Who will win the war of attrition on trade between US-China?

·       As Trump wants to change China’s internal system, including non-tariff barriers rather than only tariffs, it would be a long war of attrition between the US and China on trade deal 2.0

·       Both the US and China may postpone reciprocal tariffs on each other till December ’25, eventually to fight this long trade war; the question is who will win this game of chicken?

·       As of now, the US may suffer a supply shock soon due to the effective embargo on Chinese imported goods, part & parcel of daily American life.

On Friday, May 2, 2025, Wall Street surged on the progress of US-China formal trade talks and then expected NFP/JOB report for April, which may ensure no Trumpcession; USD surged, and UST and Gold slipped. Wall Street was boosted by all the major sectors led by communication services, banks & financials, industrials, materials, healthcare, energy, real estate, consumer discretionary, techs, utilities, and consumer staples. Dow-30 was boosted by Nike, Caterpillar, American Express, 3M, NVIDIA, IBM, Microsoft, Travelers, JPM, Goldman Sachs, and Salesforce, while dragged by Apple, Amgen, McDonald’s, United Health, Amazon, and Merck. Apple and Amazon slumped on guidance warnings amid Trump tariffs.

Trump Tariff War Strategy on China- Escalating & De-escalating

The 145% U.S. tariffs and China’s retaliatory 125% tariffs have disrupted global markets, with fears of a synchronized recession. Addressing fentanyl could signal goodwill, potentially leading to tariff reductions. China’s Commerce Ministry, on May 2, 2025, confirmed it is “evaluating” a U.S. offer for trade talks, noting Washington’s “repeated willingness” to negotiate, but stressed that the U.S. must show “sincerity” by rolling back tariffs. This suggests China sees fentanyl as a low-cost gesture to test U.S. flexibility without committing to broader trade concessions.

China’s Position

By offering cooperation on fentanyl, China aims to counter U.S. narratives of complicity in the opioid crisis. State media, like the Global Times, highlight China’s “world’s toughest anti-drug policies” and past efforts, such as cracking 151 drug-material cases in 2024, to frame Beijing as a responsible actor. Domestically, this bolsters the Chinese Communist Party’s image as standing firm against U.S. “bullying” while pursuing humanitarian goals. Internationally, it aligns with China’s outreach to the EU and others to resist Trump’s tariffs.

China’s Economic Challenges

China’s economy faces challenges, including a potential slowing growth rate and market turmoil from tariffs. By leveraging fentanyl, Beijing hopes to stabilize trade relations with the U.S., its largest export market, while relying on domestic stimulus (e.g., rate cuts and infrastructure spending) to cushion tariff impacts. Diversifying trade with ASEAN and Belt and Road countries further reduces dependence on the U.S. market.

China’s Negotiation Tactics

Conditional Engagement: China’s strategy hinges on demanding U.S. concessions first, particularly tariff reductions, before committing to fentanyl crackdowns. The Commerce Ministry’s May 2 statement emphasized that the U.S. must correct “erroneous practices” to rebuild trust, echoing earlier demands for “equality and mutual respect.” This aligns with Beijing’s broader approach of delaying talks to exploit U.S. internal divisions, such as Treasury Secretary Scott Bessent’s push for lower tariffs versus Trump’s hardline stance.

Retaliatory Leverage: China maintains pressure through 125% tariffs, rare earth export restrictions, and blacklisting U.S. firms, signaling readiness to escalate if talks stall. These measures target U.S. vulnerabilities, like tech supply chains (e.g., Apple’s 19% market cap loss). On fentanyl, China could selectively enforce regulations to disrupt U.S.-bound precursor flows, but only enough to gain negotiating leverage without harming its chemical industry (?).

Strategic Patience: Beijing is likely waiting for Trump to soften his tariff stance, especially as the 90-day tariff pause (excluding China) expires in July 2025. By offering Fentanyl concessions now, China tests the U.S.'s willingness to reciprocate while preparing for prolonged negotiations. Its engagement with over 75 countries, as noted by Bessent, suggests confidence in diversifying trade to withstand U.S. pressure.

China’s Challenges and Risks

Enforcement Gaps: Even if China schedules more precursors, experts doubt its ability to curb illicit trade due to the ease of producing alternative chemicals and widespread corruption. A House committee report accused China of subsidizing precursor exports, a claim Beijing denies but which undermines trust. U.S. officials demand high-profile prosecutions and regulatory overhauls, which China has resisted.

