The Trade War is dead! Long Live the Trade War!

The market is hiding a secret in plain sight. Ever since the “Liberation Day” reciprocal tariff panic, trade war tensions have been in retreat, and the S&P 500 has regained all of its losses and achieved fresh all-time highs. This has happened against a backdrop of continuing uncertainty over tariff levels imposed by the U.S. on its trading partners. The question is why.

That’s because despite all of the dire headlines about the imposition of a 25% tariff rate on Canada and 30% on Mexico and the European Union, the only trade war that matters is effectively over. China has won, and the stock market is rallying in relief.
 

 

 

U.S. Trade Overview

Consider the nature of U.S. trade in context. By country, the lion’s share of U.S. imports comes from the North American trade bloc at 29%, followed by China at 14% and Europe at 24%.

 

The accompanying chart shows the U.S. goods trade balance by country. Keep in mind that the U.S. runs a trade surplus in services, such as from technology platforms, that is not shown in the chart, and the reported trade deficits are accounted for by specific circumstances. The U.S. would have a trade surplus with Canada if oil and gas imports were stripped out, and much of the trade deficit with Ireland, and the EU by extension, is attributable to pharmaceutical intellectual property rights parked there owing to its low-tax regime.

Much of the U.S. trade deficit is attributable to trade with China. Trade balance in the Americas is roughly in balance. If we were to exclude Canada and Mexico, which is part of a free trade zone, the U.S. runs a substantial trade surplus with South America. Much of the EU trade deficit is attributable to pharmaceuticals exported from Ireland by U.S. pharmaceutical companies. The remainder of the trade deficit is attributable to China and trade diversion and transhipments through Asian countries.

The Sino-American trade war began under Trump 1.0, which reduced trade with China, but found that imports were being diverted through other countries. Biden attempted to isolate China on key technologies through the CHIPS Act. Trump 2.0 further tried to address the trade diversion issue by launching a global trade war to isolate China.

The height of the trade war was marked by a 145% U.S. tariff on Chinese goods and a 125% Chinese tariff on American goods in the wake of the “Liberation Day” reciprocal tariff announcements. Trade tensions were defused after an American team led by Treasury Secretary Bessent met with Chinese counterparts in Geneva and achieved a handshake agreement to suspend a substantial amount of the tariffs.
 

 

The Isolation Strategy Failed

Even though a trade truce was achieved, the U.S. objective to isolate China on trade failed. The recent release of China’s H1 2025 trade shows a surging trade surplus. More importantly, China is posting a $115-billion monthly trade surplus even in the face of 40% U.S. tariffs.
 

 

The latest round of the trade war revealed the key supply chain chokepoints that China controlled, such as its prominent position in the production of certain rare earths.

As another window into Chinese dominance in supply chains, David Schild, of the Printed Circuit Board Association of America, testified before the U.S.-China Economic and Security Review Commission. Here are his main points:

• The U.S. once made nearly 30% of the world’s printed circuit boards (PCBs), now it’s 4%. Most of the production has migrated to Asia, and China in particular, due to lower labour costs and decades of local government subsidies.
• Asia now produces 90% of the world’s PCBs, and over 50% comes from China.
• “Congress included guidance in the FY 2022 National Defense Authorization Act Section 851 that requires the Department of Defense to have a plan by 2027 to remove from the defense supply chain all dual-use components originating in China, Russia, Iran and North Korea. What is missing are restrictions on Chinese components that live in our critical infrastructure: air traffic control, medical systems, banking, telecommunications, the electric grid, and others.”
• “U.S. PCB manufacturers companies serving the trusted and secure PCBs for the defense industry are operating at record capacity consumption levels and would be unable to scale up in a time of crisis.”
• Schild offered solutions such as “China plus one”, which is sourcing PCBs from China and one other friendly source, friendshoring or nearshoring, sourcing from another source other than China, such as Mexico.
• Tariffs are not the solution. “Many inputs required to produce PCBs are only available from the very countries subject to tariffs. Overall costs for U.S. PCB manufacturers absolutely increase in this scenario.”

You get the idea. China cannot be isolated. Be prepared for Trump to engineer a face-saving deal where he can declare victory. Don’t be surprised at further positive developments but no strategic breakthroughs that erode China’s competitive position in the upcoming Trump-Xi meeting.

Trump’s efforts to reverse the gains from globalization are failing. As a reminder, the winners of the globalization were the emerging market economies and the very rich, who engineered globalization. The losers were mainly the middle class of the developed economies. Trump’s America First policy to return manufacturing to the U.S. is failing on a number of fronts.
 

 

China’s manufacturing workforce is over 100 million, compared to about 13 million in the U.S. In effect, Trump’s industrial policy is to replace high value-added industry employment such as artificial intelligence and biotechnology with low value-added jobs such as making sneakers and apparel.

In addition, the launch of a global trade war in an effort to isolate China has painted the U.S. into a corner. Instead, it is isolating the U.S. instead of China. The global trade war has won America no friends. The latest development calls for U.S. tariffs with trading partners will rise substantially on August 1 in the absence of trade deals. Trump suspended to “Liberation Day” reciprocal tariffs in April for 90 days and promised 90 deals in 90 days. Instead, it made one trade deal with the U.K., and outlines of deals with Vietnam and Indonesia.For Trump, tariffs are the answer. The new tax bill locks the U.S. into a protectionist regime as it depends on tariffs to offset the substantial projected fiscal deficit. Moreover, his view is that America should be charging other countries a fee to access such a large and substantial consumer market. If Trump is steadfast in that view, the risk is a backfire of the “isolate China” policy. Instead, the rest of the world isolates America on trade.