Ever since the November truce in the U.S.-China trade war, chaos has receded and a sense of equilibrium has begun to take hold in American trade policy.
Business leaders have revised their tariff fears, GDP growth is forecast at a robust 3.5%, tariffs are on track to raise a remarkable $256 billion of additional annual revenue, predictions of runaway inflation and spiraling retaliation have been disproven, and green shoots of increased manufacturing activity are sprouting after a season of uncertainty.
But an increasingly conciliatory attitude toward China has created a feeling that the administration’s trade strategy is muddled.
The terms of the November truce suspended high reciprocal tariffs in exchange for China permitting rare earth exports to flow, essentially resetting the U.S.-China relationship back to the status quo immediately prior to Liberation Day.
The White House has even placed national security matters, such as semiconductor export controls and cyber-espionage sanctions, on the negotiating table to preserve the detente.
This has frustrated those who thought the overriding aim of Liberation Day was to decisively squeeze China and provoke decoupling. China has been able to grow its global exports despite U.S. tariffs.
Commentators note that we have been treating allied countries and important fence-sitters like India more harshly than our chief adversary, “punishing our friends while courting Beijing.”
There is plenty of room to criticize the administration’s current approach on pure national security grounds.
But as a trade matter, it’s a different story.
The recent pessimism ignores a fundamental reality: tariffs on China are significantly higher than tariffs on the rest of the world, and as long as that remains the case, it will drive a structural realignment in the global trading system that disadvantages China.
In order to keep exports growing in the face of U.S. tariffs, China must increase sales to new markets. But those new markets tend to be exporters themselves, and don’t have the ability to painlessly replace U.S. demand.
China can only access these markets by aggressively underpricing its exports — weakening the balance sheets of its manufacturers and subjecting its trading partners to China Shock dynamics of bankruptcy, unemployment, and deindustrialization.
In essence, the measures China must take to fuel its export machine end up undermining it.
The administration should hasten this realignment by doing more diplomatically to create a united anti-China trade bloc, conditioning preferential tariffs on blocking Chinese exports and levying high tariffs on countries that remain open to them.
Ultimately, one number is truly determinative for the future of the global trading system: the gap between the U.S.’s effective tariff rate on China and its effective tariff rate on the rest of the world.
That gap represents the extra cost that an American purchaser would pay to source from China versus alternative countries or domestic suppliers.
The Peterson Institute estimates that, as of Nov. 10, 2025, the effective U.S. tariff on Chinese exports was 47.5%, while the equivalent rate for the rest of the world was 18.5% — a substantial gap of 29%.
Although the November truce suspended reciprocal tariffs, the combination of Trump’s other tariffs under Section 301, Section 232, and pre-Liberation Day fentanyl tariffs are enough to render China’s goods more expensive than others. China therefore risks losing access to the U.S. market in any product market where its cost advantage over the next-cheapest supplier is within 29%.
China’s exports to the U.S. have cratered by 29% year-over-year as of November. The Chinese share of U.S. imports has now dropped below where it stood just prior to China’s entry to the World Trade Organization in 2001.
This forces Chinese firms to survive by cutting prices, creating extreme balance sheet problems and putting net profits in freefall.
Western observers often have the impression that Chinese firms aren’t subject to profit-and-loss pressure due to government subsidies. That impression is false — subsidies cause overcapacity at the sector level, but Chinese firms are subject to “cut-throat price wars at home” that “only sharpen their hunger to capture overseas markets.”
With the loss of U.S. orders, this problem is now entering an acute phase characterized by producer price deflation, firm bankruptcies, and declining fixed-asset investment, endangering the future growth of the industrial sector. Chinese factories accept unprofitable orders just to retain their workforces and clear inventories.
Starved for margin and deprived of their main export market, Chinese producers are exporting at aggressively low prices into new markets that can’t accommodate them. Chinese exports to Europe are up by 14% compared to 2024 and the EU’s trade deficit with China has nearly doubled from 2017 levels.
To avoid deindustrialization and mass unemployment from the loss of a manufacturing sector that makes up over 20% of the European economy, the EU — and other regions facing the flood of diverted Chinese exports — will find they have no choice but to limit Chinese access to their markets. This realization is now dawning on governments around the world, which are rolling out anti-China trade and investment measures at a record pace.
Just this week, Mexico announced tariffs of up to 50% on Chinese imports, drawing outrage from Beijing. Even French President Emmanuel Macron, famously dovish on China, is now threatening what he calls “protective measures” to address “unbearable imbalances.”
All countries that wish to retain their industrial capacity are converging on the same set of policies, without any central coordination or political agreement. When that convergence occurs, China will have no option to export itself out of trouble. There won’t be any large markets left to divert to.
The administration has at least three important tasks ahead of it. First, it must monitor the effective tariff gap closely to ensure that it remains large enough to trigger trade diversion away from China.
If the gap shrinks too much — or if the administration drops the ball on anti-circumvention enforcement — the realignment will halt.
Second, it should avoid doing and saying things that unnecessarily slow the trend. Realignment is coming, but bullying rhetoric will create political pressure for countries to distance from the U.S. and explore their options with China. This will leave them weaker when they later conclude that those options are unworkable, which is deadweight loss that the administration can avoid by front-loading diplomacy to create a united anti-China front.
Working with allied countries to scale up a rare earths mining and processing supply chain that excludes China is an ideal venue.
Finally, the administration should do everything in its power to address the major causes of unaffordability in American life: the spiraling costs of housing, health care, child care, and higher education. These are major political challenges, but without action, pressure to scapegoat tariffs as the affordability culprit will grow, and the coalition holding them in place may break.
That would close what may be a brief window to resist deindustrialization and prove the viability of a different vision of the future — one in which America masters the innovative industries of the future, builds reciprocal relationships with its trade partners, and ends its dependence on its chief adversary.
Nicholas Phillips is an international trade lawyer writing about how trade law and policy can reindustrialize America. From Commonplace.org
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