US-China Proxy Trade War Brews as US Cracks Down on Chinese Transshipments

China Avoids Fresh US Tariffs—But Is a Proxy War Brewing?

US trade policy took center stage on Monday, July 7, with US President Trump announcing fresh tariffs effective August 1. Trump declared the new levies on X (formerly Twitter) despite previously announcing plans to dispatch letters to trade partners.

Notably, the July 7 tariffs mirrored Trump’s Liberation Day (April 2) levies, with South Korea and Japan facing 25% tariffs. However, one notable absentee stood out in the early announcements, with China seemingly dodging the threat of tariff hikes.

Asian countries dominated the overnight tariff list, suggesting a potential change in US tactics to impact reliance on Chinese goods.

The Kobeissi Letter stated:

“The US reached a trade deal with Vietnam last week that places a 40% tariff on goods rerouted through the country, aimed largely at curbing Chinese re-exports to the US. The Vietnam deal appears to be a ‘proxy trade war’ with China.”

Last week, Vietnam accepted a US-imposed 20% tariff on its exports to the US and a punitive 40% tariff on trans-shipments via Vietnam to the US. The trade deal included zero tariffs on US goods bound for Vietnam. The US-Vietnam trade deal could become a blueprint for future trade agreements with other countries potentially used by China to dodge US tariffs. Monday’s tariffs and the focus on Asian countries suggest the US administration may use punitive tariffs as an incentive for trade deals to include higher levies on transshipments.

China Trade Terms Raise Threat of a Proxy Trade War

China’s trade data has faced intense scrutiny since the escalation in the US-China trade war, with economists assessing the impact of tariffs on China’s economy. May’s trade data suggested that China shipped through third countries to bypass US tariffs.

Chinese exports to the US tumbled 43% year-on-year (YoY) in May, while total exports increased by 4.8%. Notably, exports to ASEAN countries rose 15% YoY and by 12% to the EU. The Kobeissi Letter offered a breakdown of Chinese exports to key Asian countries, stating:

“$3.4 billion of China’s exports were rerouted via Vietnam in May, a +30% YoY increase. Trade routed through Indonesia also saw a notable jump of +25% YoY.”

Notably, Indonesia is absent from the first batch of tariffs for August, suggesting the administration could be targeting the Southeast Asian country with a Vietnam-style trade deal.

China Economy and a US Proxy Trade War

June’s private sector PMIs signaled weaker overseas demand as domestic competition intensified, pressuring profit margins. US trade deals with China’s transshipping routes to the US could exacerbate Beijing’s challenge in addressing price wars, labor market weakness, and domestic consumption.

Private sector employment in China fell in June, potentially affecting consumer sentiment and private consumption. A further weakening in corporate profits could increase pressure on China’s labor market, putting Beijing’s policy measures under the spotlight. Corporate profits slid 9.1% in May, underscoring the impact of tariffs on competition and pricing.

Mainland China and Hong Kong Markets Respond to Tariff Silence

Market reaction to Trump’s latest tariff hikes and the absence of fresh tariffs on China boosted demand for Mainland and Hong Kong-listed stocks. However, the threat of a proxy trade war likely capped the gains on Tuesday, July 8.

US transshipment tariffs could strain US-China relations. An escalation in the US-China trade war, including renewed restrictions on rare earth mineral exports and China’s access to US tech, could impact sentiment.

In July, the CSI 300 and Shanghai Composite Index have gained 0.96% and 0.98%, respectively, while the Hang Seng Index has dropped 0.14%. US markets have also struggled as concerns that tariffs could delay Fed rate cuts weigh on market sentiment. The Nasdaq Composite Index is up just 0.21% in July.

US-China Trade Developments: What to Watch

This week, trade headlines will be crucial for global markets. However, US-China trade developments could be the focal point. A US proxy trade war and Beijing’s delay in issuing licenses for rare earth mineral exports may lead to tariffs hikes, pressuring Beijing to introduce fresh stimulus to bolster China’s economy.

Monitoring China’s rare earth mineral exports would provide markets insights into the state of US-China relations. Rare earth magnet exports plunged 74% YoY, the largest fall on record. Rare earth magnet exports to the US slumped 93%. With China mining 69% of global rare earth minerals and processing about 90% of the global supply, the next trade report will be crucial.

On the domestic front, China’s housing market, youth unemployment rate, consumer sentiment, household spending, and trade data will need consideration.

Follow our coverage as US-China tech tensions reshape global markets.