The trade relationship between the United States and China underwent significant changes in 2018. This marked a new phase of economic confrontation. Under Trump, the U.S. began enforcing strict tariffs and trade limits. These actions aimed to curb what it saw as unfair Chinese trade practices. China retaliated with its measures, sparking the U.S.-China trade war. A partial truce came with the “Phase One” deal in early 2020. However, most tariffs remained, and major disagreements continued.
Roots of the Trade Conflict
The Trump administration viewed the trade war as a crucial means to address long-term imbalances. A key issue was the U.S. trade deficit with China, which hit $350 billion by 2016 and rose to $419 billion in 2018. Trump said tariffs would cut the deficit. They would also help American manufacturing and promote fair trade. During this period, U.S. exports to China were around $120 billion annually. In contrast, imports from China peaked at over $538 billion in 2018, revealing a stark trade imbalance.
The U.S. expressed worries about China’s practices regarding intellectual property. They are also concerned about forced technology transfers. The “Section 301” investigation began in August 2017. It found that Chinese practices, such as forcing U.S. firms to share technology, hurt American interests. These actions are said to be intimately connected to China’s “Made in China 2025” program, an industrial plan focused on being number one in key sectors.
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Additionally, U.S. officials criticized Chinese subsidies for domestic firms and their unclear industrial policies. The U.S. has sought to counter China’s growing economic influence by imposing tariffs of up to 145% on Chinese products, prompting China to implement retaliatory measures. Experts worried that following these guidelines might harm both countries’ economies, yet Trump’s group saw the tactics as necessary to encourage China to open its markets.
The “Phase One” Deal and Its Limitations
After long negotiations, the U.S. and China signed the “Phase One” agreement in January 2020. In this deal, China pledged to increase its purchases of U.S. goods by at least $200 billion over the next two years. In return, the U.S. lowered some tariffs but kept most in place. The deal also included commitments on better IP protection and opening Chinese markets to foreign firms.
Despite these commitments, analysts observed that the impact of the Phase One deal was limited. Important issues like industrial subsidies, state-owned enterprises, and full market access were deferred for future agreements that never took place. Meanwhile, COVID-19 complicated the agreement’s implementation and shifted political attention.
Global Impact and Supply Chain Shifts
The trade war’s effects extended beyond the U.S. and China. Economists estimate that both countries suffered losses. A Federal Reserve study indicated that American consumers paid nearly the full cost of the tariffs through higher prices. Farmers and manufacturers also faced reduced exports, as China cut purchases of U.S. soybeans, pork, and dairy.
While Chinese exports to the U.S. fell by 35%, Beijing offset losses by strengthening trade ties with other countries. The trade war led many multinational companies to adjust their supply chains. Some shifted manufacturing from China to Southeast Asian nations like Vietnam, Thailand, and Malaysia to avoid tariffs. Consequently, countries like Vietnam and Mexico benefited from increased exports to the U.S.
Source: Business Insider
However, the uncertainty of tariff policies disrupted global business confidence. According to the WTO, global merchandise trade is projected to decline by 0.2% in 2025, with North American exports expected to drop sharply by 12.6%. If tariff tensions escalate, trade could decline by up to 1.5%, especially harming export-reliant least-developed countries. Meanwhile, services trade is forecast to grow by 4.0%, slower than previously expected. Businesses delayed expansions and sourcing changes due to fears of sudden policy shifts.
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Institutional and Geopolitical Fallout
The United States, once the main builder of global trade rules, has stalled the World Trade Organization’s (WTO) Appellate Body. Since 2019, it has blocked judicial appointments. This lets member states, especially the U.S., dodge accountability by “appealing into the void.” Consequently, panel decisions are unenforceable. To address this, the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) was created for dispute resolution. Yet, many major economies have opted out, which weakens the initiative. As a result, the number of cases brought to the WTO has dropped sharply, indicating a significant decline in trust in the organization’s ability to enforce global trade rules.
Conclusion
The U.S.-China trade war arose from deep economic grievances and a broader strategic rivalry. While the Phase One deal brought a temporary pause, it did not resolve core issues. Tariffs remained, and significant differences persisted over technology, subsidies, and governance. Third-party countries experienced both gains and losses from the shifts in global trade. Some benefited from rising demand, while others struggled with slower growth.
Ultimately, neither country emerged victorious. Both economies slowed, companies adjusted their strategies, and global trade governance weakened. The trade war revealed how political tensions can disrupt global institutions and supply chains. As tensions rise between the U.S. and China, the trade war teaches future policymakers important lessons. It also creates lasting changes in the global economy.
