The US-China trade war 2.0: March update

According to our scenarios, there is an 80% chance of further tariff hikes on China by the US

On March 4, US President Donald Trump imposed another 10% tariff on all goods imports from China. In response, China immediately implemented its own tariffs targeting specific US goods, mostly on agricultural products such as soybeans, wheat, corn, beef, fruits, etc. China also introduced non-tariff measures by targeting US companies, placing ten companies on a national security blacklist and slapping export controls on 15 others. Notably, Beijing banned US biotech company Illumina, which it added to its “unreliable entities list” last month, from exporting its gene-sequencing equipment to China.

Business Implications:

Increase internal communications: Regional executives should step up efforts to communicate with headquarters and establish the structures required for more agile and flexible decision making, if they haven’t already done so. APAC executives should also consider building connections with other regions, as an increasingly higher amount of output originally destined for the US market will now need to be redirected elsewhere.

Align on internal margin assumptions if supplying the US from China, or if sourcing from China:

• MNCs should continue to assess their exposure to the latest round of US tariffs on China and to utilize our scenarios to pressure test their strategic plans. The most recent 10% tariff increase is unlikely to be the last. As per our base case and downside scenarios, which have a combined likelihood of 80%, US tariffs on China are likely to rise further in the coming quarters. Given that Trump has also imposed 25% tariffs on Mexico – albeit with some potential exceptions -, previously common strategies of rerouting goods through Mexico are clearly no longer viable. Executives should scrutinize their cost structures to determine how much of the tariff increases can be absorbed internally and how much must be passed on to customers under different scenarios. Additionally, they should consider how potential price increases could affect market share and customer relationships.
• In the global market, there will almost certainly be shortages of essential minerals and raw materials for US-based MNCs. As China’s export control takes effect, MNCs that source from China should quickly identify alternative supplies to mitigate risks.

Evaluate supply chain shifts if supplying China from the US:

• MNCs that supply China from the US should urgently assess their exposure, particularly those involved in the agricultural value chain. Similar to strategies employed by many Chinese firms, US exporters, such as raw material suppliers, can explore rerouting products through third countries too. In these countries, products can be processed into intermediary or final goods before being shipped to China to avoid the tariffs.
• In other cases, US MNCs might want to consider manufacturing products within China to avoid tariffs altogether (especially if the situation appears to be trending towards our downside scenario), provided the market potential justifies this approach. In the short term, MNCs headquartered in US-allied countries (e.g., EU member states, South Korea) might find themselves receiving warmer receptions and preferential treatment from Chinese officials seeking to offset US pressure. Depending on the opportunities available and their risk appetite, these companies may want to consider leveraging this favorable treatment by establishing or expanding existing production facilities within China to better serve the local market and increase their market shares.

Brace for higher Chinese competition in non-US markets: Additionally, all MNCs, regardless of their headquarters’ location, should brace for intensified competition from Chinese companies, which are likely to expand overseas more aggressively with additional state support. Competition is likely to be particularly intense in markets within the Global South and those involved in China’s Belt & Road Initiative.

Increase public policy monitoring & government engagement efforts:

• US-based MNCs with extensive operations in China should continue to prepare for potential sporadic probes by Chinese officials. Depending on their sector, they should also assess their potential exposure to censure under the “anti-foreign sanctions law” or the risk of being included in China’s “unreliable entity list”. Additionally, they should closely monitor domestic consumer sentiment to gauge fluctuations in anti-US feelings. Iconic American brands may encounter an increasingly hostile business environment, especially in our downside scenario where the risk of sudden consumer boycotts would rise markedly. These brands should invest in strategies to counter negative publicity proactively on China’s social media platforms, such as through corporate social responsibility initiatives that enhance their reputations, foster goodwill with local communities and stakeholders, and avoid being drawn into sensitive political debates that could force them to take a political position.
• Overall, MNCs with exposure to both the US and China should invest in becoming more politically savvy by engaging in diplomatic and strategic dialogues to stay informed about policy changes in both Beijing and Washington, while advocating for their interests. For example, US MNCs could explore ways to seek exclusions from President Trump’s tariffs. This will likely require allocating more resources to government relations teams at the corporate level to work closely with officials and lobbyists in DC to address challenging issues.

