In early 2025, the United States imposed a sweeping series of “reciprocal tariffs” on Chinese goods, raising duties on a wide range of imports to as much as 245 percent. In Washington, the move was presented as a way to address trade imbalances and protect American industry. In Beijing, it was interpreted as an escalation, another chapter in deepening economic decoupling.

But, behind the headlines, a more nuanced picture has emerged. These tariffs, while politically powerful, are not likely to achieve their stated goals. While China is facing short-term challenges, its economic response – both defensive and strategic – may, in fact, accelerate its shift toward innovation, regional integration, and market diversification.

Logic behind U.S. tariffs

“Reciprocal” implies balance and fairness. In reality, the most recent U.S. tariffs are far more sweeping than any previously imposed. Their stated goals are familiar: reduce the bilateral trade deficit, reshore supply chains, and prompt Beijing to further open up its markets.

However, tariffs are blunt instruments. The U.S. goods trade deficit with China – US $295.4 billion in 2024 – will take time to significantly decrease. U.S. imports from China have decreased, but much of that trade has been rerouted through third countries like Vietnam and Mexico. Meanwhile, China’s retaliation has hurt American exporters, particularly those in agriculture and energy. Soybeans and liquefied natural gas, once major U.S. exports to China, are now largely sourced elsewhere.

The complexity of modern supply chains also reduces tariff effectiveness. Intermediate goods travel across multiple borders before final assembly, and new duties create uncertainty and inefficiency at every stage.

China’s short-term challenges

The immediate economic impact of U.S. tariffs on China has been noticeable. Export orders from the United States have decreased significantly, particularly in manufacturing hubs such as Guangdong and Zhejiang. Industries with thin margins, such as machinery, apparel, and consumer electronics, are under pressure.

According to some estimates, China’s GDP growth could slow by two percentage points in 2025. Exports to the United States may fall by as much as two-thirds. However, these figures only tell a portion of the story.

Beijing has moved quickly to stabilize vulnerable sectors, offering tax breaks, wage subsidies, and low-interest financing to help affected businesses. In the face of turbulence, the central government’s emphasis on macroeconomic stability, as evidenced by a controlled renminbi depreciation and strong foreign exchange reserves, is designed to boost investor confidence.

China’s strategic recalibration underway

The deeper impact of these tariffs is not immediate disruption, but rather the acceleration of long-term structural change.

Multinational corporations are accelerating “China plus one” strategies, establishing production bases in Southeast Asia or Mexico to mitigate geopolitical risk. Chinese firms, too, are investing in offshore assembly plants to maintain global reach.

Meanwhile, China is focusing more on technological self-reliance. Restrictions on high-tech imports from the United States have prompted significant investment in semiconductors, artificial intelligence, green energy, and advanced manufacturing. The “Made in China 2025” initiative has evolved into a larger national push for innovation.

Regionally, China is strengthening trade ties through the Regional Comprehensive Economic Partnership (RCEP) and pursuing membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). ASEAN is now China’s largest trading partner, reflecting Asia’s increasing economic integration. Efforts to promote the renminbi in cross-border trade settlements underscore Beijing’s desire for greater financial autonomy.

Beyond retaliation: a domestic pivot

China’s response can go beyond retaliatory tariffs. While U.S. goods are now subject to up to 125 percent tariffs in China, Beijing is also concentrating more than ever on promoting domestic growth.

Stimulus efforts are focused on strategic sectors such as electric vehicles, digital infrastructure, and green technologies. Policies to increase rural incomes, expand social security coverage, and increase middle-class consumption all aim to boost internal demand.

At the same time, Chinese companies are aggressively entering emerging markets in Africa, Latin America, and the Middle East. Many of these companies are no longer just competing on price; they are also offering differentiated, innovation-driven products and services.

Even as geopolitical tensions persist, China’s selective liberalization of financial services and foreign ownership rules indicates that it remains open to high-quality global capital.

A decoupled future or a new balance?

Tariffs may yield short-term political gains. However, they rarely provide long-term economic clarity. United States consumers pay more, and American exporters lose their market share. Chinese manufacturers suffer, but they may adapt, often with surprising speed.

What emerges is a more fragmented, multipolar trading world rather than a clean decoupling. China is adapting, shifting its focus from volume to value, from the United States to the Asia region, and from trade dependence to domestic innovation.

For both China and the United States, engagement continues to be preferable to estrangement. Rules-based trade and constructive negotiation, rather than tariff escalation, provide the best chance of managing competition while preserving global economic stability.

The decisions we make today will determine whether we move toward greater fragmentation or renewed cooperation tomorrow.

Dr. John Quelch is executive vice chancellor, American president and distinguished professor of social science at Duke Kunshan University in China and the John deButts professor of practice at Duke University’s Fuqua School of Business in the United States.