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TRADE WAR
The cost of the US-China trade war. How China defeated the EU and the US with their weapons. Why democracy will lose the war against totalitarianism. Principles of the new international trade system.
12 May, 2025
Trade & Investment
Industry
World
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The great China-US trade war has already begun. Customs duties of about 100% are, in fact, a trade embargo, with which the countries have established an iron curtain for each other. As a result, commercial ties established over decades have been blocked, and tens of thousands of business plans of Chinese and American companies have been thrown into the trash. As of the beginning of 2024, China's investment in the United States amounted to $43.9 billion, and the United States' investment in China amounted to $126.91 billion. The number of American companies that exported goods to China in 2024 amounted to 30045 units, while the number of small and medium-sized businesses that exported goods to China was 27311, or 90.9% of the total number of exporters. According to the U.S. Department of Commerce, U.S. exports to China support about 550,000 jobs, but there is no information on how many jobs Chinese imports have destroyed in recent years in the United States. But from the 2025 National Trade Estimate Report on Foreign Trade Barriers, we can form an opinion on why Americans are so angry with the Chinese government.
Source: 2025 National Trade Estimate Report on Foreign Trade Barriers. United States Trade Representative. March 31, 2025
In January 2020, the United States and China signed the Economic and Trade Agreement, under which China committed to improve the conditions for US companies to access its agricultural market and financial services sector, refrain from measures that worsen the terms of trade related to intellectual property and technology transfer, and increase the volume of purchases of certain goods and services. The Chinese government has taken some measures, but the main obstacles, according to the American side, remain. For example, numerous non-tariff barriers to U.S. agricultural products, including seafood, have not changed. The U.S. Department of Commerce has called China's trade regime state-led, non-market, so let's see what all this means in practice.
On China's "non-market" regime
The Chinese government continues to pursue an active industrial policy, supporting its own producers in certain sectors both in China and on the global market. Nomenklaturе favorites (state-owned and private companies) receive resources and regulatory support, while access for foreign competitors to the domestic Chinese market is strictly limited. This applies to both producers of goods and service providers. A striking example of a harmful and destructive policy that undermines the principles of fair and open competition is the Made in China 2025 program, adopted in May 2015. It is a 10-year plan for state support of industry:
L"…information technologies, automated machine tools and robotics, aviation and aerospace equipment, marine engineering equipment and high-tech vessels, modern railway transit equipment, new energy vehicles (NEVs), power equipment, agricultural machinery, new materials, biopharmaceuticals and advanced medical devices."L
Formally, the government program aims at increasing industrial productivity and developing national technologies. However, under the guise of such goals and means, China has been actively pumping up commercial favorites of the authorities for more than a decade. By the way, this is not a Chinese invention, but a copy of the policies of the EU, the US, and other developed countries. China's communist leadership, viewing business as part of the war against the West, set out to first achieve the dominance of national companies in the domestic market, and then to implement the same scenario in foreign markets.
Many of the tools for achieving these goals are unprecedented in terms of state interventionism, as they
L"…include numerous types of government intervention and support that work in concert and are designed to promote the development of Chinese industry, largely by restricting, discriminating against, or otherwise creating obstacles to foreign enterprises and their technologies, products, and services. Indeed, even apparently neutral measures can be used to favor domestic enterprises, as American and other foreign enterprises have experienced, especially at local levels of government."L
American experts estimated the amount of state support for Chinese manufacturers under this state program alone at $500 billion. This approach is harmful not only to developed countries, but also to developing countries that do not have the same resources as China. In March 2021, the Communist Party Congress adopted long-term development goals for the country until 2035. This means that the government does not intend to abandon the state-business relations that violate the rules of equal and fair competition.
