The Dragon Strikes Back

A look at the challenges China faces in offering concessions to remove the latest 10% tariff increase, which is also expected to rise further.

AUTHORS 
Robert Gilhooly 
Michael Langham

Key takeaways

• The initial good news that President Trump did not announce tariffs on China on his first day back in the White House didn’t last long.
• Additional 10% tariffs and an end to de minimis exemptions – which allowed low-value items to be imported without any duty – went into effect after three weeks. The equivalent rise in the average bilateral tariff rate during the first trade war took over a year.
• The focus on fentanyl as a justification for tariffs makes any rollback unlikely. China will struggle to deliver strong political optics, such as Mexico’s 10,000 troops on the border, while House Bill 747 – the Stop Chinese Fentanyl Act – could spark sanctions on Chinese producers.
• Moreover, the US trade review will almost certainly conclude that China did not live up to the Phase 1 deal and that non-tariff barriers to trade, such as subsidies, remain high, leading to further tariff increases. While these could be used to create leverage to force through a new trade deal, another plan for China to purchase more US goods may struggle with credibility. We continue to expect a large and lasting increase in US-China tariffs.
• Ultimately, more support will be needed to mitigate the impact of trade war disruptions, and our best guess is that around 1% is knocked off Chinese GDP, limiting 2025 growth to 4.6% and potentially pushing 2026 GDP growth down to 4.1%.

China’s retaliation to US tariffs was restrained but sets out a playbook for how it could hit back more forcefully. 

We think China will find it challenging to offer concessions to remove the latest 10% increase, and in fact, tariffs are likely to rise further. 

Additional easing will help to mitigate much, but not all, the damage to the economy.

No reprieve 

While Mexico and Canada managed to avoid US tariffs – helped by last-minute phone calls – China did not.

Across-the-board 10% tariffs have gone into effect, while the end to de minimis duty free imports will be put into place soon, after US customs work out the practicalities.

While this tariff hike is, for now, smaller than the 60% President Donald Trump threatened on the campaign trail, it is striking in several regards. 

First, it took over a year for the average bilateral tariff rate on US imports of Chinese goods to rise by 10 percentage points during the first trade war (Chart 1).
 

Chart 1. Is +10% just the start?

Image

Source: U.S. Census Bureau, USTR, WITS, abrdn, February 2025.
*Scenario assumes 60% tariffs applied to Lists 1-4
 

Second, the implementation of across-the-board tariffs suggests no inclination on the US’s part to lessen the hit to consumers. This could have been achieved by pursuing a more targeted approach focused on intermediate products, which would have likely been partly absorbed across the supply chain.

Third, the addition of tariffs for security, as they have been framed by some members of the administration – for example those targeting fentanyl – could result in tariffs settling at a higher rate than we anticipate. 

For now, we judge these tariffs as a stepping-stone towards our base case for US-China average bilateral tariffs to increase to 40%. But there remains a risk they go higher still, particularly if the Commerce Department focuses on non-tariff barriers such as government subsidies and currency manipulation. 

China’s silver linings playbook

China’s retaliation was measured, setting out a playbook for where it can do more damage if pushed China hit back by announcing:

• 10–15% tariffs on US imports of liquid natural gas, coal, oil, farm equipment, and some large engine autos
• An antitrust investigation into Google
• Tighter export controls on a selection of critical minerals

The three prongs are more of a warning about where China can strike back harder if provoked, rather than an attempt to inflict material damage on the US. 
China’s imports of US energy are a very small share of US exports. Google is a high-profile US company, but corporates with larger exposure to China could certainly have been found (Apple or Tesla, for example). And there are alternative minerals that are more critical to the US which could have been chosen. 

Indeed, if we consider minerals where China is both the largest US supplier and the largest global producer, out of the minerals now facing tighter controls only Tungsten meets these criteria. And, even then, US import reliance is notably lower than other minerals (Chart 2).
 

