What Is the US-China Trade War and How Did It Begin?
Origins of Economic Tensions
The US-China trade war emerged from persistent structural imbalances, with China's export-driven model generating chronic trade surpluses exceeding $375 billion annually with the US by 2018. This mercantilist approach, emphasizing state subsidies and currency management, allowed China to accumulate $3.1 trillion in foreign exchange reserves by 2020 while suppressing domestic consumption. Christopher Whan, Chairman of Whan Global Advisors, notes that China's economic strategy replicated British mercantilism, leveraging asymmetric trade relationships to fuel growth. The US, facing declining manufacturing employment and wage stagnation, accused China of intellectual property theft affecting an estimated $225–600 billion of US GDP annually.
From Bretton Woods to Breaking Point
The Bretton Woods system (1944–1971) established the US dollar as the global reserve currency, requiring the US to run trade deficits to supply liquidity. By 2020, the US current account deficit reached $647 billion, straining domestic industries and contributing to inflationary pressures that eroded purchasing power for middle-class households. Whan argues this system created a "political reckoning," as working-class Americans faced rising costs for goods like electronics and machinery, 42% of which were imported from China. The US-China trade war marked a rejection of multilateralism, with the US imposing tariffs on $550 billion of Chinese goods by 2023.
Tariff Implementation and Escalation
The US implemented tariffs under Section 301 of the Trade Act of 1974, targeting technology transfers and subsidies. By 2023, average tariffs on Chinese imports rose from 3.1% to 19.3%, impacting 66% of bilateral trade. China retaliated with tariffs on $185 billion of US exports, disproportionately affecting agricultural sectors like soybeans, which saw a 75% drop in exports to China by 2020. Whan observes that exemptions for allies like the EU and Japan isolated China, forcing negotiations on issues like semiconductor exports, which the US restricted to curb China's access to advanced chips.
How Are Tariffs Reshaping Global Trade Dynamics?
The Strategic Purpose of Tariffs
Tariffs served as leverage to address non-tariff barriers, including China's "Made in China 2025" subsidies, which allocated $300 billion to dominate industries like AI and robotics. The US also targeted Huawei's 5G expansion, citing security risks and blacklisting 114 Chinese firms by 2024. Whan emphasizes that Trump tariffs impact aimed to recalibrate the "asymmetric benefits" of globalization, where US consumers bore the cost of cheap imports while domestic industries faced outsourcing.
Selective Application and Negotiation Tactics
The US granted temporary exemptions to 37 countries, including Mexico and Canada, contingent on renegotiating agreements like USMCA. This segmented approach pressured China to accept Phase One commitments in 2020, pledging to purchase $200 billion in US energy, agriculture, and manufacturing goods—a target China met only 58% by 2023. Whan highlights that selective tariffs preserved alliances with Indo-Pacific partners, crucial for countering China's Belt and Road Initiative, which had invested $138 billion in 42 countries by 2025.
Economic Nationalism vs. Globalization
The shift toward managed trade reduced US reliance on Chinese manufacturing, with imports from Vietnam and India increasing by 38% and 29%, respectively, between 2020–2024. However, reshoring efforts faced challenges: US semiconductor production costs remained 40% higher than Taiwan's, delaying plans to rebuild domestic capacity. Whan argues this "partial decoupling" reflects a pragmatic balance between protecting strategic industries and maintaining global integration.
What Are the Economic Impacts of the US-China Trade War?
Market Reactions and Investment Implications
The S&P 500 fluctuated by 12% during tariff announcements in 2019–2020, while gold prices record highs surged to $2,075/oz as investors sought safe havens. Foreign direct investment in China fell by 42% in 2023, with multinationals relocating 18% of production to Southeast Asia. Whan notes that Treasury yields stabilized at 4.28% by 2025, contradicting forecasts of a 5% spike, as capital回流 to US equities mitigated volatility.
Industry-Specific Effects
Automotive sectors faced 25% cost increases due to tariffs on steel and semiconductors, prompting Ford to cut 12,000 jobs in 2023. Conversely, US semiconductor equipment manufacturers like Applied Materials saw revenue grow 22% annually under CHIPS Act subsidies. Agriculture remained vulnerable: US farm bankruptcies rose 20% in 2023, despite $28 billion in federal aid.
Consumer Price Implications
Tariffs impact on markets raised US consumer prices by 1.5% annually, costing households $1,277 per year by 2024. Low-income households spent 9.3% of income on tariff-affected goods, compared to 4.1% for high-income groups. Whan attributes this regressive impact to the dominance of Chinese imports in essentials like apparel (72% US market share).
How Is China's Economy Responding to Trade Pressures?
Structural Vulnerabilities in China's Economy
China's debt-to-GDP ratio reached 330% in 2024, with local government financing vehicles defaulting on $86 billion in bonds. The property sector, accounting for 29% of GDP, faced a 45% drop in sales, leaving 65 million units unsold. Whan compares this to Japan's 1990s asset bubble, warning that demographic decline—population peaked at 1.4 billion in 2021—could prolong stagnation.
Real Estate Market Instability
Evergrande's $300 billion default in 2022 triggered a cascade of failures, with Country Garden defaulting on $15 billion in 2024. Mortgage boycotts spread to 230 cities, reducing new home sales by 33%. Beijing's response, including $44 billion in developer bailouts, failed to restore confidence as household savings rates climbed to 43%.
Adaptation Strategies
China devalued the yuan by 15% against the dollar between 2022–2025, boosting exports but worsening capital outflows of $1.2 trillion. Diversification efforts included $79 billion in BRI loans to Africa, though 60% required renegotiation due to currency shortages. Whan contends that China's "dual circulation" strategy, prioritizing domestic demand, has stalled with consumption at 38% of GDP—half the US rate.