US-China Mutual Distrust: The U.S. views China’s fentanyl offers as opportunistic, while Beijing accuses Washington of using the crisis to justify tariffs, labeling it “blackmail.” This mutual suspicion, compounded by Trump’s confrontational rhetoric (e.g., accusing China of a “reverse Opium War”), risks derailing talks.

Economic Fallout: Prolonged tariffs and trade uncertainty could exacerbate global recession risks by year-end. For China, export losses and supply chain disruptions threaten growth, but its stimulus and trade diversification provide a buffer, potentially emboldening a hardline stance if Fentanyl concessions yield no U.S. reciprocity.

Latest Tariff Context by US-China

Trump’s Policy: Trump’s tariffs, announced on April 2, 2025, imposed a 10% baseline on all imports, with higher rates for specific countries (e.g., 145% for China, 26% for India, 24% for Japan). A 90-day pause on April 9 excluded China, maintaining its high tariffs due to Fentanyl and trade deficit concerns. Trump has signaled flexibility, stating on April 24 that China’s tariff levels would be set within weeks, but no changes have occurred by May 2.

China’s Response: China’s 125% retaliatory tariffs, non-tariff barriers (e.g., rare earth restrictions), and WTO complaints reflect a tit-for-tat approach. The Commerce Ministry’s May 2 statement suggests Beijing sees U.S. outreach as a chance to negotiate but insists on tariff rollbacks, aligning with its fentanyl strategy to test U.S. intent.

Non-Tariff Barriers: China has escalated non-tariff measures, including blacklisting U.S. companies, tightening customs inspections, and restricting rare earth exports critical for technology and defense. These actions amplify economic leverage, given China’s dominance in rare earths (over 80% of global supply).

China’s negotiation strategy

Conditional Engagement: Beijing is open to talks but demands the U.S. reduce tariffs first, framing this as a test of U.S. sincerity. This aligns with prior denials of active talks (e.g., April 25 Foreign Ministry statement) to avoid appearing eager.

Strategic Patience: Analysts suggest China is waiting for the U.S. to blink first, leveraging its economic stimulus and diversified trade ties (e.g., with ASEAN) to withstand tariff impacts. The ministry’s cautious tone reflects a desire to control the narrative and avoid rushed concessions.

Economic Stabilization: China is accelerating domestic stimulus, including interest rate cuts and increased infrastructure spending, to cushion the impact of tariffs. This internal focus aims to reduce reliance on U.S. markets, with exports to the U.S. already declining as a share of GDP (from 19% in 2006 to under 10% in 2024).

Delaying Tactics: China’s insistence on U.S. “sincerity” and its cautious response to reported U.S. outreach suggest a strategy of delaying negotiations to assess Trump’s resolve and exploit divisions within the U.S. administration and business community. For instance, U.S. Treasury Secretary Scott Bessent’s call for lower tariffs contrasts with Trump’s hardline rhetoric, offering China room to wait for favorable terms. Also, corporate America is now pressuring Trump to scale back his tariff rhetoric.

Strengthening Non-US Trade Ties: China is accelerating its effort to deepen trade ties with the EU, ASEAN, and Belt and Road (BRI) countries to diversify markets. Recent deals, like tariff exemptions with African nations, aim to offset U.S. market losses and position China as a leader in global trade amid U.S. isolationism.

Exploiting U.S. Vulnerabilities: The US is dependent on the Chinese supply chain, but China doesn’t

Targeting US Businesses: By threatening US big firms like Apple, which lost 19% of its market cap due to tariff fears, China aims to pressure American corporations to lobby against Trump’s policies; and restrictions on rare earths further exploit U.S. dependence on Chinese supply chains.

Currency and Treasury Holdings: While not explicitly threatened, China’s $1.1 trillion in U.S. Treasury holdings and potential yuan adjustments are latent tools to unsettle U.S. financial markets, though Beijing treads cautiously to avoid self-harm.

Selective tariff exemptions by the US and China to each other: A Win-Win approach by both without hurting the core economy

The U.S. and China have recently implemented selective tariff exemptions as part of their ongoing trade war, reflecting strategic efforts to mitigate economic fallout while maintaining public stances of strength.

U.S. Tariff Exemptions on Chinese Goods

Electronics and Tech Products: On April 11, 2025, the U.S. Customs and Border Protection (CBP) announced exemptions from the 145% reciprocal tariffs on Chinese imports for specific electronics, including smartphones, laptops, computers, semiconductors, flash drives, and solar cells. These exemptions cover Harmonized Tariff Schedule (HTSUS) codes for products critical to U.S. tech giants like Apple, which rely on Chinese manufacturing. However, a 20% tariff related to fentanyl precursors remains in effect for these goods.