China's trade interventionism against the United States and the rest of the world
An analysis of China's trade regime and the government's attitude to business allows us to identify the following main instruments of industrial and trade interventionism:
- Import Duties
In 2023, the average applied import duty rate under China's most-favored-nation (MFN) regime was 7.5%. It was 14.0% for agricultural products and 6.4% for non-agricultural products. In April 2018, China imposed duties on US goods (steel, aluminum, and several agricultural products) ranging from 15% to 25% in exchange for US protectionist measures. The WTO recognized that the Chinese government's decisions violate WTO rules and standards. - Administration of duty quotas on agricultural products
By the end of 2024, China had not fully met the WTO requirements regarding market access through the system of tariff-rate quotas (TRQ). - Taxes
The Chinese government resorts to lowering or raising VAT rates to manage the supply of goods for the domestic market. - Technical barriers to trade: sanitary and phytosanitary barriers
They include: food security, standards, and permits for agricultural biotechnology. - Public procurement
China has not yet signed the WTO Agreement on Government Procurement (GPA) on access to domestic government procurement by the United States and other countries. - Protection of intellectual property
According to the US government, “deficiencies in the system of protection and enforcement of intellectual property rights in China continue to pose serious obstacles to U.S. exports and investment”. - Trade secrets
It is about the theft of trade secrets in favor of Chinese companies. - Unfair trademark registration
- Digital piracy
Online copyright infringement is widespread in China, especially in music, movies, books, magazines, software, and video games. - Counterfeit goods
Despite the existence of laws, the authorities look the other way in numerous cases of the production and sale of such goods, especially in the pharmaceutical sector. - Local innovations
The Chinese government supports the development of innovative activities. The Chinese government constantly discriminates against foreign producers in the use of intellectual property. - Barriers to investment
China uses a number of restrictions to prevent foreign investment in its market. For example, China's Foreign Investment Law and its implementing regulations, which came into force in January 2020, establish separate regimes for domestic investors and investments, as well as for foreign investors and investments. - Subsidies
For decades, China has supported and continues to support domestic producers, which is a form of discrimination against foreign companies in the Chinese market. Many forms of subsidies are prohibited by the WTO. The Chinese authorities annually allocate $4.2 billion to fisheries alone. This kind of fisheries policy leads to the depletion of fishery resources and excessive supply. - Excess production capacity
China is the world leader in terms of excess, unused production capacity. The centralized nature of capital allocation (distribution) is accompanied by investment mistakes, as a result of which private and state-owned enterprises simply abandoned machines, equipment, and premises, turning them into "dead" capital. The largest number of such abandoned capital is in metallurgy, the production of electric vehicles, lithium batteries, and solar panels. This process has been described in detail by economists of the Austrian School of Economics (AES), in particular in the theory of business cycles. The market mechanism of "profit-loss" is blocked by the authorities for the sake of national industrial favorites, which not work according to market laws, but according to the instructions of the state plan. Unlike the Soviet State Planning Committee, the Chinese authorities set KPIs in the form of domestic and foreign market shares. For example, from 2000 to 2023, China increased its steel production capacity, although there was no increased demand. Today, the country has 50% of the world's steel production capacity, which is twice as much as the EU, Japan, the US, Canada, Mexico, and Brazil combined. Despite the decline in demand for steel in the domestic market, steel production has increased significantly since 2019, exceeding 1,000 million tons. This has led to a sharp increase in the supply of steel and steel products on the global market, where demand has also declined. In 2023, China exported more steel than India, Japan, the United States, and Russia combined. Excessively cheap steel is also a tool of state support for producers in other industries, such as shipbuilding. The situation in China is similar concerning aluminum production. Between 2000 and 2023, it increased primary aluminum production by more than 1600%. China has increased its production capacity by 80% of the world's and continued to increase it in the 2020s, despite declining prices and demand. According to the OECD, government subsidies have attracted inefficient producers to aluminum production. This has led to market fragmentation and overcapacity in shipbuilding. Chinese shipbuilders increased their share of global merchant tonnage from 5% in 1999 to more than 50% in 2023. The share of Chinese ownership in the global merchant fleet increased to 19%. They control 95% of shipping containers and 86% of the world's intermodal chassis supply. - Administrative and legal practices of distortion of competition
The Chinese authorities use antitrust laws to protect the interests of commercial favorites. It cynically applies it to assess the activities of companies at the provincial level, but not to state-owned enterprises of the central government. In addition, the antimonopoly law protects the status of state monopolies in those sectors that are considered "important on a national scale". - State-owned enterprises
China has made commitments to the WTO, the United States, and other trading partners regarding the operation of state-owned enterprises. It pledged to place them in a market environment, but this has not happened. The government has further increased the role of state-owned enterprises and strengthened their protection from foreign competitors. - Workforce
China violates the generally accepted rights of workers, in particular concerning forced labor. The province where the Uyghurs live stands out in particular. - Environment and environmental standards
China has a strict import regime for unprocessed scrap and recyclable materials. It allows imports of only certain recycled materials: copper, steel, aluminum and brass, granulated plastic scrap, and shredded paper pulp. - Other barriers to foreign trade
For decades, China has been actively applying export restrictions (quotas, licenses, minimum export prices for some raw materials for which China is the largest supplier). It also practices value-added tax refunds and related policies. For example, the Chinese authorities have actively applied the VAT refunds policy for different export commodities at different rates, and in some situations, export duties have been introduced. These measures, together with excessive government support, also led to the formation of excess production capacity. In addition, China practices anti-dumping investigations. As of the beginning of 2025, 11 anti-dumping investigations were opened, and 108 anti-dumping measures were taken against companies from 17 countries. Administrative licensing is also a serious obstacle in the Chinese market for American businesses. This includes obtaining permits/certificates of product safety, approval of investment agreements, business expansion permits, licenses to engage in certain activity types, and even permission to conduct routine business operations. As a result, Chinese companies are favored in the licensing process.
