The Tariff Wars

On March 22, 2018, President Trump signed a presidential memorandum directing the U.S. Trade Representative to impose tariffs on Chinese goods under Section 301 of the Trade Act of 1974, citing Chinese theft of intellectual property and forced technology transfer. The memo set in motion the largest tariff escalation since Smoot-Hawley.

The tariffs arrived in three tranches. Tranche 1 (July 6, 2018): 25% on $34 billion of Chinese goods, targeting industrial machinery, electronic components, and medical devices. Tranche 2 (August 23, 2018): 25% on another $16 billion, hitting semiconductors, plastics, and chemicals. Tranche 3 (September 24, 2018): 10% on $200 billion of goods, later raised to 25% in May 2019, sweeping in consumer products, auto parts, and processed foods.

The quarterly data reveals an asymmetric response. On the import side, almost nothing happened immediately. Q3 2018 imports were $134.4 billion, virtually identical to Q3 2017’s $124.7 billion. Q4 2018 imports were $133.7 billion — barely a blip below Q4 2017’s $132.1 billion. American companies absorbed the tariff cost rather than switching suppliers. Renegotiating supply contracts, qualifying new factories in Vietnam or Mexico, redesigning products for different components — all of this took time that importers didn’t yet have.

On the export side, the impact was immediate and devastating. China retaliated within hours of each American tranche, imposing mirror tariffs on American goods. The biggest weapon: a 25% tariff on soybeans, announced July 6, 2018. By Q4 2018, American exports to China had plunged to $23.8 billion — down 32% from Q4 2017’s $34.9 billion. The retaliation hit harder and faster than the original tariffs because China targeted agricultural products where alternative suppliers (Brazil, Argentina) were immediately available. American soybean farmers had no substitute customer. Chinese importers had plenty of substitute suppliers.

The import decline, when it finally arrived, was gradual. Q1 2019: $119 billion. Q2: $117 billion. Q3: $112 billion. Q4: $101 billion. Each quarter a little lower than the last, as companies that had initially absorbed the tariff cost began completing their supply chain shifts. The full-year drop was significant: from $539 billion in 2018 to $450 billion in 2019, a $90 billion decline.

But the decline was not what it appeared. Much of the $90 billion didn’t represent reduced consumption of Chinese goods. It represented rerouting. Samsung moved smartphone production from China to Vietnam. Furniture manufacturers shifted from Dongguan to Binh Duong province. Electronics assemblers set up shop in Thailand and Malaysia. Some goods were simply relabeled — shipped from Chinese factories to intermediate countries like Vietnam or Cambodia, repackaged, and re-exported to the United States with a non-Chinese country of origin. Customs authorities called this “transshipment.” In the NAFTA series, we documented the evidence: the countries that gained most in U.S. imports between 2018 and 2024 were precisely the ones most connected to Chinese supply chains.

The Phase One trade deal, signed on January 15, 2020, was supposed to halt the escalation. China committed to purchasing $200 billion in additional American goods over two years, including $32 billion per year in agricultural products. In exchange, the United States reduced some tariff rates from 15% to 7.5% and paused further escalation. The agreement held, sort of: China never met the full purchasing targets, but agricultural imports did surge, and the tariff rate stabilized. Both sides called it a truce.

COVID-19 scrambled the tariff story. Q1 2020 saw imports crash to $83 billion — not because of tariffs but because Chinese factories shut down during the initial Wuhan lockdown. The recovery was equally dramatic: $110 billion in Q2 as factories restarted, then $115 billion and $125 billion in Q3 and Q4 as American consumers, locked at home with stimulus checks, ordered laptops, exercise equipment, home office furniture, and masks from China in record quantities.

The irony was exquisite. The same tariffs that were supposed to reduce dependence on Chinese goods were still in effect as Americans placed more orders from China than ever before. By Q1 2022, imports hit $152 billion — a quarterly record that exceeded even the pre-tariff peak. The pandemic proved that tariffs could raise the cost of Chinese imports but not the demand for them, at least not in the short term. When Americans needed N95 masks, ventilator components, and home office electronics, they needed them immediately, and China was the only supplier with the capacity to deliver at scale.

The post-COVID normalization brought imports back down to $110–115 billion per quarter by late 2022 and $104–109 billion through 2023. This represented the new baseline: roughly $430 billion annualized, down from the $540 billion peak but still enormous. Six years of tariffs had reduced Chinese imports by roughly 20%, not eliminated them.

The data from 2025 shows something qualitatively different from the 2018 tariffs. In the first quarter of 2025, imports ran at $113 billion — typical of the prior two years. Then came the April tariff escalation: reports indicated rates as high as 145% on a broad range of Chinese goods, dramatically exceeding the 25% ceiling of the 2018 round.

The Q2 2025 collapse was unlike anything in the prior data. Imports fell to $68.7 billion — a 39% decline from Q1, and the lowest quarterly figure since the COVID lockdown quarter of Q1 2020. But unlike the COVID dip, which reversed within one quarter as factories reopened, Q3 2025 showed no bounce: $69.1 billion, virtually flat with Q2. The decline has stabilized, not reversed.

Exports told the same story in miniature. Q2 2025 exports fell to $25.9 billion, the lowest since Q4 2018’s retaliation-driven trough. Q3 recovered slightly to $27.7 billion. Chinese counter-tariffs and trade restrictions are clearly biting again — American soybean and semiconductor exporters are losing access.

If Q2–Q3 2025 import levels hold for a full year, annualized Chinese imports would be approximately $275 billion — down 37% from the 2024 level and 49% from the 2018 peak. That would represent the lowest annual import figure from China since 2009, erasing fifteen years of trade growth. The 2018 tariffs bent the curve. The 2025 tariffs may have broken it.

Three patterns emerge from the quarterly data that annual figures would conceal.

First: retaliation hits faster than tariffs. When the U.S. imposed tariffs in mid-2018, American imports from China barely moved for two quarters. But Chinese retaliation crushed American exports within weeks. The reason is structural: China’s retaliatory tariffs targeted agricultural commodities (soybeans, pork, cotton) where alternative suppliers exist immediately. American tariffs targeted manufactured goods where switching costs are high and alternatives take months or years to develop. The attacker had a blunt weapon; the defender had a scalpel.

Second: front-running distorts the data. Q1 2025 imports of $113 billion were elevated above the 2024 trend — importers were pulling forward purchases ahead of the anticipated April tariffs, just as they had in early 2018 before the first tranche. The Q2 collapse was partially amplified by this front-running effect: part of the $69 billion figure reflects not just reduced demand but inventory already sitting in American warehouses from Q1’s accelerated purchases. The true “new normal” will only become visible in Q4 2025 and beyond, when the front-run inventory has been consumed.

Third: the 2025 shock is structurally different. The 2018 tariffs topped out at 25%. At that rate, many importers found it cheaper to absorb the cost than to relocate production. A 25% tariff on a $100 item adds $25 — painful but manageable. A 145% tariff on the same item adds $145 — making the product more than double its pre-tariff price. At 145%, the incentive to find any alternative — any country, any supplier, any substitute product — becomes overwhelming. The Q2–Q3 data suggests that importers are responding accordingly.