Trade Tensions and Global Economics: How US-China Rivalry Shapes 2025

US-China trade tensions have returned to the center of global economics in 2025, disrupting supply chains, reshaping inflation paths, and complicating central bank decisions. The world's two largest economies continue to clash over tariffs, technology restrictions, and strategic resources. As the IMF and WTO warn of the macroeconomic fallout, other countries are rethinking their trade strategies in response to the trade tensions.

Tariffs, Controls, and Tit-for-Tat Moves

The US has revived tariff pressures, threatening duties of up to 100% on Chinese goods. It has also tightened restrictions on semiconductor exports, software and AI-related tools. In response, China has expanded export controls on rare earth elements, which are key to electronics and defense industries critical in times of geopolitical tensions. These back-and-forth actions have unsettled firms and markets, with each side targeting the other’s key sectors - from chips to EVs.

In a temporary truce that happened in late October, the U.S. agreed to reduce the 20% tariffs on certain Chinese goods linked to the fentanyl supply chain, while China pledged to “work very hard” to curb rare-earth exports and resume agricultural purchases. Analysts caution that this is a pause and not a resolution, as the underlying technology, subsidy and industrial-policy disputes remain unresolved, leaving businesses to navigate persistent policy risk.

Disrupted Supply Chains and Trade Flows

Years of U.S - China tensions have led to the reordering of global supply chains. Companies have accelerated “China-plus-one” strategies, which involved diversifying production to countries like Vietnam, Mexico, and India with the objective of reducing reliance on Chinese manufacturing. This significant reshuffling can be confirmed by trade data: China's share of U.S goods imports fell by roughly 8 percent (to about 13% of U.S imports) between 2017 and 2024. During the same time, China's overall share of global exports actually rose to over 14%, suggesting some exports are being rerouted through third-party countries to circumvent tariffs and reach U.S. consumers. This kind of trade diversion is fueling protectionist sentiment elsewhere as other nations worry about becoming backdoors for goods that have tariffs.

More critically, this supply chain diversification is costly. Redundancy and reshoring reduce efficiency, raise prices, and pressure productivity. According to the IMF, these structural shifts could subtract up to 0.8 percentage points from global growth by 2026 if trade barriers remain in place.

Macro Impacts: Inflation and rate policy

The trade tensions are not just rattling supply chains, they are now showing up in household price tags. Recent data indicate that U.S. tariffs on Chinese imports are starting to push up consumer-goods prices, from canned soup to car parts, what the Financial Times calls a lagged “cost push inflation” effect. Because many duties come via intermediate goods, the pass-through to headline inflation has been delayed. This means that even as services inflation softens, policy makers may still face an inflation tail-risk linked to trade policy. In this context, the Federal Reserve's rate-cut is looking a lot more cautious as they wait for the tariff driven inflation impulse to clearly fade; a rate cut too early would lead to premature easing. 

Sector Spotlight: Chips, EVs, and minerals

Semiconductors are ground zero however there is potential for Nvidia’s CEO Jensen Huang to negotiate with Beijing. The US has blocked exports of high-end chip tools and design software to China, citing national security. NVIDIA has been barred from selling its most powerful GPUs to Chinese buyers. Beijing responded by investing heavily in domestic chipmaking and launching antitrust probes into US firms. The result is a bifurcating tech landscape, with parallel US- and China-led ecosystems developing. 

Additionally, Electric Vehicles (EVs) have also been impacted. The EU has imposed anti-subsidy tariffs on Chinese EVs, while the US restricts tax credit on vehicles sourced outside of China. China then retaliated with tariffs on European food and alcohol exports adding further trade tensions in a strategically important industry. 

Critical minerals, especially rare earths have become a geopolitical weapon and China controls over 80% of global rare earth processing. In October, it expanded export curbs on 12 of the 17 rare earths, raising alarms across tech and defense industries. Western economies are now racing to develop alternative sources in Africa, Australia, and North America. 

From what started as a strategic rivalry is now deeply embedded in the economic environment. The frictions of the US-China trade war have become a macroeconomic force in their own right as they inflate costs, slowing trade, pressuring central banks, and rewiring global production lines. Policymakers and businesses must adjust to a world where politics shape inflation, investment and growth.