China Faces Trade Showdown as Tariff Truce Masks Deepening Strains

US-China Trade War Truce

The US-China trade truce may have bought 90 days of calm, but beneath the surface, tensions are hardening. With tariffs, supply chains, and rare earths in play, the path to a balanced trade deal looks more fragile than ever.

The US and China agreed to extend the trade war truce by a further 90 days in August. The agreement removed the threat of a 145% levy on Chinese shipments until October. However, since the extension, the two sides have made little to no progress toward a trade deal.

Despite the truce extension, tensions have escalated since two days of negotiations resulted in a pledge to uphold the Geneva Trade Agreement. Crucially, China committed to lifting restrictions on rare earth minerals, while the US would remove controls on semiconductor chip shipments.

Since the Geneva agreement, the London talks, and the second 90-day truce extension, several events have dampened hopes for a balanced US-China trade deal.

Geopolitical Pressures: US, EU, and India

In recent months, the US administration expanded its tariff policies to target transshipments. Notably, Vietnam agreed to a 40% US levy on transshipments bound for the US, while Indonesian shipments face a 19% tariff.

Vietnamese exports to the US declined by 2% month-on-month in August, reflecting the effects of a 20% direct tariff and 40% transshipment levy on trade terms. Coincidentally, Vietnamese imports from China also declined 2%.

Rumors suggest the US may introduce a rules-of-origin trade policy, which could further impact China’s trade terms.

The administration may also be using bilateral trade talks to weaken global demand for Chinese goods. This week, reports emerged that Trump pressured Europe to hit China and India with 100% tariffs to dissuade Russian oil purchases and increase pressure on Moscow to reach a peace deal with Ukraine. According to news outlets, the US administration will mirror the EU’s tariff.

Notably, Trump’s request followed China-Russia-backed Shanghai Cooperation Organization (SCO). President Vladimir Putin and Indian Prime Minister Narendra Modi attended the summit.

While targeting China through the EU, the US has also resumed trade talks with India. President Trump announced progress toward a deal, stating:

“I am pleased to announce that India, and the United States of America, are continuing negotiations to address the Trade Barriers between our two Nations. […[ I feel certain that there will be no difficulty in coming to a successful conclusion for both of our Great Countries!”

Trump could pressure India to stop purchasing Russian oil and to step back from China. Could the US President be looking to tilt the balance in his favor ahead of renewed trade talks with China?

China’s Economy Under Strain

US tariffs have started to affect the Chinese economy. Exports to the US fell 33% year-on-year in August, slowing total export growth to 4.4% compared with 7.2% in July. Unemployment has risen from 5% to 5.2%, with youth unemployment soaring to 17.8% in August, up from 14.5% in July. The sharper increase in youth unemployment highlighted structural labor market challenges. Rising unemployment also weighed on retail sales, raising doubts about Beijing’s 5% GDP growth target.

Beijing responded to the slowing economic momentum, pledging fresh stimulus measures. On Wednesday, September 10, China’s National People’s Congress Standing Committee held a plenary meeting, vowing to utilize fiscal policy to support stable employment and trade.

Robin Brooks, Senior Fellow at the Brookings Institution, commented on China’s trade data and economic outlook, stating:

“China is in a tough spot. Its exports to the US are down 24% q/q in Jun ’25. Exporters have only 2 options: (i) transship to the US; (ii) export goods to other countries at a discount to generate demand. Either way, a big hit to profitability and a deflationary shock for China.”

Mainland Stock Markets Hold Firm

Mainland China equity markets have avoided a sharp reversal of year-to-date (YTD) gains despite cracks forming in the economy and margin squeezes.

The CSI 300 and the Shanghai Composite Index have risen 12.97% and 13.74% YTD, tracking the Nasdaq Composite Index (13.34%). However, the Hang Seng Index leads the way, rallying 30.61% YTD, benefiting from Mainland China and overseas investor inflows.

Beijing’s pledges to support the economy have bolstered demand for Mainland and Hong Kong-listed stocks. However, trade developments, China’s housing crisis, and domestic demand will be key market forces in the near term.

Weakening external demand could impact the labor market. Rising unemployment may weigh on consumer sentiment and spending, undermining Beijing’s efforts to boost consumption.

However, addressing the housing sector crisis and reaching a trade deal with the US could change the narrative. Crucially, a trade deal would likely boost external demand, easing margin pressures. Rising margins could spur job creation and lift domestic consumption.

The Road Ahead: Consumption, Tariffs, and Stimulus

For investors, China’s bid to boost domestic consumption and soften trade shocks will influence sentiment. Beijing’s stimulus efforts and trade developments will determine whether the markets can maintain their bullish momentum.

However, traders should continue assessing Chinese economic data for clues on the effectiveness of Beijing’s policy measures. Retail sales and industrial production on September 15 will reveal whether July’s softer data was isolated or part of a deteriorating trend.

Softer retail sales and industrial production, alongside deflationary pressures, could bring Beijing’s 5% GDP growth target into question. Conversely, a rebound in retail sales and industrial production could send Mainland China’s equity markets to fresh 2025 highs.

Why are Mainland China’s equity market performances crucial for Beijing?

Leading economist Hao Hong recently remarked on Mainland China’s market trends and consumer confidence, stating:

“There’s no quick fix to boosting household confidence except for a stock market rebound.”

Track our real-time updates on China trade policy and equity market trends, and consult our economic calendar.