This piece is an excerpt from a report first published in and with the kind permission of China Leadership Monitor and the author.

The second US-China trade war began only a few weeks after Trump took office. Washington imposed 10% tariffs on China in early February, another 10% in early March, and then another 24% on April 2 (“Liberation Day”). Beijing retaliated cautiously at first, partly because Washington was imposing tariffs on other countries as well. It retaliated with 10% tariffs on US natural gas, coal, machinery, and agricultural products in February and March.

After April 2, Beijing took off its gloves and imposed 34% tariffs on all US goods. This triggered an escalatory spiral between Washington and Beijing that by mid-April resulted in US tariffs on Chinese goods cumulatively rising to 145% and Chinese tariffs on US goods rising to 125%. Tariffs that high, if sustained, would have effectively embargoed bilateral trade.

However, China’s most consequential retaliatory measure, at least in the medium term, was the export control regime on rare earths it unveiled on April 4. China cut off US firms from these critical inputs, giving it leverage with Washington. If such export restrictions were sustained, some US industries reliant on these materials – such as defense, electronics, and renewable energy – would be severely disrupted.

The United States and China negotiated a truce and a de-escalation of the trade war. Both sides’ representatives have so far formally met in Geneva (May), London (June), and Stockholm (July). The effective embargo on bilateral trade via extremely high tariffs thus lasted only about a month. During that time, both countries issued tariff exemptions for some critical goods, mostly electronics on the US side and mostly semiconductors and aviation parts on the Chinese side.

US tariffs on Chinese goods are still effectively around 50% once all prior tariffs (including those from the first trade war) are included. By the standards of less than a decade ago, that is staggeringly high. It is enough to cause a drop in direct US imports from China and a substantial redirection of China’s exports to other economies.

China’s overall exports are holding up well so far. From April to July 2025, China’s reported exports to the United States fell 23% year on year, or a US$41 billion decline. Meanwhile, China’s exports to other markets increased 11%, or a US$117 billion increase. Overall, China’s exports were up 6% year on year during that period. The gains in other regions were broad-based.

Chinese exporters may have found new markets to replace what they have lost in the US market. By comparing the decline in China’s exports of specific goods to the United States with the increase in its exports of those same goods to other markets, we can approximate how much of China’s exports are being diverted. By this method, about 82% of China’s lost exports to the United States found alternative markets in the second quarter. The top destinations for those diverted exports are Southeast Asia and Europe. Comparing those trade diversion estimates with the increased US imports of those same goods from those regions, we can estimate a maximum for potential transshipment into the US market. By that metric, Southeast Asia is the top potential source of transshipped goods. Overall, potentially transshipped goods during the second quarter equal 23% of China’s diverted trade, suggesting that Chinese exporters have, at least so far, mostly found alternative markets.

With only a few months of data, it is difficult to say whether China’s export growth elsewhere will be durable. Some of China’s increased exports to other markets could be offshore stockpiling, given uncertainty about US tariffs globally. Some of China’s diverted or new exports will ultimately end up in the United States, either as inputs to other countries’ exports or through tariff-evasion schemes. The Trump administration is concerned about tariff evasion, especially through Southeast Asia. On July 31, President Trump announced additional tariffs of 40% on “transshipped” goods; this applies to all countries, but it is mostly aimed at Chinese exporters shipping through third countries with lower tariffs. How this will work in practice, such as with “rules of origin” for all content, is not yet clear.

China’s sustained export growth in the face of US tariffs has likely benefited from policy support, a weaker exchange rate, and lower export prices, which have increased volumes. As the trade war heated up, Beijing pledged to support affected export industries, with rebates, trade credits, and upgraded free trade zones. These actions may have helped at the margins.

China’s central bank, with the help of the state-owned commercial banks, has effectively targeted a stable exchange rate against the US dollar since 2023. In the first half of 2025, the US dollar fell about 11% globally against all key currencies. With a quasi-peg to the weakening US dollar, the Chinese yuan fell relative to other currencies. Its real effective exchange rate (inflation-adjusted trade-weighted currency value) declined about 4% in the second quarter, while other key currencies such as the euro appreciated. That likely has helped China’s exports.

Finally, Chinese exporters are offering lower prices in exchange for increased volumes. The total value of China’s exports has continued to grow as larger quantities have offset lower prices. In the past year, the divergence between China’s export volume growth and export unit value (price) growth has been the largest in over a decade. Only four broad categories of manufactured goods have registered price increases for exports year on year, with all others declining.

This piece is an excerpt from a report first published in and with the kind permission of China Leadership Monitor and the author.