The Trade War Returns

Having won his second term, President Donald J. Trump did not waste any time in launching the trade war by issuing the “America First Trade Policy” on his first day in office.Footnote ² Recognizing “trade policy as a critical component to national security,” he directed the secretary of commerce, along with the secretary of the treasury and the U.S. trade representative, to “investigate the causes of our country’s large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits, and recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits,” with a report due by April 1, 2025.Footnote ³

Two weeks later, President Trump announcedFootnote ⁴ an additional 10 percent tariffFootnote ⁵ on all imports from China, citing a national emergency over fentanyl imports under the International Emergency Economic Powers Act (IEEPA)Footnote ⁶ and the National Emergencies Act.Footnote ⁷ While the 10 percent tariff seems low, especially compared to the 25 percent fentanyl tariffs against Canada and Mexico imposed concurrently, it was on top of the 25 percent Section 301 tariffsFootnote ⁸ that President Trump imposed on China during his first term (and maintained by President Joseph R. Biden, Jr.),Footnote ⁹ effectively raising tariffs against most Chinese products to at least 35 percent.Footnote ¹⁰

In addition to tariffs, the order also announced the termination of duty-free de minimis treatment.Footnote ¹¹ This was particularly impactful as it means that all small-value packages imported from China at $800 or less would need to go through the full customs process and pay duties. This essentially destroyed the business model for Chinese firms like Shein and Temu, which relied on the tariff exemption and low shipping costs for small value packages to compete in the U.S. market.Footnote ¹² Requiring each package to go through the customs process would add to the costs several times the value of the package itself, even though the 10 percent tariff itself is minimal.

In response, China announced on February 4 that it would impose tariffs of 10–15 percent on various energy imports and cars,Footnote ¹³ in addition to export controls on rare-earth minerals.Footnote ¹⁴ It filed a WTO dispute the next day.Footnote ¹⁵

On February 10, President Trump issued a proclamation imposing ad valorem tariffs on steel imports and raising aluminum tariffs from 10 percent to 25 percent, citing Chinese overcapacity as a destabilizing force in global markets.Footnote ¹⁶ On February 27, he announced the “America First Investment Policy” and directed the Committee on Foreign Investment in the United States (CFIUS) to restrict Chinese-linked investments across a wide range of strategic sectors, expanding on measures from his first term.Footnote ¹⁷ On March 3, President Trump raised tariffs on Chinese goods to 20 percent in view of China’s alleged failure to act on fentanyl.Footnote ¹⁸ The following day, China retaliated with additional tariffs of 10–15 percent on a range of U.S. agricultural exports.Footnote ¹⁹

Legal Bases for the Retaliatory Measures

In the 2018 trade war, China justified its retaliatory measures by invoking “relevant laws and regulations such as the PRC Foreign Trade Law and basic principles of international law.”Footnote ²⁰ The People’s Republic of China Ministry of Commerce (MOFCOM) did not provide further details, but the most relevant provision is Article 7 of the Foreign Trade Law,Footnote ²¹ which authorizes countermeasures against countries that impose discriminatory trade measures on China. The legality of this provision, however, is rather dubious. It suffers from the same flaw as the U.S. Section 301 legislation which, although it survived a WTO challenge, nonetheless prompted a WTO panel to warn that a unilateral determination of WTO-inconsistency against another country’s measures “before the adoption of DSB findings” could amount to “a prima facie violation of Article 23.2(a) [of the DSU].”Footnote ²²

In the current trade war, the Chinese government has gone further, citing both the Tariffs LawFootnote ²³ and the Customs LawFootnote ²⁴ in its retaliatory tariff announcements.Footnote ²⁵ Since the Customs Law is largely procedural, the key substantive basis lies in the Tariffs Law. Article 17 authorizes countermeasures when a trading partner fails to uphold most-favored nation (MFN) or tariff concessions, while Article 18 permits retaliatory tariffs or restrictions when a partner violates treaty obligations by imposing discriminatory or trade-restrictive measures against China. Yet, these provisions face the same fundamental problem as Article 7 of the Foreign Trade Law.

