US President Donald Trump’s tariffs are having two broad impacts on the global economy – they are eroding international confidence in US leadership and disrupting global supply chains, and causing rapid geographic restructuring of international trade.

As the most aggressively targeted nation, China has been firm, but measured. While the short-term shocks induced by the trade war put pressure on Beijing, they also propelled other countries towards deeper engagement with China’s long-term initiatives.

The 2025 “Liberation Day” tariffs and their subsequent escalation have deeply shaken global perceptions of the US. Over the past year, its global net perception rating dropped from +22% in 2024 to -5% in 2025, which is lower than that of China at +14% and similar to Russia’s -9%. The proportion of countries that viewed the US positively decreased from 76% to 45% over this same period.

The 2018-19 trade conflict was a power struggle between two major economies. But the 2025 “reciprocal” 10% tariffs cast a wider net, drawing allies and rivals into the crossfire. Under Trump 2.0, the US has come to prioritise its interests explicitly above the collective good.

The economic consequences of the trade war were initially primarily borne by US consumers and Chinese exporters, before spreading more widely. The average effective tariff rate for US households reached 28% in April, the highest since 1901. Even after the US-China trade truce, it remained at 17.8% in May 2025, the highest since the 1930s. Tariffs pushed prices up by 3%, causing a 2% decline in consumer welfare. Though some US industries have benefitted, their gains were outweighed by the broader welfare losses.

For China, the trade war has primarily manifested as a demand shock, with exporters being hit the hardest. With nearly all Chinese goods subject to prohibitive US tariffs, direct exports to the US have collapsed. Export-oriented businesses have suffered immediate revenue losses. Though it is still too early to determine the full impact, estimates suggest the tariff war could reduce China’s GDP growth by 0.5% to 2% in 2025.

Yet global supply chains reveal some resilience. Many Chinese firms quickly redirected their exports to Latin America, Canada, Mexico and other parts of Asia – partially to access the US market indirectly. While the 90-day truce agreed upon in Geneva reduced the intensity of the tariffs, it did not restore business confidence in China. Exporters across regions are now adopting trade strategies to hedge against future shocks and trying to diversify.

China’s policy response has been strong in rhetoric, but the offsetting macroeconomic stimulus has so far been restrained. Referencing the principles of Asian regionalism. Beijing pushed back strongly against Washington’s tariff moves, responding to each new tariff announcement with tit-for-tat retaliation. The government’s stance has earned strong public support, especially as the White House’s confrontational rhetoric stirred historical sensitivities linked to China’s “century of humiliation”. Strategically, this hardline position enhances China’s leverage in future negotiations.

China also moved swiftly to counteract economic headwinds. At the 25 April Politburo meeting, Beijing pledged to accelerate key stimulus measures. These included issuing special local government bonds and “ultra-long special” treasury bonds. Supportive monetary and financial measures were introduced on 7 May. While these policies were already part of the central government’s broader policy agenda, the trade conflict brought their rollout forward. Depending on developments in US-China trade talks and the effectiveness of current policies, indications are that the government is ready to ramp up the stimulus in the third quarter substantially.

Besides short-term macroeconomic policies, the trade war does not seem to have shifted China’s long-term policy direction. The authorities are still focusing on long-term structural reforms, including strengthening domestic consumption­ — especially consumption of services — improving productivity and efficiency, and deepening institutional reform.

This direction is important not only for China but also for the wider region. China’s persuading the region that it is not going to shift back from openness is important to the rest of Asia. The tariff war has revealed the fragility of global supply chains and the risks of relying too heavily and directly on a single economic partner. In this context, regional trade agreements, such as the Regional Comprehensive Economic Partnership and Beijing’s expanding engagement through the Belt and Road Initiative, are the go-to frameworks for a more collaborative and resilient regional economy.

The shifting global landscape presents big challenges but also opportunities for Beijing. The certainties of the global order have been deeply shaken. Even longtime US allies such as Japan, South Korea, the United Kingdom and Europe were unable to negotiate broad tariff relief and have instead been pressured into signing deals requiring them to provide market access and investment in return for lower tariffs imposed by the US.

China is trying to seize opportunities to deepen co-operation with Europe, other BRICS countries and the Global South through its bilateral diplomacy and pushing alternative collaborative frameworks. This would need to involve China taking a more active role in setting international standards, digital infrastructure development and financing the green transition across emerging and developing countries and becoming a trusted partner in these roles.

While the US has announced a revised set of tariffs on a range of countries, bilateral talks with China are still ongoing. It seems likely that the US and China will reach trade deals in areas including rare earth minerals and magnets, which are essential to electric vehicles and defence. But the strategic competition between the two great powers is here to stay.

While it’s unlikely that the US administration will return to international order and free trade any time soon, China seems set, despite the risks, to continue to align its domestic resilience with leadership on the world stage. The world may remain cautious, and there are huge diplomatic booby traps along the way. Beijing is edging towards a more active leadership role in a fragmented world through domestic reform, regional co-operation and support for open, multilateral trade.

Republished from East Asia Forum, 5 August 2025

The views expressed in this article may or may not reflect those of Pearls and Irritations.