The US-China trade war has been a focal point of economic discussions for a significant period, as the world’s two largest economies have imposed tariffs on each other’s goods. The Donald Trump administration imposed 10% tariffs on Chinese imports, and China, in turn, levied 15% tariffs on the United States liquid natural gas (LNG) and coal, as well as 10% tariffs on oil, farm equipment and some automobiles.
Trump’s idea of imposing tariffs is built around the narrative of “Make America Great Again.” He believes that tariffs will reduce the trade deficit by encouraging foreign companies to invest in the US, leading to job creation and an increase in income within the country.
In 2017, when Trump took office for his first term the US had a trade deficit with 116 countries. In 2024, the US has its largest trade deficit with China, totalling around $300 billion, followed by Mexico with over $200 billion and India, with a deficit of approximately $40 billion.
Source: United States Census Bureau
Contrary to the wishful thinking that tariffs would make a difference, data shows that the US trade deficit with China continued to rise even after the major tariff announcement against China in 2020.
During Barack Obama’s tenure (2009-2016), the average annual trade deficit with China was $311 billion, which rose to $361 billion during Trump’s first term (2017-2020) and decreased to $327 billion under Joe Biden (2021-2024).
Tariffs may not be effective, as trade interdependence between the US and China has decreased over the past decade. Data reveals that China’s reliance on the US has declined at a faster rate. In contrast, the US continued to remain dependent on China. Between 2009 and 2024, China’s GDP grew at a compound annual growth rate (CAGR) of 9.01%.
Excluding China’s trade component with the US, the Chinese economy grew at a slightly lower pace of 8.62%. In contrast, the US economy grew at a CAGR of 4.78% during the same period, and without China, the US economy’s growth rate drops to 4.07%. These small changes in growth rate numbers are significant in absolute terms, especially when considering the two largest economies in the world – the US at $29.16 trillion and China at $18.27 trillion in 2024.
Some takeaways
There are two important takeaways from these numbers. First, trade is beneficial for any country’s growth. Second, in the event of a trade war, the US economy is likely to lose out more compared to China.
The result remains unchanged even if we conduct the same analysis for the past five years. It’s little wonder that Beijing’s leadership is in such a defiant mood.
Source: United States Census Bureau
Apart from the growth aspect, tariffs also negatively impact jobs. A study finds that job losses from trade retaliation surpass job gains from tariff protection. In 2019, the US exports to China supported 1.2 million jobs, while 1,97,000 people were employed by Chinese multinationals – both affected by tariff escalation.
Another study pointed out that the job losses due to cheap imports are significantly less than the benefits to the US consumers in terms of lower price and income generation. Interestingly, after Trump took office in January 2025, claims of joblessness in Washington D.C. surged to 1,780, with nearly 4,000 workers in the city filing for unemployment insurance.
The recent slowdown in China’s GDP is not due to US tariffs, but rather a decline in consumption demand, caused by falling property construction, an aging population, a hostile business environment and the lingering effects of prolonged COVID-19 lockdowns.
How is China managing to grow?
China is no stranger to protectionism. The Global Trade Alert, a database tracking protectionist measures, reveals more than 17,737 measures have been initiated against Chinese exports. In response, Chinese policymakers recognized the need for a new approach and began heavily investing in Asia, Africa, Central America, and, to some extent, Latin America.
This strategy led to three key outcomes. First, as production costs are lower in these regions, Chinese firms are benefitting from shifting their production bases outside of China.
Second, Chinese firms were able to evade protectionist measures targeting their exports by exporting from other countries outside China. Take for instance, Mexico. In April 2024, US Trade Representative Katherine Tai accused China of disguising its steel products as Mexican steel to enter the US market.
In 2023, US imports of Mexican goods totaled $475 billion, approximately $20 billion more than the previous year. During the same time, the US imports of Chinese goods amounted to $427 billion, around $10 billion less. An estimated $3.7 billion Chinese FDI came to Mexico in 2023, significantly higher with an average flow of $1.3 billion during the past decade.
At least 30 Chinese firms now operate out of Mexico including Chinese automobile giants such as BYD and Cherry International. Container traffic from China to Mexico has increased by 22% in 2024 in comparison to previous years.
Third, investing in Africa and Asia has helped reduce China’s energy requirements, allowing Beijing to secure cheaper foreign energy sources (oil and power) and minerals. Chinese companies have built six hydropower plants and one thermal power station in Myanmar and have invested in power transmission and copper processing in Vietnam.
In countries like Sri Lanka (Hambantota port), Pakistan (Gwadar port) and throughout the Middle East, Africa, and Southeast Asia, Chinese investments are being used to develop port infrastructure.
India as a Counter Balance to China
Now that China’s actions are becoming more assertive, the US needs India not only to counterbalance China’s military influence but also to act as a key economic powerhouse. Trump wants India to increase its purchases of defense equipment, oil and gas.
At a time when advanced economies are adopting protectionist measures – such as the US Inflation Reduction Act and CHIPS Act, and the EU’s Net Zero Industry Act and Carbon Border Adjustment Mechanism – to re-shore manufacturing, India should seize this opportunity.
However, this should be accompanied by a caveat: joint production of defense items, which would allow India to access crucial technology as a key component of trade.
Nilanjan Banik is Professor, Mahindra University.