Automotive Sector: On April 23, 2025, Trump signed an executive order exempting certain car parts from China from fentanyl-related tariffs, though other tariffs (e.g., 25% on foreign-made autos) still apply. Steel and aluminum used in auto manufacturing were also exempted from reciprocal tariffs to support U.S. automakers.

Temporary Nature: On April 13, Trump signaled that exemptions for electronics are temporary, with plans for targeted tariffs on semiconductors and pharmaceuticals potentially starting in May 2025. This reflects a strategy to pressure tech and pharma companies to shift manufacturing to the U.S. while avoiding immediate consumer price spikes.

Rationale: The exemptions aim to shield U.S. consumers and companies from immediate economic pain, particularly for tech products where Chinese supply chains are irreplaceable in the short term. Analysts see this as a sign of U.S. vulnerability, given its reliance on Chinese manufacturing, and a pragmatic move to buy time for domestic production to scale up.

China’s Tariff Exemptions on U.S. Goods

Critical Pharmaceuticals and Medical Goods: Since April 2025, China has quietly exempted select U.S.-made pharmaceuticals from its 125% retaliatory tariffs. The American Chamber of Commerce in China reported that member companies importing drugs faced no tariffs, with exemptions being product-specific rather than industry-wide.

Semiconductors and Tech Components: By April 25, China waived tariffs on at least eight classifications of U.S.-made microchips and integrated circuits, critical for its tech industry. Importers in Shenzhen and reports from Chinese media (later deleted) confirmed zero tariffs on these goods, with refunds offered for duties paid between April 10 and 24.

Aircraft Parts and Ethane: China granted exemptions for aerospace equipment, including aircraft engines and landing gear, and ethane, a petrochemical critical for plastics production, as the U.S. is the sole supplier. These waivers address supply chain vulnerabilities, as reported by Reuters on April 30. The move will relieve pressure on Chinese firms that import US ethane for petrochemical production while also providing a market for natural gas liquids, a byproduct of US shale gas production.

Whitelist Approach: China has compiled a confidential “whitelist” of exempted U.S. goods, including pharmaceuticals, microchips, and aircraft parts, shared privately with companies. The Commerce Ministry is surveying firms to identify critical imports, with a list of 131 product categories (worth $45 billion in 2024 imports) circulating on social media, though unverified. This allows Beijing to maintain a hardline public stance while offering practical relief.

Be ready for another potential marathon trade negotiation (2-3 years) between the US and China, but the question is, who will win the war of attrition?

Both the U.S. and China are using selective tariff exemptions to manage domestic economic pressures while maintaining aggressive public rhetoric due to respective domestic political compulsion and satisfaction of domestic audience (nationalism). China’s “whitelist” approach allows it to protect strategic industries (e.g., tech, pharma, aerospace) without losing face, but its secrecy risks distrust if exemptions are perceived as inadequate. The U.S.’s exemptions, particularly for electronics, reveal dependence on Chinese manufacturing, undermining Trump’s “reshoring” narrative, though they buy time for policy adjustments.

The fentanyl issue could be a pivotal bargaining chip for China, but its effectiveness hinges on verifiable enforcement, which past efforts lacked. Mutual distrust and the complexity of decoupling supply chains suggest that exemptions are temporary patches in a protracted trade war, with negotiations likely to be slow and contentious (like during Trump 1.0).

China’s exemptions aim to protect its tech, pharmaceutical, and manufacturing sectors, which rely on U.S. imports. With rising unemployment and deflationary pressures, Beijing is mitigating the trade war’s impact on its economy, which ran a $1 trillion trade surplus in 2024 but depends on key U.S. goods. China’s potential fentanyl concessions are a pragmatic but calculated move to break the trade war deadlock while preserving economic and diplomatic leverage.

By addressing a U.S. priority—fentanyl—Beijing aims to secure tariff relief without sacrificing core interests, like its chemical industry or geopolitical stance. However, its history of minimal enforcement and the U.S.’s deep skepticism risk rendering the gesture symbolic unless paired with verifiable actions, such as prosecuting major exporters or dismantling illicit networks.

