The Economic and trade agreement between the United States of America and The People’s Republic of China

The US-China trade war, initiated in 2018, stands as of the most significant and abrupt shifts in US trade policy history, particularly given America’s traditional leadership in promoting global market integration. This political event quickly escalated, with the US imposing tariffs on approximately $350 billion of Chinese imports, to which China retaliated by levying tari+ on around $100 billions of US exports. Although a Phase One agreement signed in January 2020 to de-escalate tensions, the tariffs largely remained in place as of late 2021. The scale of this trade war is notable; it appears more substantial than the 1930 Smoot-Hawley tariffs.

Recent Political Developments

In Stockholm on July 28-29, 2025, US officials (led by Treasury Secretary Scott Bessent and US trade representative Jamieson Greer) and Chinese counterparts (led by Vice Premier HeLifeng and Deputy Commerce Minister Li Chenggang) held two days of “candid and constructive” trade talks. Both sides agreed to work toward extending the current- tari+ pause

which is set to expire on August 12 the, 2025- by another 90 days. However, the extension is not yet finalised with the ultimate decision resting on the lap of President Donald Trump. Talks remain fragile, with major sticking point in the form of China’s continued import of Russian and Iranian energy, which Biden-era US officials see as undermining sanctions which complicated negotiations even further.

Economic Impacts on Markets and Industries

One of the most surprising and crucial endings regarding the trade war’s economic impact is the complete pass-through of tariffs-inclusive import prices. This means that for goods imported into the US, the prices paid by buyers (before applying tariffs) did not fall with the tariffs: instead, the tariffs inclusive import prices rose one-for-one with the tariff changes. This outcome was unexpected, as standard trade models, especially for large economies like the US and China, would typically predict incomplete pass-through, implying that exporters would absorb some of the tari+ cost. This complete pass-through meant that US consumers of imported goods bore the brunt of the tariffs through higher prices. This aggregate cost to import buyers was estimated to be approximately 0.58% of US GDP. Notably, similar complete pass-through was observed for China as an importer, suggesting that neither country was effectively able to manipulate the terms of trade in its favour through these tariffs.

Producer Effects: While US export or producer prices might have been expected to fall in response to Chinese retaliatory tariffs, variety-level export prices to China (relative to other destinations) generally did not decline. However, some analysts suggest that US sector-level export price indices did fall with retaliation in the same sector. Conversely, US tariffs also led to increased costs for imported inputs, which, in turn, raised US export prices, demonstrating how tariffs can increase costs along supply chains.

Aggregate Welfare Losses: Despite the complexity of these price dynamics, research consistently shows that the trade war has lowered aggregate real income in both the US and China, although not by large magnitudes relative to GDP. Simulations from various general equilibrium models estimate these losses to be relatively small, typically in the range of 0.01% to 0.29% of GDP for both countries. However, the tariffs were notably costly relative to the revenue they generated, with a negative marginal value of public funds (MVPF).

Trade Reallocations: The tariffs spurred significant trade reallocations. Both US and Chinese imports and exports shifted away from each other and towards other global origins and destinations. Other countries, not directly exposed to the tariffs, responded by increasing their exports to the US and, in some cases, shifting exports away from China, while also significantly boosting exports to the rest of the world.

Employment Impacts: Crucially, the trade war did not result in an increase in manufacturing employment in the US. While direct import protection might have modestly raised employment in some industries, these gains were more than offset by negative consequences from rising input costs and foreign retaliation. Chinese retaliatory tariffs also negatively impacted employment at the county level in the US, particularly in the goods sector. Model simulations also suggest a significant dispersion in real wage changes across US counties, reflecting regional specialisation patterns, such as the agricultural Midwest facing higher retaliation.

The trade war also had a profound impact on market sentiment and introduced considerable uncertainty into the global economy.

Stock Market Volatility: Announcements of impending tariffs frequently coincided with sharp and typically negative movements in equity markets. Some analysts suggest that these tari+ events contributed to significant cumulative market declines (e.g., a 12.9% drop over 11 events between 2018 and 2019).

Discrepancy in Impact Assessment: There is a striking difference between these substantial stock market losses and the smaller aggregate welfare losses predicted by static trade models. This discrepancy suggests that static models may not fully capture important mechanisms such as dynamic losses or growing uncertainty. Indeed, the trade war significantly increased market-based measures of volatility and uncertainty reported by arms.

In conclusion, the US-China trade war represents a pivotal moment in recent trade policy. While its aggregate economic costs relative to GDP have been modest, it led to a complete pass-through of tariffs to import prices, burdening consumers, and did not achieve its goal of increasing US manufacturing employment. Furthermore, the trade war significantly heightened economic uncertainty, reflected in considerable stock market volatility. Ongoing research continues to explore its longer-run impacts, including production relocation, supply chain resilience, and its profound geopolitical implications