As for the “principles of international law,” China has never clarified which specific principles it relied upon. The most comprehensive justification comes from Tsinghua University Professor Yang Guohua, a former senior MOFCOM official, who identified several possible bases:Footnote ²⁶ the right of self-defense under Article 51 of the United Nations Charter; suspension or termination of treaties for material breach under Article 60 of the Vienna Convention on the Law of Treaties; and the right to take necessary measures to safeguard essential interests against grave and imminent peril under Article 25 of the Draft Articles on State Responsibility. While these arguments might resonate with public international lawyers, most WTO lawyers would reject the idea that such broad principles can override specific WTO obligations.Footnote ²⁷

Liberation Day Tariffs

The situation escalated further on April 2, when President Trump, citing authority under IEEPA, announced “Liberation Day” tariffs against all U.S. trading partners,Footnote ²⁸ which resulted in an additional 34 percent duty on Chinese imports. He also signed an executive order reinstating the revocation, which in early February had been suspended, of the de minimis exemption for parcels from mainland China and Hong Kong, citing improved enforcement capacity.Footnote ²⁹

China was not the only target of the “Liberation Day” tariffs. Several of China’s regional neighbors also faced steep increases: Cambodia at 49 percent, Laos at 48 percent, and Vietnam at 46 percent. One of the most baffling entries on the list was Heard Island and McDonald Islands, an uninhabited Australian territory populated only by penguins, which was assigned a tariff of 10 percent.

The methodology behind these tariffs drew widespread ridicule. It was revealed that each country’s tariff rate was calculated by dividing its goods trade surplus with the United States by the value of U.S. imports from that country and then halving the result.Footnote ³⁰ Critics argued the formula ignored basic economic logic and opened the door to misclassification and manipulation.

But the Heard Island case pointed to a deeper issue. Trade data indicated that in 2022, the remote territory recorded $1.4 million in “machinery and electrical” goods exported to the United States—despite having no population or economic infrastructure.Footnote ³¹ Unless one assumes a remarkable evolutionary leap by the local penguin population, the more plausible explanation is the use of the island as a transshipment hub to disguise the true origin of the exports.

This tactic has also been observed in the Mekong River Delta countries, including Cambodia, Laos, and Vietnam, which experienced a surge in Chinese-origin goods being rerouted through their borders following the initial U.S.–China trade war in 2018.Footnote ³² The high tariffs imposed on these countries under the Liberation Day framework likely reflect growing U.S. concerns over transshipment and circumvention of tariff barriers.

The Liberation Day tariffs clearly violated core WTO obligations, notably the most-favored-nation principle under Article I.1 of the General Agreement on Tariffs and Trade (GATT)Footnote ³³ and the tariff binding commitments under GATT Article II.1. Yet, defying widespread expectations, most countries refrained from retaliating—due in part to the importance of access to the U.S. market, and in part to the executive order’s explicit warning that any retaliation would trigger additional duties.Footnote ³⁴ Instead, they lined up in Washington to negotiate.Footnote ³⁵

From Retaliation, Escalation, to Negotiation

The sole exception was China, which responded swiftly with a matching 34 percent tariff on all U.S. importsFootnote ³⁶ and another WTO complaint.Footnote ³⁷ That same day, MOFCOM imposed new export control requirements on seven rare earth elements—samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium—effectively weaponizing its strategic dominance in critical minerals.Footnote ³⁸

On April 8, President Trump responded to China’s retaliation by raising the tariff from 34 percent to 84 percent,Footnote ³⁹ which China matched the next day.Footnote ⁴⁰ The president immediately retaliated by jacking up the tariff to 125 percent.Footnote ⁴¹ Adding to this the 20 percent fentanyl-related tariff and the 25 percent duties from the first trade war in 2018, most Chinese exports to the United States were at this point effectively subject to a combined tariff rate of 170 percent. The same executive order also announced the suspension of Liberation Day tariffs for all other countries for three months since “more than 75 other foreign trading partners … have approached the United States to address the lack of trade reciprocity in our economic relationships and our resulting national and economic security concerns.”Footnote ⁴²

Two days later, on April 11, China matched the U.S. escalation by raising its tariffs again to 125 percent, while stating that further U.S. hikes would be ignored as “the current tariff levels leave no room for market acceptance of U.S. goods in China.”Footnote ⁴³ In a nod to this gesture, President Trump issued an executive order exempting from the tariffs “semiconductors”—a term broadly defined to cover not only chips but also products like smartphones, monitors, solid-state storage devices, and flat panel display modules.Footnote ⁴⁴

