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The new tariffs on Chinese goods are the latest salvo in what analysts see as a trade war that could last for years. That could mean higher prices on a range of goods.

As questions over interest rates dominate the headlines, one risk to the economy is already here: the latest escalation in the global trade war.

China fired up its export machine in recent years, and that’s beginning to send a wave of cheap solar panels, electric-vehicle batteries, semiconductors, and other products to foreign shores.

This week, the U.S. fought back.

The Biden administration raised tariffs on $18 billion of goods from China as part of its long-awaited review of the tariffs levied by the Trump administration. The Biden administration said China’s control of production of critical inputs in key sectors such as energy, technology, and healthcare led to a surge in exports that threatens American businesses and workers.

The higher tariffs were largely targeted at areas President Biden has been aggressively investing in to bolster domestic production, such as electric vehicles, clean energy, and semiconductors.

The administration tripled tariffs on aluminum and steel to 25%, doubled them on semiconductors by 2025, quadrupled the tariff on electric vehicles to 100%, and doubled the rate on solar cells. Tariffs—essentially a tax on foreign goods—were also raised on ship-to-shore cranes and certain medical products. Tariffs on non-electric vehicle batteries and critical minerals like graphite will be boosted starting in 2026. The delay was aimed at helping companies transition as they rejigger supply chains, and domestic production in the U.S. gears up.

The tariffs are the latest salvo in what analysts see as a trade war that could last for years. Though administration officials said the new measures wouldn’t contribute to inflation, economists are worried that this is confirmation of a shift in global trade that could indeed lead to price increases—raising uncomfortable questions for markets and investors.

Chinese officials responded by urging the U.S. to “immediately cancel the additional tariffs on China,” and warning that “China would take all measures necessary to defend our rights and interests.”

Even before this week’s moves, rising U.S.-China tensions, the pandemic, and Russia’s attack on Ukraine forced a rethinking of globalization. Companies now prioritize resiliency over efficiency in their supply chains. Governments are leaning on industrial policy and trade restrictions to bolster domestic production of critical goods and protect domestic manufacturers.

“Our long-term inflation expectations have to be adjusted higher,” says Marko Papic, chief strategist at Clocktower Group, an alternatives asset manager. “And they haven’t been: Long-term inflation expectations remain well anchored at 2.5%. That matters for the assumptions you are making in your asset allocations and in valuations.”

Richard Bernstein, chief investment officer of macro investment firm RBA, says investors should pivot away from the so-called Magnificent Seven megacap stocks to what he sees as the next big investment trend: the reshuffling of trade.

Bernstein says small- and mid-cap U.S. industrial companies are poised to benefit from less competition from the trade restrictions, while many of the leaders of the recent bull market could be vulnerable. “Anything that causes secular inflation to become more of a reality—as tariffs would do—is likely to upset the market.”

A Global Battle

The U.S. is hardly alone in pushing back against China’s export machine. The European Union is expected to impose its own tariffs on Chinese electric vehicles in the coming months. Brazil is restoring tariffs on electric vehicle imports. India has levied tariffs on Chinese steel. Others are considering measures as China’s aggressive investment in critical areas like clean energy and advanced manufacturing has created overcapacity at home and a surplus of goods it is now trying to sell abroad.

When the trade war started during the Trump administration in 2018, markets whipsawed on every tit for tat between the U.S. and China. Trade frictions are broader-based this time, and come as the Federal Reserve is already grappling with inflation.

“There’s not much appreciation of the bigger 800-pound gorilla in the room: significant tailwinds to inflation coming not just from goods but also services,” says Torsten Sløk, chief economist at Apollo Group Management. “Trade has tentacles, indirectly or directly, into almost all the major factors of the consumer price index basket other than housing.”

Sløk says the protectionist policies will also feed into services through rising wages, a byproduct of producing closer to home at higher labor costs than in China.

The trade tensions could last awhile, says Claire Reade, senior counsel at Arnold & Porter, who formerly was focused on China at the Office of the United States Trade Representative in the Obama administration. “It’s going to be restrictions by a thousand cuts. The question: Is everyone going to remain conscious of the fact that they don’t want to cut so deeply that they are fundamentally wounding their economy?”

One reason for concern is that China shows scant signs of changing its approach. While Chinese leader Xi Jinping has denied any excess-capacity issues lately, he has prioritized investing in key strategic advanced manufacturing sectors, redirecting money that previously had made the property market a major engine of growth.

Selling higher-valued goods abroad—solar panels, batteries, electric machinery, semiconductors—is part of Xi’s playbook to help revive the world’s second-largest economy and position it for rising conflict with the U.S. and others.

China’s aggressive investment and subsidies contribute to Chinese companies’ cost advantage. But it goes beyond that. The heavy investment created intense competition that forced companies to constantly innovate to come out on top. The result: China has widened its cost advantage and closed the quality gap with foreign rivals. While U.S. export prices have risen 20% from 2019 levels and European and Mexican export prices are 15% higher, China’s export prices are flat.

