US-China Trade War: Punishing Tariff Rates Not Sustainable

The economic damage goes far beyond trade, extending to the bond markets and the US dollar.

- Vikram Khanna

Last week, the threat of a US Treasury bond market blow-up forced US President Donald Trump to "pause" many of his misnamed "reciprocal tariffs" except the 10 per cent baseline duties on all countries. But after a series of tit-for-tat hikes, US tariffs on China have soared to 145 per cent, while China's retaliatory tariffs on the US stand at 125 per cent. As the analyst Stephen Innes put it: "That's not de-escalation, that's targeted escalation."

At 24 per cent, the average US weighted tariff is still the highest in over a century. In other words, the global trade war continues—and it is global because trade is driven by global supply chains of which China, as the world's biggest manufacturer, is at the centre of many.

And so, after battered stock markets initially soared on news of the Trump "pause," they tanked again the morning after as the reality sank in that the world's two biggest economies are in a full-blown trade war.

As both sides will surely know, it's not sustainable. The two economies are so deeply intertwined that unravelling the ties that bind them would be all but impossible, and catastrophic.

Trade is a huge part of the story. Since 2000, total trade between the two has grown 375 per cent to US$585 billion (S$768 billion) in 2024. Although the US runs a bilateral trade deficit of US$295 billion, this, like its other trade deficits, is a by-product of US consumption and investment far exceeding its savings, which means it has to import to make up the difference.

ACUTE DEPENDENCE ON CHINA The US dependence on imports from China is acute. In terms of the proportion of US imports, China supplies about 75 per cent of smartphones, 47 per cent of machinery and other capital equipment, more than half of plastic products and 30 per cent of furniture. China-made imports also make up 90 per cent of laptops, lithium-ion batteries, toys, footwear, bicycles, lighting products and Christmas decorations.