After weeks of intensifying measures, both sides began to step back. On May 12, Chinese and U.S. negotiators reached an agreement in Geneva to temporarily reduce reciprocal tariffs by 115 percent, effective May 14. The deal removed the two rounds of tariff escalations. The United States suspended 24 percent of the 34 percent Liberation Day tariffs on China for ninety days,Footnote ⁴⁵ while China reduced tariffs on U.S. goods to 10 percent.Footnote ⁴⁶

China’s return to the negotiating table surprised many pundits, who had argued that its authoritarian system gave it a higher tolerance for economic pain and thus a greater ability to hold out than the United States.Footnote ⁴⁷ But China’s options were limited and reflected hard economic realities: the U.S. remains its most valuable export market by far. While the share of Chinese exports directly shipped to the United States has declined since the 2018–2019 trade war, it still accounts for approximately 15–18 percent of China’s total exports by value, and crucially, the lion’s share of China’s overall trade surplus. In 2023, for example, China’s trade surplus with the United States stood at $279 billion, compared to a global surplus of roughly $285 billion—meaning that trade with the United States essentially accounted for the entirety of China’s external surplus. Without the U.S. market, China’s trade balance is likely to be in deficit.

Although official trade flows between China and the United States have fallen from their pre–trade war peak—exports to the United States dropped from $539 billion in 2018 to around $428 billion in 2023—this headline decline masks a significant shift in trade routes rather than true decoupling. A growing share of Chinese-origin goods now reaches the United States indirectly through transshipment hubs, especially in Southeast Asia. For example, Vietnam’s exports to the United States almost tripled between 2018 and 2024,Footnote ⁴⁸ making it the seventh-largest U.S. trade partner, while Cambodia’s exports to the United States more than tripled in the same period.Footnote ⁴⁹ Much of this growth is attributed to “country-of-origin laundering,” where Chinese firms reroute goods or minimally reprocess them in third countries to evade tariffs. This phenomenon helps explain why the Liberation Day tariffs hit not only China but also its neighbors even harder—Cambodia (49 percent), Laos (48 percent), and Vietnam (46 percent)—reflecting their growing roles as intermediaries in China–U.S. trade.

China’s Warning to Third Countries: Carrots and Sticks

While China has adopted a cautious approach toward the United States—matching tariffs without escalating further—it has demonstrated a clear willingness to retaliate against third countries that align with U.S. trade strategy. As early as April 2025, when reports began circulating that the Trump administration was conditioning tariff exemptions on adopting China-restrictive provisions, MOFCOM issued a sharp warning. It declared that “China firmly opposes any party making a deal at the expense of China’s interests” and vowed to “resolutely take countermeasures.”Footnote ⁵⁰

This posture is consistent with past Chinese practice, where Beijing has used economic coercion—such as import bans, investment restrictions, and regulatory pressure—to dissuade smaller states from siding with Washington. In particular, China accelerated efforts to expand its legal arsenal for trade sanctions following the 2020 Phase One Agreement, widely regarded as humiliating due to its one-sided terms.Footnote ⁵¹ The directive came straight from the top, when President Xi Jinping called for using legal means to “resolutely safeguard national sovereignty, dignity, and core interests” at the 2020 Central Conference on the Comprehensive Rule of Law.Footnote ⁵² Following this, the 2021 work report of the National People’s Congress emphasized expanding China’s legal “toolbox” to manage risks from counter-sanctions, anti-interference measures, and extraterritorial jurisdiction.Footnote ⁵³ This effort has produced several key instruments, including the Blocking Statute (2021), the Anti-Foreign Sanctions Law (2021), and the Foreign Relations Law (2023), alongside earlier measures such as the National Security Law (2015) and the Unreliable Entity List Rules (2019).

In addition to wielding sticks, China has also sought to entice its neighbors with carrots—most visibly through Xi Jinping’s visits to Vietnam, Malaysia, and Cambodia in April 2025. Yet these overtures have yielded limited success, as the economic realities in these countries make alignment with China increasingly unattractive. In 2024, for example, Vietnam’s exports to China amounted to just 42 percent of its imports from China,Footnote ⁵⁴ while Cambodia reported a 91 percent trade deficit with China in the first quarter of 2025.Footnote ⁵⁵ By contrast, the United States is the top destination for most asean exports.Footnote ⁵⁶ Vietnam, Malaysia, and Cambodia all run sizable trade surpluses with the United States, making it unlikely they would risk access to the American market by siding with Beijing.