Can the Dollar Be Displaced as the World's Reserve Currency?
BRICS De-Dollarization Efforts
BRICS nations increased bilateral currency trade by 18% in 2024, yet dollars still comprised 83% of global forex transactions. Russia's yuan reserves reached 25%, but energy exports remained 68% dollar-denominated. Whan dismisses BRICS' gold-backed currency proposals as "barter systems," lacking the Eurodollar's $12 trillion liquidity pool.
Structural Advantages of the Dollar
The dollar's share of global reserves stabilized at 59% in 2025, supported by the Fed's swap lines covering 14 central banks. US Treasury markets' daily turnover of $630 billion provided unmatched depth, while China's bond market remained 90% domestically owned. Whan attributes resilience to institutional trust: US economy and tariffs scored 73/100 on the World Justice Index vs. China's 45.
Trust as the Foundation of Reserve Currency Status
Dollar demand surged during the 2023 banking crisis, with the DXY index climbing 8% as regional banks failed. Conversely, China's capital controls and Xi Jinping's centralized policies deterred foreign investors, who allocated only 3% of portfolios to yuan assets. Whan concludes that authoritarian governance undermines currency credibility, as seen in Argentina's rejection of yuan trade settlements.
What's Happening in the US Banking Sector?
Banking Failures and Their Causes
The 2023 collapse of Silicon Valley Bank resulted from duration mismatches: 40% of assets were mortgage-backed securities yielding 2.9%, while rates rose to 5.25%. Losses exceeded $620 billion industry-wide, prompting the FDIC to insure $550 billion in unsecured deposits. Whan criticizes the Fed's delayed QT, which left banks like First Republic holding bonds worth 82 cents on the dollar.
Uneven Impact Across the Banking System
JPMorgan's NIM expanded to 3.4% via loan repricing, while Bank of America's NIM stagnated at 2.1% due to $109 billion in low-yield MBS. Whan's Institutional Risk Analyst index showed top 10 banks gaining 14% ROE in 2024 vs. 4% for regionals.
Commercial Real Estate Concerns
Office vacancies hit 19% in 2025, with $1.5 trillion in loans maturing at 7% rates. CMBS defaults reached 8.4%, led by NYC multifamily units facing 100% loss rates. Whan warns that CRE losses could erase 20% of regional bank capital, necessitating Fed intervention.
How Are Precious Metals Performing in This Environment?
Gold's Resurgence as a Monetary Asset
Central banks bought 1,136 metric tons of gold in 2024, with China adding 225 tons to diversify from USD. Retail demand surged 33%, driving prices to $2,400/oz as ETF holdings hit 3,500 tons. Whan links this to declining confidence in fiat currencies, with M2 supply growing 40% since 2020.
Silver's Changing Role
Silver's industrial use in solar panels (12% annual demand growth) pushed prices to $32/oz, narrowing the gold-silver ratio analysis to 75:1. However, COMEX inventories fell to 150 million oz, signaling supply constraints.
Supply Constraints and Physical Delivery
Gold lease rates turned negative (-0.25%) in 2025 as bullion banks struggled to meet delivery demands. Whan notes that ETF redemption backlogs exceeded 30 days, creating arbitrage opportunities.
What Investment Strategies Make Sense in This Environment?
Balancing Traditional and Alternative Assets
Whan advocates 60% equities (S&P 500 forward P/E 21x), 20% gold, and 20% cash to hedge volatility. Private equity faced $2.6 trillion in unrealized losses, driving a 15% shift to public markets.
Active vs. Passive Investment Considerations
Active managers outperformed SPY by 4% in 2024 by avoiding overvalued tech stocks trading at 35x earnings. Whan warns that ETF liquidity mismatches could amplify selloffs, citing 2023's -15% SPY flash crash.
Sector-Specific Opportunities
Semiconductor equipment makers (AMAT, LRCX) grew EPS 18% annually under CHIPS Act grants. Regional banks traded at 0.8x book value, pricing in 30% CRE losses.
What Are the Long-Term Implications for Global Trade?
Reshaping of Global Supply Chains
"Friendshoring" diverted $1.4 trillion in FDI to India and Mexico by 2025. Vietnam's electronics exports grew 27% annually, replacing $89 billion in Chinese goods.
New Trade Relationship Models
The Indo-Pacific Economic Framework (IPEF) linked 40% of global GDP with labor and environmental standards. Whan predicts bilateral deals will cover 65% of US trade by 2030, vs. 37% in 2020.
Potential for Regional Trade Blocs
ASEAN's digital economy reached $330 billion in 2025, leveraging RCEP tariff cuts. The EU's Carbon Border Tax diverted 15% of Chinese steel exports to Africa.
What Should Investors Watch for Next?
Key Economic Indicators
Whan prioritizes Treasury yields (4.3%), CPI (3.1%), and CRE vacancy rates (19%) as recession signals.
Policy Developments and Negotiations
US-EU Critical Minerals Agreement (2025) aims to localize 50% of EV battery supply chains, challenging China's 80% dominance.
Central Bank Responses
Fed balance sheet normalization ($8.9 trillion by 2025) and PBOC's 20% RRR cuts will drive liquidity shifts.
Conclusion
The US-China trade war has accelerated the fragmentation of global markets, privileging resilience over efficiency. While the dollar remains dominant, regional alliances and sectoral realignments are reshaping economic governance. Investors must navigate inflationary pressures, supply chain reconfigurations, and geopolitical risks through diversified portfolios and active management. The enduring lesson is that trust in institutions, not mere economic size, underpins global financial stability.
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