium, germanium, antimony and some other resources to the US.
Legal action: China launched investigations into anti-competitive practices of the US and some private firms like Nvidia over their restrictions.
Entity list: China added a number of US companies on its restricted exports list for items that could be used for military purposes.
Avoidance schemes: restricted goods have still reached both the US and China through alternative trading routes and smuggling.
On February 1, 2025, President Trump announced a radical new set of tariffs:
25% on all imports from Mexico
25% on all imports from Canada (except oil and gas)
10% on all imports from China
What are the economic objectives?
Reduce trade deficits: US is importing more goods than it is exporting, and it is true for its relations with all its top trading partners too (EU, Mexico, Canada and China). Tariffs could reduce the volume of imports, balancing the trade.
Protect domestic industry: boost local manufacturing and employment.
Generate additional revenue: increasing the government budget through income from the tariffs.
However, the US legally has free trade agreements with countries like Mexico and Canada, which forbids the increasing of tariffs.
To get around this, President Trump relies on emergency circumstances, and therefore presents national security reasons for these measures:
Illegal migration: Trump blames the countries of Mexico and Canada for allowing illegal migrant flows into the US. 2021-23 saw a sharp increase in illegal border crossings.
Drugs smuggling: in particular, Trump blames China for the smuggling of fentanyl, a deadly drug, into the US. Synthetic opioid overdoses more than doubled in the US since 2017.
President Trump has suggested the possibility of raising tariffs on Chinese imports to 60%-100%.
However, implementing tariffs still holds the risks that came through in 2018-20, especially of increasing prices, stagnating manufacturing and loss of trade.
Author Post factum staff
Editor Anton Kutuzov
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