The fentanyl crisis’s complexity—spanning supply, demand, and global cartels—means China’s role, while significant, is not singular, and U.S. tariffs oversimplify the issue as a bilateral dispute. Both sides’ reliance on public posturing (Trump’s “legendary” tariffs, China’s “bullying” accusations) complicates trust-building, making protracted talks likely. China’s broader strategy—retaliation, diversification, and patience—suggests it is prepared for a long game, using Fentanyl as an opening gambit rather than a resolution.

The opioid crisis (pandemic) in the US is a reflection of its economic and social issues; China, Mexico, Canada, or any other direct/indirect supplier is not the root cause of the problem. Trump can’t stop the flow of drugs in different forms, be it from Afghanistan or Pakistan, or even China. The global and also US drug cartels (mafia) are very powerful, and often associated with political and admin funding (corruption). Trump should have fixed first his home (internal/border security, corruption, and social/economic issues) rather than blaming foreign countries and using tariffs as a weapon.

Trump may press Mexico to allow the US to fight cartels- WSJ/BN.

President Donald Trump may be trying to persuade Mexico to allow his country's forces to combat cartels, especially those involved in illegal fentanyl trade, in its territory. Trump proposed that the US take a more prominent role in Mexico's fight against cartels. However, his Mexican counterpart, Claudia Sheinbaum, said the two countries could cooperate on matters such as intelligence but rejected US military presence in Mexico. The topic led to a rise in tensions during their 45-minute phone call. In a recent interview with the Spanish-language version of Fox News, Trump insisted that "Mexico is very, very afraid of the cartels" and that "We want to help her [Sheinbaum]. We want to help Mexico because you can't run a country like that."

On May 1, 2025, the US activist and influential investor Bill Ackman again tweeted about the IS-China trade war, urging both sides to relent and negotiate:

“Some have suggested that because China takes a very long-term view, China can ‘win’ a trade war with the U.S., which, according to the conventional view, is a much shorter-term player than China.

The problem with this assessment is that the longer the tariffs persist, the more rapidly every company that has a supply chain based in China relocates it to India, Vietnam, Mexico, the U.S., or some other country.

China has to understand this dynamic, which is why it should be highly incentivized to make a trade deal as quickly as possible.  Unless it is clear that a company can continue to source from China on economically viable terms, it must leave the country.

The longer high tariffs persist, the greater the likelihood that no company can be confident it can rely on China for sourcing or production over the long term. This is true for US and non-US companies. As a long-term player, China must understand this dynamic.

The China tariffs are very damaging in the short term to companies that rely on China for a large percentage of their goods or for parts to make their products. This is particularly true for small companies that don’t have the wherewithal to weather the storm. If the tariffs were to persist, our government could provide loans to help companies manage their transitions out of China, but I don’t think this will be necessary.

The tariffs are similarly damaging for medium-sized and large businesses, but their greater financial resources allow them to better manage the tariff burden until they can relocate production outside of China.

In light of the above, both China and the U.S. are highly incentivized to take the tariffs down to more reasonable levels — say 10% to 20% — as quickly as possible. The only thing stopping the reduction in tariffs to a more sensible level is the fear on the part of both countries’ leadership of looking weak.

A pause, however, would not be a sign of weakness because it requires both countries to take down their tariffs. It is just common sense.

Both countries know that the 145% tariffs have to come down now. They are just trying to manage the diplomacy in such a manner to make clear that it is a mutual decision as opposed to one country ‘going first.

So let’s imagine the U.S. and China agree to a 180-day pause to allow for negotiations to take place.

Once the pause is announced, China would be highly incentivized to make a deal as quickly as possible, whereas we have time on our side. This is true because the longer the tariffs persist, the greater the reputational damage to China as a reliable country in which to do business, and therefore the higher the probability that US and non-US companies will leave.

A lower level of tariffs in the short term will enable companies to better manage the transition out of China. It is a near certainty they will leave unless and until a new and highly favorable deal is made with China. Even then, no company will be confident it can rely on China for a major portion of its supply chain. That cake is already baked.

There is no board of directors or management team that will ever again feel comfortable relying on China for a major portion of their supply chain. The damage has been done.

The only hope for China as a place to do business is for China to immediately come to the table and make a deal that provides permanent commitments addressing IP theft, forced technology transfer, market access restrictions, tariffs, and other barriers to doing business in China.

If instead China stubbornly decides to hold out and not negotiate due to pride or other emotional issues, China will suffer much more severe and permanent economic consequences. If China holds out, I expect we will launch a loan program to enable US companies to better manage the exit from China.

