US-China Tariff Escalation 2025

• 11 Apr 2025

For Prelims: International Monetary Fund, World Trade Organisation, Semiconductors, Rare Earth Metals,India - US COMPACT Initiative,  

For Mains: Global trade conflicts and their impact on emerging economies, India’s trade policy and external sector reforms 

Source: TH 

Why in News?  

China raised tariffs on US goods from 84% to 125% in retaliation for US President Donald Trump’s hike on Chinese imports to 145%. Earlier, President Trump had announced a 90-day suspension of reciprocal tariffs for most countries, including India, but notably excluded China. 

• These retaliatory measures between the US and China have heightened concerns over global economic stability. 

What Factors Led to the Intensifying Tariffs Between the US and China? 

• US: A USD 295 billion US trade deficit with China in 2024 remains a major trigger behind US tariff hikes. 
  • The US sees such deficits as a sign of losing in global trade, viewing China’s surplus as both unfair and strategically risky. 
  • The US accuses China of intellectual property theft and forced technology transfers that distort fair competition, and has raised tariffs to protect its domestic industries. 
• China: China responded after the US tariffs on Chinese imports had increased to 145%. This measure is part of an ongoing trade dispute between the two countries. 
• Supply Chain Security: Both nations aim to reduce mutual dependence, especially in critical goods like Semiconductors, Rare Earth Metals, and Electric vehicles (EVs) components. 
  • The US is reducing reliance on China, moves like the CHIPS Act and partnerships with India (India-US COMPACT Initiative) and Vietnam aim to de-risk and diversify supply chains. 
• Geopolitical Rivalry: US-China tensions go beyond trade, rooted in strategic conflicts over Taiwan, the South China Sea, and tech dominance (Artificial Intelligence, Quantum).  
• Tariff Evasion via Third Countries: Chinese firms reroute goods through nations like Vietnam and Malaysia to bypass US tariffs.  
  • This has led to broader trade tensions beyond China, as the US seeks to prevent backdoor access to its markets through regional intermediaries. 

What are the Risks of Full-Scale Trade War Between the US and China? 

• Recession Risks: The US and China jointly account for about 43% of global GDP (International Monetary Fund (IMF) 2024 estimate).  
  • Simultaneous slowdowns or recessions would drag down global growth. The World Trade Organisation (WTO) warns the US-China trade war could slash global GDP by up to 7%.  
  • Uncertainty around tariffs is also dampening investment and causing market volatility.  
  • A tariff-heavy regime risks pushing up the prices of everyday goods, fuelling inflation and potentially curbing consumer spending, raising the threat of a global recession. 
• Product Dumping Risks: With diminished access to the US market, China may redirect surplus goods like steel and solar panels to other markets at subsidized prices. 
  • This could undercut local industries in regions like the EU, UK, and India, affecting employment and wages, increasing trade litigation and protectionism. 
• Weaponization of Strategic Tools: China’s control over rare earths like gallium, germanium, and lithium could escalate the US-China conflict into a tech cold war, threatening global supply chains.  
  • For India, this risks disrupting the Make in India push, especially in electronics and renewables. 
• Disruption to Global Supply Chains: Countries dependent on Chinese manufacturing (e.g., ASEAN, EU ) or US-designed technologies (e.g., software, chips) would face cross-border economic shocks. 
  • Reshoring and near-shoring efforts are expensive and time-consuming. 
• Geopolitical Polarization: Decoupling may force countries to choose sides, undermining multilateralism and fragmenting global economic governance. 

What are the Implications of the US-China Trade War on India? 

• Supply Chain Disruptions: Electronics, auto parts, and pharmaceuticals in India heavily rely on Chinese components. 
  • Rising costs or delayed shipments due to tariffs may make gadgets, vehicles, costlier or harder to source in India. 
• Pharmaceutical Sector at Risk: Around 70% of Active Pharmaceutical Ingredients (APIs) used in Indian medicines are imported from China. 
  • Tariff-linked cost hikes or supply bottlenecks could raise drug prices and impact India’s healthcare and pharma exports. 
• GDP and Inflation Effects: Weaker global demand could slow India’s GDP growth, as seen earlier when it fell from 8.3% in 2017–18 to 4.2% in 2019–20, with the US-China trade war in 2018 being a major cause 
  • Inflation could rise due to costlier imports, affecting household spending and business costs. 
• Export Opportunities: As the US imposes steep tariffs on China, Indian sectors such as textiles, and leather have an opportunity to become more competitive and capture a larger share of the US market. 

What Can be Done to Reduce the Impact of  US-China Trade Conflict? 

• Global Actions: The WTO’s Appellate Body has been paralyzed since 2019. Reviving it through consensus-building among G20 and Quad countries is vital to mediate large-scale tariff disputes legally. 
  • South countries must reduce overdependence on the US-China axis by investing in South-South trade corridors (e.g., India- Africa - ASEAN) 
  • If Europe strengthens ties with Asia, global trade could decentralize from US dominance in the long term. 
  • Forums like Asia-Pacific Economic Cooperation and BRICS must prioritize economic de-escalation and cooperation over unilateralism. 
• National Actions: India should fast-track India-EU Free Trade Agreement (FTA), India-UK FTA, and India-GCC FTA to ensure India’s exports are shielded from US- China trade war linked supply shocks. 
  • Strengthen Production Linked Incentive Schemes and Make in India in semiconductors, electronics, APIs, and solar modules to curb overdependence on Chinese imports. 
  • Position India as a preferred China+1 destination to attract supply chains looking to exit China by easing land, labor, logistics, and compliance under PM Gati Shakti and Invest India platforms. 
  • Use platforms like Quad, BRICS, G20, and Shanghai Cooperation Organisation (SCO) to push for non-politicization of supply chains and protect developing country trade rights. 
  • Establish a National Trade Watchdog to monitor tariff shifts, rerouted goods, and early warning systems for Indian exporters. 

Drishti Mains Question: 

Q. Discuss the implications of the 2025 US-China tariff escalation on India’s economy and global trade. What steps can India take to mitigate these risks?

UPSC Civil Services Examination, Previous Year Questions (PYQs)  

Mains  

Q1. The China-Pakistan Economic Corridor (CPEC) is viewed as a cardinal subset of China’s larger ‘One Belt One Road’ initiative. Give a brief description of CPEC and enumerate the reasons why India has distanced itself from the same. (2018)  

Q2. “China is using its economic relations and positive trade surplus as tools to develop potential military power status in Asia”. In the light of this statement, discuss its impact on India as her neighbour. (2017) 

Q3. ‘What introduces friction into the ties between India and the United States is that Washington is still unable to find for India a position in its global strategy, which would satisfy India’s National self-esteem and ambitions’. Explain with suitable examples. (2019)