Since the writing of this article, trade tensions between China and the US were escalated when the US announced an additional 10% tariff on Chinese imports starting from March 4, citing the “fentanyl issue,” raising total tariffs to 20%.  China then retaliated by increasing tariffs on key US agricultural products by up to 15%.

According to CEIBS Professor of Economics Bala Ramasamy, America’s imposition of tariffs represents a foolish step backwards to a global trade policy that has been proven to be counterproductive. He emphasises, however, the need for mainland China’s policy makers to closely observe how Washington adjusts its trade policies toward other Asian economies, particularly Japan, South Korea, and Taiwan. The escalation of the trade war represents not only a geopolitical standoff, but also a potential catalyst for reshaping Asia’s supply chain landscape.

By Bala Ramasamy and Matthew Yeung

The Trump-initiated US-China trade war was restarted on February 4, 2025 when China’s Ministry of Finance announced a 15% retaliatory tariff on certain types of American coal and LNG and a 10% tariff on US crude oil, agricultural machinery, large cars and pickup trucks. These amount to $20 billion, which is a fraction of the $500 billion worth of Chinese goods that will be tariffed by the US. China has also imposed export restrictions on some rare earth metals, put several more US companies on its blacklist, and lodged a complaint to the WTO citing the violation of trade rules.

Trump’s basis for imposing these tariffs is confusing. It ranges from trade imbalances to the unregulated flow of some fentanyl precursor chemicals from China to the US and to arm-twisting Bytedance into selling its international wing, TikTok, to an American buyer. None of these justifications entirely make sense. Controlling the flow of fentanyl into the US is surely a customs control issue that would be more effectively done on the buyers’ side; if the US was serious about combating the opioid epidemic, non-tariff measures would be more powerful. Bytedance and TikTok are private companies. Penalising a whole country for the actions of one company feels like overkill.

The US’s overall trade deficit is one that goes back to Trump’s first term and further, and despite the various trade restrictions imposed on China, it remains. Fundamentally, the appetite of the American consumer is insatiable, and the issue of trade deficits will therefore continue whether, with China or other trading partners. Trump’s argument is that traders from all other countries are desperate to sell to the American market, 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.

The reason that this policy is so misguided is that the tariffs will, in effect, be equivalent to a direct increase in the consumption tax on the American consumer.

Consider the goods that are exported by China to the US. We looked at a fairly disaggregated level (HS 6 digits) and found that the top 20 items make up about 40% of China’s exports to the US. The largest export in 2023 was mobile phones, amounting to $45 billion, or 9% of China’s total exports. One can assume that a large portion of this would have been iPhones; imposing an additional 10% tariff would not, therefore, distract the demand of the typical American consumer from 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 US. China alone exported about 120 million mobile phone sets in 2023. Compare that to the second and third largest source of US imports of mobile phones – Vietnam at 18 million and India at 11 million – and one can easily conclude that it will be several years before these two countries can become a real threat to China.

China’s second largest export item in 2023 was laptops and tablets; similarly, one can also assume that a sizeable proportion of these would be iPads. This category makes up 7% of China’s exports, and a similar argument holds. China exported about 84 million units to the US, compared to the second largest source, Vietnam, at about 14 million units. This is also the case for the third and fourth largest export categories, lithium batteries, children’s scooters, tricycles, etc. In fact, if one takes China’s top 20 export items, it ranks as the number one US import source for 15 of the product categories.

There is no real substitute for China’s production capabilities. China is not just the factory for the world; it is the factory for the US. Without a real substitute either domestically or internationally, the 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 the American consumer. It is not surprising, then, that researchers from the Peterson Institute for International Economics estimate that a typical American household will pay about $1,200 annually if the tariffs on Canada, China and Mexico are implemented. Research from the same Institute found that tariffs imposed on China during Trump’s first time did not yield any significant increase in government revenue.

If Trump were to escalate the tariffs, say to 60%, this would have an effect on China’s exports. But it would also mean that the price of phones and tablets would increase for American consumers, as demand would dramatically outweigh supply.

Ultimately, this trade war seems to be about optics, intended to increase popularity among voters and show that America is strong; something which, ironically, no one doubted in the first place.

Bala Ramasamy is Professor of Economics and Associate Dean at CEIBS. Matthew Yeung is Associate Professor of Marketing at Hong Kong Metropolitan University.