Source: International Trade Administration. https://www.trade.gov/data-visualization/country-reports-ita-industry-analysis
Source: International Trade Administration. https://www.trade.gov/data-visualization/country-reports-ita-industry-analysis
The existence of so many trade barriers in China, their active application to different countries in different modes and combinations, allows us to conclude the essence of China's foreign economic and trade policy. It is a combination of harsh foreign trade protectionism, industrial dirigisme, and nomenklatura favoritism in shaping the capital structure. Neither the U.S. government, nor the EU authorities, nor other members of the G-20 and OECD have monetized all the measures that China has taken against its foreign competitors in foreign and domestic markets. Obviously, their monetary equivalent is many times higher than the estimate of customs duties as a formalized trade barrier.
When assessing the impact of all instruments of state interventionism, it is necessary to identify the amount of lost profits of American companies in the Chinese market, the amount of lost profits of American companies in the US market due to state support for Chinese exporters.
D. Trump's April 2, 2025, import duties on Chinese goods, with their further increase to 147.6% on April 12, 2025, are a measure in response to China's economic and trade policy, which has been going on for more than 20 years. In response, the Chinese authorities raised import duties on all US goods from 84% to 125%. From April 2, 2025, duties were raised first to 34%, then to 84%.
Source: Peterson Institute for International Economics. https://www.piie.com/research/piie-charts/2019/us-china-trade-war-tariffs-date-chart
For more than 20 years, China's economic policy in general and trade policy in particular have comprehensively provided non-market advantages to Chinese commercial organizations both in the Chinese domestic market and in the United States. Before D. Trump, US presidents had introduced certain instruments of trade restrictions against certain Chinese goods, but they were definitely not based on the principle of reciprocity, if this means all forms, volumes, and modes of state support for Chinese producers.
China has not invented anything original or innovative in its economic and trade policy. All the tools it uses are described in standard development economics, Harrod-Domar, Solow/Swann models, industrial and innovation policy recommendations, which are actively promoted by international development agencies, the UN, the IMF, and the World Bank.
The Chinese authorities used simultaneously numerous monetary, fiscal, regulatory, and administrative policy instruments, which the Western academic and analytical authorities considered adequate, appropriate for economic growth, industrialization, poverty reduction and sustainable development. That is why producers in certain sectors of the economy and regions have been operating under extremely favorable conditions. Not only did they receive substantial tax benefits, but due to budget support, they were net beneficiaries of the state budget, i.e., they received more taxpayer money than they paid in taxes.
In fact, such corporations acted as China's economic weapon as part of its "beggar thy neighbor" policy.
The policy of "beggar thy neighbor " is an economic policy of state support for export enterprises of a country (subsidies, grants, credit privileges, insurance, tax benefits, regulatory regimes (licenses, quotas, inspections, certificates, etc.), which allows to significantly reduce tax, financial, regulatory costs of production and dumping, entering the markets of other countries, displacing national producers who operate under market rules and do not receive state support from their government. This policy leads to bankruptcy of enterprises in the victim country, increased unemployment, increased burden on the state budget, and, ultimately, to distortion of the capital and employment structure under external influences.
The weakness of the WTO, the presence in international trade legislation of a large number of rules for protectionist policies, the paralysis of international arbitration for the consideration and resolution of trade disputes between countries, the unscrupulousness of politicians and businessmen from the United States and the EU (agreements with the Chinese authorities, agreements with Chinese businesses, widespread use of offshore optimization schemes within global value chains) - all this allowed China to pursue an aggressive foreign economic policy without meeting resistance and response.
On the other hand, since the early 1990s, the tax and regulatory burden in the United States, the EU, and Western countries has also increased significantly. In the context of open international markets and free movement of capital, taking into account the high cost of labor in developed countries, many American companies have created global value chains, within which they organized the phased production of goods from idea, design, development to packaging, branding and delivery to the consumer. The location of certain elements of the production chain was a way to optimize production costs, on the one hand, and to reduce the cost of entry into the capacious Chinese market, on the other.
Economic freedom for a select few. How China defeated the US/EU with their own weapons
The Chinese government has been adept at inviting American companies to its market, easing the burden of entry and regulation. This has happened in a wide variety of sectors, from mining to advanced electronics and IT. Here is an example of regulatory barriers in America itself.
L"An analysis by S&P Global showed that the United States ranks second in the world in terms of the time it takes to bring a mine from discovery to production (29 years). Only three large-scale mines have been commissioned in the US since 2002. None of them are located on federal land."L
Source: Can Trump break China’s critical minerals stranglehold? Henry Storey. Hinrich Foundation Report.
