Manish Tewari | Stop US-China trade war, manage interdependence

In a major escalation of its trade offensive, the United States has slapped a sweeping tariff on tariff’s taking import duties upto as much as 245 per cent on a very broad spectrum of Chinese imports, sharply intensifying tensions in the ongoing US-China trade war.

The Trump Administration unveiled the move as a “necessary reset”, aimed at correcting long-standing trade imbalances and curbing what Washington calls unfair Chinese economic practices.

In a striking contrast, the United States has simultaneously announced a 90-day pause of reciprocal tariffs for numerous other countries, China being the sole exception. This dual-track strategy seems designed to economically isolate Beijing while offering relief to allies and strategic partners, nudging them to align with America’s broader geo-economic objectives.

Yet the fallout stretches far beyond Washington and Beijing. Global markets are in turmoil, supply chains are under fresh strain, and trade flows are being disrupted just as the world economy struggles to regain equilibrium after the pandemic’s long shadow.

Reading the Trade Chessboard: The latest tariff hike is rooted in structural tensions that have long haunted the US-China trade relationship. In 2018, the US trade deficit with China swelled to a staggering $418 billion, driven by Beijing’s export-led growth model, marked by subsidies, state-backed credit and industrial overcapacity, compounded by America’s chronically low household savings rate. Even landmark efforts like the 2020 Phase One deal failed to deliver lasting resolution.

Beijing has responded in kind, matching Washington’s tariffs with an equivalent 125 per cent duty on key US exports, targeting critical sectors such as agriculture, energy, and high-end manufacturing. Meanwhile, the US is tightening scrutiny on third countries like Vietnam and Cambodia, suspecting them of serving as re-routing hubs for Chinese goods.

Amid this high-stakes game, Washington’s 90-day tariff reprieve to strategic partners India, Japan, and select EU nations has opened new diplomatic and trade pathways. India has launched formal negotiations with the US for a potential trade agreement.

Growth Risks, Price Surges, and Market Jitters: The economic aftershocks are already visible. The International Monetary Fund (IMF) warns that further escalation could shave 0.5 percentage points off global GDP in 2025, amounting to hundreds of billions in lost output. This warning comes at a moment when global growth remains fragile, investment sluggish, and inflationary pressures persistent.

One immediate consequence is a shift in inflation dynamics. As US companies pivot away from Chinese suppliers toward alternatives in Southeast Asia and Latin America, the resulting demand spike in these regions may trigger price surges. Currency volatility adds fuel to the fire, particularly the expected weakening of the Chinese yuan that could increase the cost of dollar-tied imports globally.

Financial markets, too, are rattled. The Trade Policy Uncertainty Index has spiked, reflecting growing investor unease. Past episodes offer a cautionary tale; the previous trade war cycle dampened investment in capital-intensive sectors like semiconductors, automobiles, and electronics. The current round risks a similar chilling effect, just when the world economy can least afford it.

The Realities Behind ‘Decoupling’ from China: One lasting impact of the deepening rift is the accelerating reconfiguration of global supply chains. Multinationals are increasingly adopting a “China Plus One” strategy, shifting parts of their operations to countries like Vietnam, Thailand, Malaysia, Indonesia and Mexico to diversify risk. India, unfortunately, has not been able to leverage this paradigm of multinationals because of policy instability and uncertainty that creates business risk.

But the notion of complete economic decoupling is more myth than reality. China remains deeply embedded in global value chains especially in high-tech sectors such as semiconductors, advanced electronics, and precision components. Final assembly may move elsewhere, but critical intermediate goods continue to originate from Chinese factories. This makes decoupling selective and sector-specific, governed by industrial dependencies and the complexity of China’s manufacturing ecosystem.

Take the battery and energy storage sector. In 2024, over 70 per cent of US imports of lithium-ion energy storage systems, a pillar of renewable energy infrastructure, came from China. With tariffs on Chinese batteries now exceeding 125 pc, the US is likely to increase sourcing from treaty partners like South Korea and Japan, where tariffs remain at a relatively modest 10 pc.

Trade Rules on Shaky Ground: Beyond tariffs and retaliatory measures, perhaps the most unsettling development is the erosion of global trade governance. The World Trade Organisation (WTO), once the backbone of multilateral trade order, is increasingly sidelined. With its Appellate Body paralyzed by US opposition to appointments, the WTO’s dispute-resolution function is virtually defunct just when it’s most needed.

In this institutional vacuum, regional and plurilateral frameworks like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP), and the Indo-Pacific Economic Framework (IPEF) have gained traction. While these arrangements offer some stability, they are often exclusive and lack strong enforcement mechanisms raising fears of a fragmented and uneven trading order.

The use of national security rationales to justify economic interventions adds to the uncertainty. Tools once reserved for defending critical infrastructure such as export controls, tech bans, and foreign investment screenings are now instruments of strategic rivalry. China’s recent threat to restrict exports of rare earth elements like gallium and germanium, vital for everything from smartphones to missile systems underscores how economic policy is becoming a battlefield for geopolitical confrontation.

From Trade War to Managed Interdependence? Despite the harsh rhetoric and punitive tariffs, a full-scale economic severance between the US and China remains improbable. The sheer scale of their trade volumes, investment interdependence and technological linkages points toward a more realistic paradigm, what experts call “managed interdependence”.

This emerging framework envisions targeted decoupling in strategic sectors such as semiconductors, biotechnology and telecom while maintaining cooperation in less sensitive domains. For the rest of the world, particularly emerging economies, this bifurcated system presents both risks and opportunities; scope for strategic alignment, supply chain repositioning, and greater leverage in trade negotiations.

What’s unfolding between Washington and Beijing is no longer a narrow bilateral skirmish. It marks the beginning of a new chapter in international commerce shaped by shifting geopolitical alignments, contested rules and fragile institutions.

Navigating this future will require more than reactive policy. It will demand renewed thinking on global economic governance, including revitalising institutions like the WTO and crafting new rules for digital trade, green technologies and cross-border data flows. The challenge is not just to manage conflict but to imagine and build a more inclusive, resilient and forward-looking trading system for a rapidly changing world.