Time is the friend of the US and the enemy of China in this negotiation.

A pause and negotiations should therefore begin soon. Tell me why I am wrong.”

Conclusions: 

China is in a better position of strength to win this long war of attrition on trade; the US has to reset completely to compete with mighty China.

Ackman is partially wrong in the sense that Time (patience) is in favor of the US/Trump; neither Main Street nor Wall Street is ready to digest an impending supply shock, which may be followed by a demand shock even if Trump reduces tariffs to 10%-20% levels with all the countries including China. The US economy and its ecosystem are quite dependent on China, but the opposite is not true. China has alternative sources of US goods, including a domestic supply chain. The US has no feasible alternative supply chain, including domestic ones, which can match the Chinese scale, efficacy, and cheaper prices. Thus, Trump is blinking first. But as China and the US are dependent on each other for development and prosperity, both sides are gradually relenting and negotiating rather than engaging in protracted trade retaliation.

The US and China may soon pause retaliatory tariffs on each other till at least Dec’25 to start Trade Deal 2.0 negotiations. Trump is under huge pressure from corporate/business America to pause Chinese tariffs ahead of the Festival season advance order by May, everything being equal.  But Trump’s effort to change China’s internal policy may not be possible so easily, and that’s why there may be marathon negotiations for at least 2-3 years.

Trump often raised the issue of various non-tariff barriers by other big trading partners like China, Japan, India, and the EU. But Trump is also trying to protect the US manufacturing industry from global competition through his high sectoral tariffs. Trump now wants to abolish all types of other taxes, including even income tax, in favor of only tariffs, and that to be paid by exporters, not importers. This is hilarious and may be the biggest joke by a sitting US President in several decades. The US now collects around 10-12% of its tax revenue from its GDP, which is a global standard. Now, Trump may want it to be around 20% and thus impose tariffs (import duties) and try to provide further income tax cuts, especially for corporate America.

No doubt, Trump needs high revenue to fund his deficit spending. Thus, he imposed 10% basic universal tariffs on all US merchandise imports, along with 145% tariffs on China and 25% sectoral tariffs on metals and automobiles, along with some exceptions. Trump tariffs, if applied at face value at present at a 10% basic rate and 20-30% on China (till Trade negotiations go on), coupled with various sectoral tariffs, will lead to around 25.5% average weighted tariffs against 2.5% earlier. This will inevitably lead to a high cost of living for Americans and may also affect the Goldilocks nature of the economy in the longer run.

Trump could have called for universal global tariffs and sales tax/VAT/GST of 5%-10%, totaling 10%-20%, including the US, coupled with reciprocal non-tariff barriers for national security issues. But Trump is now going for separate trade deals with 90 countries in 90 days, which may not be possible in such a short time. Thus, Trump will now go for preliminary trade deals with all the countries or 18 major trading partners, including China, to ensure no supply shock for the US economy in the near term. Trump will continue 10% basic universal tariffs on almost all major trading partners except China. For China, Trump may impose 20-30% tariffs depending on the Fentanyl issue. Trump may also continue sectoral tariffs on metals and automobiles, partly, and bring pharmaceuticals under this when the US would be self-sufficient in pharma production.

Bottom line

Trump may soon scale back unusually high tariffs of 145% on Chinese goods to avert a potential imminent supply shock for the US economy; there are no easy alternatives to replace Chinese goods in terms of scale, efficiency, and costs for at least the next few years. Trump also has to ensure tariff policy stability in the next few days, rather than constant flip-flops, as US retailers and MSMEs need to place advance orders for the coming festival season sales by May to big exporters like China.

Market Impact

A lingering trade war between the US and China would be positive for Gold and negative for stocks and vice versa.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 41400) now has to sustain over 41800 for a further rally towards 42000/42500-43000/43500, and even 44600-45200 in the coming days; otherwise sustaining below 41700, DJ-30 may again fall to 41000/40600-4010039900 and 39700/38600-38000/37700-37300/37000 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20800 for a further rally to 21100/21400-21700/22000 and 22400-22600 in the coming days; otherwise, sustaining below 20750/20600-20500/20400, NQ-100 may again fall to 20000/19600-19400/19200 and 19100/18800-18600/18000-17600/16400 and 16200-15800 in the coming days.

Also, technically Gold (CMP: 3300) has to sustain over 3315-3325 for any further rally to 3355/3375* and 3400/3425-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3290-3275, Gold may again fall to 3255/3225-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.