April 2025. https://www.hinrichfoundation.com/research/wp/trade-and-geopolitics/can-trump-break-china-critical-minerals-stranglehold/
The situation is worse only in Zambia. Thus, in the field of industrial production, China has managed to defeat the United States/EU with their own weapon - economic freedom for the elect in nomenclature-designated sectors within a limited time frame. Such a regime was enough to tempt American and European corporations to take advantage of China's offers. Over the past 25 years, this country has recorded a technological and industrial spillover effect. At first, Chinese businesses used and copied American and European technologies, using mostly foreign technologies. At the same time, it gradually developed its own, through direct copying in violation of intellectual property rights, as well as through original developments. By the early 2020s, their number had increased dramatically, as had the share of high-tech goods that Chinese manufacturers began to offer to the American and global markets. That is why the structure of trade between the United States and China has acquired modern contours.
Today, the reindustrialization of America through, in fact, a trade embargo with China is impossible in its old form, because the very nature and essence of industrial production has changed radically. Industry and the service sector have formed a unique fusion. The share of services, ranging from IT to design, intellectual property rights, marketing, branding, etc., in the production costs of industrial goods, in some cases, exceeds 40%. Any attempts by the state to define, influence, and push economic entities to create a certain capital and employment structure desired by the VIP bureaucracy are the same State Plan, elements of non-market decisions and relations in a market economy. High selective customs duties, outright bans, tax and regulatory privileges for selected corporations and sectors are the same dirigisme, protectionist industrial policy.
There is no doubt that the United States needs to revise its military-industrial policy to neutralize its heavy dependence on China. There is no doubt that it is necessary to reduce the level of dependence on components for pharmaceutical, electronic, aerospace, and automotive production. However, D. Trump's trade policy measures called "Liberation Day" are inadequate means to achieve the goal of the US government's declared goal of Making America Great Again.
Conclusions
The US-China trade war has put the creation of a new architecture, a framework for international trade, on the global agenda. And it's not just about import duties as an element of an active trade policy, because it's about the whole set of relations between the state and producers of goods/services. The practical implementation of the theoretical model of the General Interventionist State, which emphasizes the mission economy, has led to numerous unintended consequences.
The mission economy is a theoretical model by M. Mazzucato and D. Rodrik, according to which the state, in order to neutralize global and national challenges, ensure sustainable development within the framework of ESG, "green transition", and production of public goods at the national and global levels, consolidates resources of the public and private sectors to implement large-scale production, infrastructure projects. In this model, the state is the main author of the future capital structure, financier, manager, and consumer of future goods/services. The mission economy is something that the Chinese Communist Party has been doing in their country for more than 20 years as part of five-year and ten-year plans. The economics of missions is a proposal for the comprehensive state-led management of economic activity, disregarding the essence and nature of private property as an institution, the theory of business cycles, and the impact of such non-market behavior on other countries. Such a model leads to the imperative of global governance and coordination of national economies in the name of global goals. Its features are described in the book “Mission Economy”.
Source: A Moonshot Guide to Changing Capitalism. Mariana Mazzucato
https://www.harpercollins.com/products/mission-economy-mariana-mazzucato?variant=40371956547618
https://www.harpercollins.com/products/mission-economy-mariana-mazzucato?variant=40371956547618
Trade war, fragmentation of the international system of division of labor, and the rise of economic nationalism and isolationism are just some of these consequences. Paradoxically, totalitarian China's implementation of the theoretical models of the mainstream West in practice has led to a sharp increase in the material and technological power of the communist regime, but not to a value reorientation or democratization.
Relations between the United States and China over the past 25 years have shown that in every form of cooperation between a totalitarian regime and a liberal democracy, totalitarianism wins, weakening democracy. It is impossible to win against totalitarianism with its own tools and weapons in economic policy.
The United States and the West need to develop a new model of behavior and relations with China and authoritarian regimes. In fact, there is no single set of norms and standards for relations between countries in the world that is binding for all countries, taking into account the state-business regime.
New international trade regime must necessarily take this into account to ensure the principle of equality and justice, to prevent trade and economic wars through monetary, fiscal, trade and regulatory policy instruments.
Ideally, the agreement between China and the United States could become a prototype for a new global system of international trade, but in the spring of 2025, these countries are still far from sitting down at the negotiating table with a constructive, positive agenda.
Important tables: Dynamics of the share of Chinese exports of goods to the G-20 countries, exports and imports of goods and services of China and the United States, 2018-2023 in pdf version of the article.
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Yaroslav Romanchuk
A well-known Ukrainian and Belarusian economist, popularizer of the Austrian economic school in the post-Soviet space. He specializes in reforms in transitional economies in the post-socialist space.
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