Still stinging from the last time China fueled up its export machine in 2015 and flooded the world with cheap goods, policymakers are gearing up to protect their own players. The last surge in exports from China after it entered the World Trade Organization reshaped the U.S. and European labor forces. And this time, the Chinese economy is 10 times as large as it was two decades ago—and the threat is hitting higher-technology goods that are critical to countries’ economic prospects.

The speed of China’s ability to transform—from being the biggest customer of steel to its largest producer, and becoming a clean energy powerhouse—has created an urgency in global policy circles. While electric vehicles saw the biggest tariff increases from the U.S. and are at the center of the debate in Europe, the direction of China’s economic policy could mean increased output in other areas, from car parts to refined petroleum products, setting up trade battles to come.

China is producing far more than it can absorb domestically. The number of electric vehicle exports in 2023 is seven times greater than what China exported in 2019, and exports of solar cells are up fivefold from 2018 to 2023, according to Rhodium Group. China’s lithium-ion battery production is almost twice the volume of domestically installed batteries in 2022.

China’s share of global exports has risen to 14% but its exports to G-7 countries is down to 29%, from 48% in 2000. The first batch of tariffs and the push to make supply chains resilient is already changing the mix, with China selling less to the U.S. and Europe but more to emerging markets. But as China’s overcapacity in sectors critical to U.S. and Europe’s industrial bases and national security grow, policymakers are trying to act pre-emptively to protect their industries.

“We are seeing a sea change in the thinking about a trade war,” says Clete Willems, a partner for international trade policy at Akin Gump and former deputy assistant to the president for International Economics in the Trump administration. Both political parties are willing to use a much wider toolbox of trade restrictions to push back against China.

Eye on November

With the parties toughening their stance against China, trade rhetoric will likely heat up into the November U.S. election. More restrictions on technology, medical devices, and biotechs are expected in coming months from the Biden administration.

Another Trump administration would likely focus more on tariffs; outbound investment restrictions; and increased scrutiny of Chinese electric vehicles and parts, cloud computing, and biotechs on national-security grounds. Trump could also try to revoke China’s Permanent Normal Trade Relations designation, which had normalized trade relations between the countries. Revoking it would impose more tariffs on a range of goods from China, risk a greater retaliation from China, and impose greater costs on consumers and businesses. That could shave an estimated $1.9 trillion from gross domestic product over four years, according to a client note from J.P. Morgan’s global head of research, Joyce Chang.

While political analysts see potential for deal making and more willingness to consider Chinese firms investing in the U.S. in a Trump administration, they also think it could be more volatile for markets.

Trump has floated a 60% tariff on Chinese products and an across-the-board 10% tariff. At a campaign event last weekend, Trump said he would put a 200% tariff on every Chinese-made car coming from plants in Mexico.

“Just the proposition [of 60% tariffs] is so extreme that even if it doesn’t end up a policy in its own right, it could still rattle markets as investors examine what that means as the opening salvo on trade discussions with China,” says Sarah Bianchi, chief strategist of international political affairs and public policy for Evercore ISI who served as deputy U.S. Trade Representative from 2021 to 2024.

Over the next five years, Willems also expects a redefinition of where products come from, potentially linked to who owns a factory versus where it is based, as Chinese companies set up factories in Mexico and Vietnam.

China’s Response

At least for now, analysts expect China to retaliate in a measured way as it struggles with reviving its economy and waits to see what happens in the U.S. elections. Responses could include increasing scrutiny or pressuring the Chinese operations of U.S. and European auto makers and other industrial companies. China could also restrict access to critical minerals that it dominates.

Global business leaders in the auto industry estimated that almost a quarter of their profits could be at risk from policies and other sources of disruption in supply chains within a decade if these trends hold; electronics manufacturers and pharmaceuticals and medical-equipment makers each estimated that more than a fifth of profits could be at risk within a decade, according to a report from PwC Singapore commissioned by global asset manager Eastspring Investments.

The disinflation that came as companies sought the cheapest location is now giving way to a different phase of globalization. The potential costs to company profits, consumer pocketbooks, and entire economies aren’t adequately factored into investors’ longer-term assumptions, some economists believe. One snapshot of that increased cost: Taiwan Semiconductor Manufacturing’s plans to build a multibillion-dollar fabrication plant in the Arizona desert has been stymied by costly delays and labor shortages.

Higher costs could mean trouble for private equity, where investments are locked up for as much as a decade and valued using lower rates of inflation, says Papic, the Clocktower Group strategist. Unprofitable technology companies where valuations still don’t reflect a world of higher inflation are also at risk. For those looking for hedges, Papic favors commodities, industrials and metals, as well as emerging markets that are better positioned for inflation, shifting trade flows, or both.