Tariff War Intensifies: Navigating Challenges and Opportunities in a Changing Global Economy
Dr Jing Li
2 April 2025
Since the beginning of American President Donald Trump’s second term in the White House, a new round of trade war has unfolded on a full scale. As of March 2025, not only has a 25% tariff been imposed on imported steel and aluminium, but targeted tariffs have also been implemented on major trading partners such as China, Canada, and Mexico, further escalating global trade tensions. In the face of America’s increasingly hard-line trade protectionist policy, the EU, Canada, China, etc. are attempting to alleviate the tariff pressure through litigation, negotiations, and countermeasures. However, the US has gone beyond these actions. On 26 March 2025, Trump announced that, effective on 2 April, all imported automobiles will be subject to a 25% tariff and plans are under way to impose the same tariff on non-American components of vehicles assembled on US soil, starting one month later. In addition, the “reciprocal tariffs” implemented simultaneously will step up the trade war.
In the wake of Trump’s first term as US President, tariffs were already at the core of his economic strategy. He firmly believes in them as a tool to boost domestic manufacturing and employment, framing tariffs as an important means of “Making America Great Again”. However, in actual fact such a policy has triggered grave concerns and adverse impacts around the world. Classical economic theories have long demonstrated that tariff hikes will hinder economic growth through various channels. First, tariffs will raise import costs, directly undermining consumer interests and weakening their purchasing power, in other words, compromising the overall consumption power. Second, rising import costs will also drive up production costs for domestic enterprises, implicating related industries through supply chains, and thereby leading to diminishing output. Subjecting American companies to liquidity pressure, this can even set off a chain reaction that affects the entire investment environment. Nonetheless, Trump remains convinced that the economic benefits derived from tariff-hike pressure will outweigh potential losses. Meanwhile, with the continued escalation of the trade war, companies and consumers in the US and around the world will face even greater harm.
The reciprocal tariffs are introduced by the US to escalate the trade confrontation from a bilateral to a multilateral one. In response to Trump’s non-discriminatory tariff policy, national governments and multinational companies are reassessing the trade landscape and their respective investment strategies for the medium to long term. The new “reciprocal tariff” measures will not only take into account the tariff levels imposed by other countries on the US, but will also comprehensively consider the amount of subsidies provided by each country for its industries as well as any potential unfair trade practices from the US perspective. This goes to show that the so-called “reciprocal tariffs” are actually trade rules redefined based on American interests, particularly business interests. The imposition of these tariffs will no doubt be met with countermeasures from the rest of the world. Besides further intensifying uncertainties in the global economy, this will expose the US economy to even greater challenges.
History does not repeat itself but the similarities are astonishing. America’s well-known Smoot-Hawley Tariff Act in 1930 was a radical move at trade protectionism. To resolve domestic overcapacity, protect domestic industries, and aid farmers in hardship, the Act raised duties to a record high on more than 20,000 imported goods. Following the passage of the Act, retaliatory tariff measures by other nations dealt a serious blow to the US economy, resulting in a nearly two-thirds reduction in US imports and exports during the Great Depression. Despite the lack of hard evidence that retaliatory tariffs were the direct cause of the Great Depression, the pressure these tariffs exerted on the US market and the numerous disputes surrounding the Act were undoubtedly a catalyst for the severe economic recession in the US.
Today, Trump is still trying to create national wealth by raising tariffs to tackle a string of domestic economic problems, including employment. Nevertheless, judging by the tariff strategy during his first term, punitive tariffs this time are unlikely to achieve any significant effect. As it has turned out, this protectionist policy often backfires. The negative effects of the trade war, including inflation and investment uncertainty, will harm both American individuals and companies. The tariff war has been expanding since Trump’s second term began. If the reciprocal tariffs are implemented as scheduled, the new tariff regime will remain a threat issued by Trump to fight for national interests, and the expected countermeasures by other countries will also plunge the US economy into a predicament similar to that caused by the Smoot-Hawley Tariff Act.
2024 trade data shows that China, the EU, Mexico, Vietnam, and Taiwan were the top five export partners with the largest trade deficits with the US. Given that China has been levied an additional 20% tariff since the start of Trump’s second term, under the framework of reciprocal tariffs, China is unlikely to sustain any further impacts. Subject to the upcoming announcement by the US government on 2 April 2025, the details of tariff implementation warrant close attention.
Furthermore, unlike the trade war initiated in 2018, the current tariff hike is obviously not just targeted at China but also affects many other countries, including several American allies. Hence, to control trade costs, companies around the world will need to adopt different approaches to their investment strategies.
During the China-US trade war, numerous enterprises would choose to cooperate with Vietnam, Mexico, etc to bypass the US duty increases placed on China. In contrast, this business strategy may be much less effective for Trump’s upcoming tariff measures, leading to skyrocketing uncertainties in the investment environment and making “exiting” China not the best approach to evade rising tariffs. Enterprises now need to reassess their international investment strategies and previous decisions about investing in China to address the latest changes in the global trade landscape.
In response to the US protectionist policy, countries worldwide will proactively seek new opportunities for international cooperation. This reflects efforts to overcome the US tariff barriers, ease pressures from the trade war, and safeguard their economic benefits and growth potential.
Against this backdrop, China should capitalize on current international cooperation opportunities and strive to develop mutually beneficial collaborations. In particular, in the domains of trade, investment, and technological innovation, China can further pursue such mechanisms as the Regional Comprehensive Economic Partnership (RCEP), which will be instrumental in cementing closer partnerships.
Through deeper international cooperation, not only can China strengthen its influence in the world economy, but it can also significantly contribute to an open, diverse, and mutually beneficial global economic order.
