Tariff Truce Fails to Halt Collapse in China-U.S. Trade

Chinese Exports to the U.S. Plunge

Newly released trade figures from Beijing show shipments to the U.S. tumbled 35% year over year in May, the steepest decline since the pandemic’s early months in 2020. This follows a similarly dismal 21% drop in April. The figures point to a broader realignment in global trade flows, shaped not just by tariffs, but by long-term mistrust and shifting strategies among manufacturers and governments alike.

While overall Chinese exports managed a modest 4.8% increase, largely due to stronger demand from Southeast Asia and the European Union, the rebound fell short of economists’ expectations.
It also marked a notable slowdown from April’s 8.1% rise, indicating that the post-truce bump may already be fading.

The May data marks the first official trade report since the U.S. and China reached a tentative truce last month in Geneva, aimed at de-escalating years of tit-for-tat tariffs. Under the deal, Washington agreed to reduce tariffs on most Chinese goods to 30% from a punitive 145%, while Beijing cut duties on U.S. imports to 10% from 125%, both for a 90-day period.

Tensions and Fears

Despite that agreement, the underlying tensions remain very much alive. A high-level meeting in London this week between American and Chinese trade officials could yield progress, but few expect a clean break from the volatility that has defined U.S.-China relations under President Trump’s administration.

Trust continues to be a major hurdle. Washington has expressed frustration over Beijing’s failure to resume rare-earth exports, while China has pushed back against U.S. restrictions on AI chip exports and visa bans targeting Chinese students.
These disputes have stoked uncertainty for companies operating across borders.
Some exporters are scrambling to take advantage of the 90-day tariff reprieve. Freight volumes surged and container prices rebounded in recent weeks as backlogged orders were rushed out of Chinese ports. Yet many businesses remain reluctant to fully re-engage, viewing the truce as temporary.

A composite measure of China’s manufacturing sector showed continued weakness in new export orders, reinforcing the notion that any rebound may be fleeting. A recent federal court ruling that blocked most of this year’s new U.S. tariffs added another layer of uncertainty, though the decision is currently suspended pending appeal by the White House.

The Trade War’s Economic Echoes

For Beijing, the fallout from the trade war extends beyond export metrics. China’s GDP grew 5.4% in the first quarter, driven in part by front-loaded shipments ahead of anticipated tariff hikes. But most economists agree the boost is unlikely to last, with growth expected to taper later this year as export momentum slows and domestic challenges persist.

To cushion the impact, Chinese policymakers have ramped up stimulus measures, cutting interest rates and injecting liquidity into the system.
A nationwide consumer goods trade-in program is also underway in a bid to support household spending.
Still, signs of persistent weakness in domestic demand are mounting. Imports fell 3.4% in May, widening China’s monthly trade surplus to more than $103 billion, up from $96 billion in April.
Meanwhile, deflationary forces continue to grip the economy: factory-gate prices fell 3.3%, marking the biggest decline in over a year, and consumer prices slipped for the fourth straight month.

In a striking example of these pressures, Chinese electric vehicle giant BYD slashed prices by up to a third across several car models last week. The move, while aimed at boosting competitiveness, has revived fears of another bruising price war in the auto sector. Authorities have since stepped in to manage fallout and maintain order in the market.

Europe Caught in the Middle

Europe had hoped to stay clear of the fallout from the escalating U.S.-China trade war, even moving to deepen economic ties with Beijing. But China’s recent restrictions on rare earth exports—critical to Europe’s automotive and clean energy sectors—have exposed how vulnerable the EU is in a geopolitical clash it didn’t start.

The export curbs, imposed in April as a direct response to U.S. tariffs, were initially seen as a warning to Washington. Yet European automakers quickly found themselves in the crossfire.
China has yet to clarify if its fast-track licensing scheme applies to large-scale European firms, and stocks of rare earth magnets are rapidly depleting. Production slowdowns now loom across the continent’s biggest carmakers, including Volkswagen, Stellantis, and Renault.
Europe had banked on neutrality, believing that closer economic integration with China could shield it from the sharper edges of Washington’s more confrontational approach.
That strategy has backfired. Not only is the EU now facing supply chain bottlenecks, but it is also being flooded with cut-price Chinese exports, particularly in electric vehicles and green tech, putting further pressure on Europe’s struggling manufacturing base.

With China controlling 60% of the world’s rare earth output, the EU’s dependence on Beijing for critical materials has become a strategic liability. Calls to diversify supply chains have grown louder, but Europe is starting from behind—with little time to act before disruptions hit. In a global trade war, sitting on the sidelines offers no protection.

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