Chart 2. Critical minerals not that critical … yet

Image

Source: abrdn, Mineral Commodity Summaries, December 2024.
*Figure shows commodities where China is the primary import source for US and largest global producer
 

The latest +10% tariffs will be hard to roll back … 

China will struggle to deliver strong political optics that could help defuse tensions over fentanyl – like Mexico did by placing 10,000 troops on the border.
Even if China tightens up trade in the precursor chemicals necessary for illegal fentanyl production – introducing tough “Know Your Customer” requirements, for example – it could still be vulnerable to accusations that it is not doing enough.

Indeed, with Bill 747 – the Stop Chinese Fentanyl Act – currently moving through Congress, the US could impose sanctions on Chinese producers, stoking trade tensions further and raising the bar for tariffs to be removed. 

… While the US trade review will lead to additional tariffs

The Act of God clauses in the Phase 1 trade deal between the US and China signed shortly before the pandemic will not help China avoid additional trade-related tariffs when the US review reports on April 1.

To start, many US politicians (including Trump) have blamed China for the pandemic itself. China did increase its US purchases by around $20 billion after the initial pandemic shock unwound and global trade rebounded, but this is well short of the $200 billion agreed (Chart 3). 
 

Chart 3.  A new purchase agreement is not impossible, but it may suffer from credibility issues

Image

Source: abrdn, U.S. Census Bureau, February 2025.
 

Moreover, even though there was little-to-no effort by either the US or China to pursue the Phase 1 deal after Trump was defeated by Biden in his first attempt at re-election – this is unlikely to change the conclusion.

Of course, it would be harder for China to slow-walk purchases should Phase 1 be resuscitated, given that we are at the start of Trump’s term rather than the end. We cannot rule out that tariffs introduced after the trade review will be used as leverage for a new deal. However, the credibility of any purchase agreement will remain a big hurdle to overcome. We continue to expect a significant and lasting increase in US-China tariffs.

Offsetting some of the trade war?

China’s strong end to 2024 and continued easing of financial conditions should offset some of the trade war.

The data black hole caused by the Lunar New Year means that there are fewer indicators of activity to help judge economic momentum.

The January purchasing managers’ index did point to a potential slowdown at the start of the year, but travel and tourism figures for the Lunar New Year were fairly robust, with the number of visitors and total tourism revenue up around 6% compared to a year ago. That said, revenue per head remains below pre-pandemic norms, suggesting a degree of lingering consumer caution.

Final thoughts

Regardless, the loosening of financial conditions since the September policy pivot is unlikely to have filtered through to activity, given normal lags. With the anticipated announcement of fiscal loosening at the ‘two sessions’ occurring in March, there is a risk of disappointment, but recent communications from the State Council have been encouraging. For example, the latest statement highlights efforts to shore up foreign direct investment and support household income and consumption. This suggests that policy easing to date will help support growth in the face of headwinds from the second trade war.

Important information

FOR PROFESSIONAL INVESTORS ONLY. NOT FOR USE BY RETAIL INVESTORS.

Any individual companies or other securities discussed above have been selected for illustrative purposes only to demonstrate abrdn's views. They're not meant as an investment recommendation, indication of future performance or as an indication of any holdings by abrdn.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

UNITED STATES RESIDENTS

The purpose of this website is to provide general information about the US-registered investment advisers which are part of abrdn, and the strategies they manage. The information provided is not intended as an offer or solicitation for the purchase or sale of any financial instrument.
Past performance is not indicative of future results, and there can be no guarantee as to the accuracy of market forecasts. Opinions, estimates, and forecasts may be changed without notice. This site does not provide financial or investment advice and does not take into account the particular financial circumstances of individual investors. Before investing, investors should seek their own professional advice. The views and opinions expressed are provided for general information only, and do not constitute specific tax, legal, or investment advice to, or recommendations for, any person. We suggest that you consult your financial or tax advisor, accountant, or attorney with regard to your specific situation.

In the United States, abrdn is the marketing name for the following affiliated, registered investment advisers: abrdn Inc., abrdn Investments Limited,  and abrdn Asia Limited

AA-100325-190386-1