Every Country for Itself

This underscores why, despite China’s diplomatic push, Beijing has struggled to extract meaningful concessions from its regional neighbors. Similarly, attempts to mount a coordinated regional response to counter President Trump’s tariff policies and safeguard the region’s economic interests have also fallen flat.Footnote ⁵⁷ Instead, each country scrambled to secure its own deal with the United States, hoping to outpace its neighbors. Vietnam was the first in the region to strike a deal with the United States, agreeing to eliminate its tariffs on U.S. imports in exchange for reduced U.S. tariffs—set at 20 percent for normal Vietnamese exports and 40 percent for transshipped goods. The elevated rate for transshipments clearly targets the loophole that has allowed Chinese products to enter the U.S. market via Vietnamese channels.Footnote ⁵⁸ While Indonesia only secured its deal two weeks later,Footnote ⁵⁹ it managed to obtain a 19 percent tariff rate—modest in absolute terms, but symbolically significant for being 1 percent lower than Vietnam’s, giving Jakarta a perceived competitive edge.

But even Indonesia’s 19 percent tariff rate paled in comparison to the 15 percent rate secured by Japan the very next day—part of a sweeping agreement that also included a patchwork of purchase commitments covering U.S. agricultural and energy products, defense systems, automobiles, and one hundred Boeing aircraft.Footnote ⁶⁰ The most unusual element of the deal, however, was Japan’s pledge to invest $500 billion to help restore “American industrial power,” with 90 percent of the profits from those investments to be retained by the United States.Footnote ⁶¹

These bilateral agreements,Footnote ⁶² like the original Liberation Day tariffs, clearly violate WTO rules. Most notably, they breach the cornerstone MFN principle by offering the United States tariff reductions that are not extended to other WTO members. Moreover, the purchase commitments embedded in many of these deals amount to managed trade, which is expressly prohibited under Article 11.1(b) of the Agreement on Safeguards.Footnote ⁶³ This provision bans “grey area measures,” such as voluntary export restraints and orderly marketing arrangements, precisely to prevent such discriminatory and non-market practices.

Can these agreements be justified under the GATT Article XXIV exception for free trade areas? That is highly doubtful. The exception requires that “duties and other restrictive regulations of commerce … are eliminated on substantially all the trade” between the parties. Yet, under these deals, the United States does not commit to eliminate tariffs—in fact, all duties imposed under the new agreements exceed the United States’ bound rates at the WTO. This makes it difficult to argue that the agreements cover “substantially all the trade” in any meaningful WTO-consistent sense.

The United States has attempted to broaden the definition of “free trade agreement” in its domestic law—such as through expansive interpretationsFootnote ⁶⁴ of the eligibility criteria for preferential treatment in the Inflation Reduction Act (IRA),Footnote ⁶⁵ which even included the Critical Minerals Agreement between the United States and Japan.Footnote ⁶⁶ Given President Trump’s hostile stance toward the IRA, which froze funding and terminated awards, such reinterpretation may have limited practical impact. Even if the practice is maintained, it is unlikely to win broad acceptance among WTO members, as it diverges from the strict requirements of GATT Article XXIV.

The International Law Response

How should the world respond to such blatant violations of WTO rules? The most straightforward solution would be for everyone to multilateralize these bilateral deals—before the global trading system fragments into a patchwork of preferential agreements,Footnote ⁶⁷ each with its own complex rules of origin, driving up compliance costs for businesses and undermining predictability.

Even if the United States refuses to multilateralize, other countries should uphold the rule of law and avoid further erosion of the MFN principle. Yet the reality is increasingly discouraging. Even the European Union, traditionally the staunchest defender of MFN, has so far given no indication that its zero-for-zero tariff commitments on industrial goods with the United StatesFootnote ⁶⁸ will be extended on an MFN basis—unlike in its last tariff deal with the United States, the 2020 Lobster Agreement, which explicitly removed the lobster tariffs on the MFN basis.Footnote ⁶⁹ Without similar commitments in current agreements, the risk of systemic damage to the WTO rules-based framework continues to grow.

Bringing a case to the WTO offers little recourse, as the Appellate Body remains paralyzed—a result of the United States’ continued blockade of new appointments. The United States can simply appeal “into the void,”Footnote ⁷⁰ effectively stalling any adverse rulings. Despite growing calls to restart the appointment process, no such action has been taken.