With US-China trade tensions poised to escalate further, it is imperative for MNCs to proactively develop and implement robust strategic plans. We repeatedly advise MNCs to use our scenarios to pressure test their forecasts and anticipate potential disruptions. They should also continue exploring alternative market opportunities to safeguard their operations and maintain their competitive advantage in an increasingly volatile global landscape.

Our View:

President Trump’s 10% tariff on Chinese goods aligns with our prediction of escalating US-China trade tensions. Trump’s aggressive tariff strategy aims to force countries like China, Canada, and Mexico into negotiations. However, unlike Canada and Mexico, China has retaliated with its own tariffs and non-tariff measures, signaling a willingness to negotiate but also projecting defiance to fuel domestic nationalism.

The latest round of tit-for-tat tariffs from Washington and Beijing has accelerated the progression toward our base case scenario in the US-China trade war analysis released last month. Consequently, our previous “upside case,” where tariff rates would remain at February levels, is no longer viable. As a result, we have removed the “upside case” and relabeled the former “extreme upside case” as the new “upside case”:

Upside: Partial resolution (20% likelihood): 

In this scenario, the US and China reach a partial deal focusing on specific sectors (e.g., technology, agriculture), while other contentious issues remain unresolved. Consequently, President Trump begins to roll back some of the tariffs on Chinese goods, although not all. In this scenario, the average US tariff rate on Chinese goods at the end of 2025 will likely be around 20%, significantly lower than our base case level at 45%. Similarly, China would reciprocate by reducing tariffs on some US imports, easing export controls on some critical rare earth elements, and removing some US firms from its “Unreliable Entity List“. Additionally, China’s antitrust cases against US tech giants like Google will likely be put on hold.

While the two sides do not fully resolve all disputes in this scenario, the trade relationship does not deteriorate further, providing some stability for businesses operating in the affected sectors.

Base case: Tensions escalate (50% likelihood):

In this scenario, the US and China engage in multiple negotiation rounds but fail to reach a meaningful agreement. As a result, President Trump incrementally raises tariffs on Chinese goods throughout 2025 until they reach 45%.

In retaliation, China increases tariffs on a broader range of US goods and expands export controls to include more rare earth elements. It provides some form of additional tax rebates to support its exporters but remains cautious about deliberately devaluing its currency, as this could trigger unwanted capital outflows. Additionally, China considers intensifying regulatory scrutiny on US companies like Google and Apple and adds more US multinationals to its “Unreliable Entity List.” China also mobilizes its propaganda apparatus to fuel nationalist sentiment against selected US companies.

On the international stage, China intensifies its efforts to court countries that are traditionally aligned with the US, such as select EU and ASEAN countries, as well as South Korea, employing a “divide and conquer” strategy. This approach involves offering favorable trade terms, investments, or partnerships to MNCs from “more friendly” nations to drive a wedge between them and the US.

This scenario is marked by further strains in US-China relations, which complicate the geopolitical landscape, disrupt global supply chains, and heighten economic and trade uncertainty, with significant implications for businesses and investors worldwide.

Downside: Full-blown trade war (30% likelihood):

In this scenario, the US-China trade relationship deteriorates despite rounds of intensive negotiations, with acrimony rising and little intention to mend ties from either side. Over the course of 2025, Trump raises tariff rates on Chinese goods to 60%, the level he threatened during his campaign.

China is not passive in this process. It devalues its currency to enhance its exporters’ competitiveness and employs its state machinery to help them find new markets, leading to an influx of inexpensive Chinese goods in markets around the world. Additionally, China tightens export controls on almost all rare earth elements and conducts intensive investigations into prominent US-based MNCs with significant operations in China. More US-based MNCs are added to its “Unreliable Entity List,” with some potentially facing sanctions as well as boycotts from local customers.

Globally, China intensifies its propaganda efforts, particularly in international organizations like the UN, to vilify the US and its allies, potentially tarnishing their MNCs to benefit its own firms. MNCs from countries perceived as more friendly to China, especially those involved in the Belt & Road Initiative, receive more favorable treatment in terms of regulatory enforcement and government contracts.

This scenario plunges US-China relations to a low not seen in decades and leads to a more confrontational global environment. The US and China increasingly push countries to choose sides, dividing the world into two camps and forcing countries—many of which want to remain neutral—to make difficult decisions. The full-blown trade war undermines global supply chains and disrupts current economic and trade dynamics, with significant negative implications for businesses and investors worldwide.