US-China Trade Tensions 2025: Three Likely Outcomes Amid Shifting Dynamics

The changing trade dynamics and re-escalation of US-China tensions in October 2025 suggest a wider range of potential outcomes for the upcoming meeting between President Trump and President Xi during the APEC Summit. While both sides are likely to prefer extending the current trade truce (our base case) and may scale back some measures to avoid abrupt supply chain disruptions, the risk of either a limited deal or a sharp escalation scenario with heightened trade protectionism remains. For businesses, the outcome will be critical in shaping their 2026 strategies around sourcing, product portfolio and prices.

China’s exports show resilience, while de-risking from the US continues

Despite higher US tariffs and trade frictions, China’s exports continue to grow in 2025. During January-August 2025, China’s goods exports increased by 6.0% year-on-year. This has been supported by a surge in front-loading shipments to the US in early 2025 before the tariff hikes, as well as increased exports to other countries. Exports to ASEAN and the EU increased by 14.6% and 7.5%, respectively, during January-August 2025, while exports to the US shrank by 15.5%. Nevertheless, China’s exports weakened in categories that are highly exposed to the US such as apparel and footwear and toys – all demonstrated contraction during January-August 2025.

Exports to the US accounted for 11.5% of China’s total export value in January-August 2025, down from 14.6% in 2024

^{Source: Euromonitor International}

China’s trade resilience and declining dependence on the US markets signal the country’s growing bargaining power against the US, while its rare earth dominance gives other leverage.

The US imports less from China, but remains reliant on several sectors

After a short-lived surge in January-March ahead of the tariff hikes, US goods imports have declined since April 2025 as higher duties and slowing economic activity started to bite into trade. August imports dropped by 2.0% year-on-year, driven by a decline in imports from China. While China remains one of the US’s top three import partners, the share of imports from China in US total imports declined from 17.5% in 2019 to 13.1% in 2024, as importers turned to source from alternative markets such as Mexico, India and ASEAN.

The US, however, continues to be reliant on Chinese imports in some consumer goods categories including mobile phones, textiles, and toys and games – where Chinese imports made up more than a third of the country’s total consumption. Any further tariff hikes from the US, or China’s stricter export restrictions, therefore, would significantly hurt the US consumers of those categories, while affecting Chinese producers.

Extended trade truce brings fragile stability

As both the US and China are likely to prefer the recent status quo than an abrupt supply chain decoupling, a further extension of the trade truce reached in May could be the most probable outcome from the Trump-Xi October trade talks. Under this base case scenario, the US maintains tariffs at around 30%, while China may defer its rare earth control, limiting disruptions and economic damage.

Sectors with heavy US-China trade traffic such as automobiles, electronics, apparel, and toys would benefit from the status quo scenario. Nevertheless, the US and China will continue to de-risk from each other as uncertainty about the next negotiation would intensify. Businesses will still focus on supply chain alignment to mitigate potential risks.

Limited deal scenario reduces uncertainty but increases trade barriers

Under a limited deal scenario, both sides reach a compromise: China eases some trade restrictions, and the US delays a full tariff hike and applies 50% duties on Chinese goods. While this would offer short-term clarity, the added trade barriers would trim 2026 real GDP growth from the baseline by about 0.4 percentage points (ppt) in China and 0.6 ppt in the US. The US would face upward pressure on inflation, while China could see intensified deflationary pressure due to persistent overcapacity and weaker demand. Supply chain adjustments would accelerate as firms seek new sourcing options to avoid higher tariffs, benefiting some exporting countries in Southeast Asia and Latin America.

Escalation scenario results in major economic damage and disruptions

A more severe downside scenario involves sharp escalation, where the US implements the 100% tariffs hike, while China retaliates and keeps its trade restrictions. This scenario would carry significant economic costs for both countries beyond 2026. China’s real GDP growth could drop to just 4.1% in 2026 and 3.2% in 2027, significantly dampening consumer spending power in China. US consumers would bear the brunt of rising prices under a trade escalation scenario, seeing inflation surging to 5.8% in 2026 (baseline: 2.8%). The US economy would also see growth rates below 1.0% in 2026-2027, with negative spillover impacts on the global economy.

While some US domestic producers could benefit from protectionist tariffs, an escalation of US-China trade war would significantly disrupt the global supply chain of key industries, including electronics, semiconductors, and automobiles. Weakening demand and higher costs will squeeze profit margins heavily for businesses globally.

Even if a fragile truce is extended in 2025, the underlying structural rivalry between the US and China over technology, resources, and supply chain dominance will persist. Businesses should therefore prepare for a prolonged period of strategic uncertainty and focus on contingency plans to prepare for further shocks.

Learn more about trade and other economic shifts in the global marketplace in our report, Market Volatility: Risks and Opportunities Ahead.