In response, a group of WTO Members—including the EU and China—established the Multi-Party Interim Appeal Arbitration Arrangement (MPIA). While its legal foundation is debatable,Footnote ⁷¹ the MPIA has functioned as a de facto substitute for the Appellate Body for participating members. However, it does not bind the United States, and it thus offers no solution to disputes involving Washington.

The Domestic Law Response

Given these institutional roadblocks, the most promising path may lie in challenging the president’s tariff authority under U.S. domestic law—specifically, the use of IEEPA as the legal basis for sweeping actions like the Liberation Day tariffs.Footnote ⁷² If courts find such uses of IEEPA to exceed statutory authority, that could constrain future tariff initiatives.

Still, even if IEEPA is curtailed, President Trump could revert to using Section 301 of the Trade Act of 1974Footnote ⁷³ or Section 232 of the Trade Expansion Act of 1962,Footnote ⁷⁴ which he employed during his first term to impose tariffs on various products from specific countries. That authority remains intact and gives the executive considerable leeway to pursue targeted trade measures.

Toward a Grand Bargain

At the time of writing, the most consequential trade deal of all—the one between the United States and China—remains under negotiation. Following the initial Geneva meeting in May 2025, subsequent rounds took place in London on June 9–10, Stockholm on July 28–29, and Madrid on September 14–15. Despite positive public messaging, the joint statements offered little substantive progress beyond pausing twenty-four percentage points of the Liberation Day tariffs, first agreed in GenevaFootnote ⁷⁵ and extended in Stockholm.Footnote ⁷⁶ However, the parties’ actions suggest possible secret agreements, such as China’s suspension of export bans on dual-use items to U.S. entities on May 14,Footnote ⁷⁷ following closely the decision of the United States to rescind the AI Diffusion Rule.Footnote ⁷⁸

Talks are expected to continue for many more months and could stretch well into late 2026. At its core, the trade war reflects the structural imbalances between the world’s two largest economies, epitomized by the symbolic contrast of the United States’ $1.2 trillion goods trade deficitFootnote ⁷⁹ and China’s $1 trillion surplus.Footnote ⁸⁰ The trade war, if channeled constructively, could serve as a catalyst for deeper structural reforms in China.Footnote ⁸¹ The growing skepticism toward comparative advantage—even in the United States, long the champion of free trade—suggests the need to rethink its relevance in today’s global economy. Ricardo’s theory presumes exogenous productivity differences and institutional parity among trading partners, but that logic collapses in a world shaped by industrial policy, labor repression, and environmental dumping. Trade flows today often reflect systemic distortions rather than genuine efficiency. As scholars emphasize,Footnote ⁸² institutional asymmetries—between inclusive and extractive systems—play a crucial role in shaping trade outcomes, yet current rules overlook these dynamics. In this light, the Trump trade war may be less an aberration than a necessary corrective, pressuring countries to internalize the externalities of their development models. Yet, to achieve a lasting solution, the United States would need to resist the temptation to settle for short-term wins—such as the purchase commitments in the Phase One Agreement—and instead focus on addressing the deeper, more difficult systemic issues at the heart of the imbalance.

There, therefore, may be a silver lining to the trade war: for all its legal overreach and combative rhetoric, President Trump’s approach may have triggered a long-overdue reckoning. By disrupting the status quo and confronting non-market practices head-on, it has brought to the surface structural flaws that multilateral diplomacy had long sidestepped. In doing so, it offers—however crudely—the outlines of a possible reform agenda. As WTO Director-General Ngozi Okonjo-Iweala aptly observed, the current turmoil presents “a vital opportunity to address the system’s weaknesses and reposition the WTO for the future,”Footnote ⁸³ a sentiment that has sparked “broad agreement” among members on the urgent need for institutional renewal.

Furthermore, despite its aggressive bilateral approach, the United States remains engaged on the multilateral front. For instance, recent trade agreements—such as the one with Indonesia—contain repeated references to the WTO e-commerce moratorium and the Joint Initiative on Services Domestic Regulation. This indicates that, contrary to widespread assumptions of disengagement, the United States still seeks to shape the WTO agenda, at least in specific areas. So let us all heed the Director-General’s warning: “We must not waste a crisis.”Footnote ⁸⁴