Opinion US and China both lose if they keep raising tariffs. So does the rest of the world

This gives China extraordinary leverage. By tightening export controls on key lanthanides, China can throttle supplies of magnets used in everything from fighter jets to electric vehicles. This is a classic strategic move ahead of high-stakes talks – signalling Beijing’s leverage and testing how far it can weaponise its dominant position in the rare earths supply chain.

China’s action comes after a summer truce in the US–China tariff war. In May, both sides had scaled back to 30 per cent (US on Chinese imports) and 10 per cent (China on US imports) before pausing duties to negotiate. However, the new controls on rare earths could reignite tensions. There might be a disproportionate impact on global tech – beyond defense uses, rare-earth magnets are vital for clean-energy gear like EV motors and wind turbines. Although China’s Commerce Ministry insists their move will promote compliant trade; by controlling critical inputs, it is forcing multinationals to plan around Beijing’s chokehold.

Tariff tit-for-tat

As a response, President Donald Trump has threatened a dramatic escalation. The US plans to impose a 100 per cent tariff on all Chinese imports, effective November 1. If carried out, this would double (or more) most US import prices from China overnight. In raw economic terms, a 100 per cent tariff is essentially a prohibitive tax that would crush bilateral trade. This is textbook tit-for-tat escalation. While tariffs protect certain domestic firms, they also impose higher costs on consumers and downstream industries. For example, raising steel tariffs raises car and appliance prices. Likewise, export restrictions act like export taxes, raising global prices and squeezing manufacturers. In effect, both policies of export control and tariff escalation will shrink global output.

Quantitative analyses have confirmed this. Trump’s tariff ramp-up can significantly reduce US and global economic growth and raise inflation. Under even a moderate-retaliation scenario, US GDP would be about 2.1 per cent below baseline by 2026, with manufacturing output roughly 12 per cent lower, and inflation 1.8 percentage points higher in 2025. In all scenarios (even after tariff rollbacks), both the US and world would be left worse off. The impact would be especially severe on sectors like manufacturing and agriculture, which lose output and jobs disproportionately. In trade terms, this is a lose-lose outcome: The US forgoes its comparative advantage in many imports, China cuts export revenues, and both face higher costs for intermediate goods. Global welfare will fall as trade barriers divert supply chains into less efficient patterns. The two countries are caught in a prisoner’s dilemma – each loses if both keep raising tariffs.

Global repercussions and India’s response

The fallout of this dispute will extend beyond the two giants. If the US dollar weakens due to higher risk, much capital could flow into Europe and Asia. A sustained rise in US risk premia would divert investment abroad, lowering US growth further while other countries (especially Europe and East Asia) could benefit from cheaper financing. Mexico and Canada would partly share America’s pain, since they trade closely and might share in the capital flight. For countries dependent on export markets (like many emerging economies), a revived US–China trade war could mean slower demand and higher prices. At the same time, a bifurcation of supply chains is likely. The global economy might be headed towards a period where China localises its value chain, and the US and allies accelerate their own. In other words, the world may split into trading blocs – another blow to globalisation.

These shifts have specific implications for India. New Delhi is already on the move. India is launching a National Critical Mineral Stockpile to build a two-month reserve of rare earths. Incentives are being offered to produce rare-earth magnets domestically – a Rs 7,300 crore scheme targeting 6,000 tons of magnet production in five years. The goal is to mitigate supply risks from China. The stockpile will guard against supply disruptions and ensure mineral availability. India must still overcome technological bottlenecks. India does have substantial rare-earth reserves, but most supplies are currently imported since domestic processing capacity is limited.

In sum, the latest volley in the US–China dispute underscores a simple fact of trade theory – barriers breed hardship. Neither China’s export curbs nor an all-out US tariff surge will yield net gains. Instead, companies will face higher costs while nations face slower growth. The renewed tensions have injected uncertainty into global markets and are complicating supply chains for industries worldwide. Mutual restraint and open markets generally yield better outcomes than tit-for-tat tariffs.

For India and other emerging economies, the upheaval is a wake-up call. They must diversify supplies, shore up domestic capacity, and brace for broader spillovers from the trade war. Whatever the short-term bargaining ploys, the long-term lesson echoed is that the Chinese–American economic relationship is not a clean decoupling story. The two markets still are and will be intertwined, with consequences that will resonate far beyond Washington and Beijing.

Bardhan is a Junior Fellow at the Observer Research Foundation