The Impact of Trump’s Reciprocal Tariff Policy on China’s Two-way Cross-border Investment
Abstract
On April 2, 2025, U.S. President Donald Trump announced the imposition of “reciprocal tariffs” on almost all major trading partners, triggering a severe shock to global markets. This policy sets a 10% uniform import tariff benchmark and imposes higher tariffs on some trade surplus countries. This paper analyzes the background, motives, and characteristics of the policy, focusing on its structural impact on China’s and the world’s two-way cross-border investment pattern, including the direct impact on China’s export trade and cross-border e-commerce, the difficulties faced by Chinese enterprises’ overseas capacity layout, and the changes in foreign capital investment intentions towards China. It also assesses the potential countermeasures that countries may take and their profound impact on U.S.-China trade relations and global investment trends, revealing the economic and political intentions behind the Trump administration’s tariff policy and its potential impact on the current global trade order.
I. Policy Overview: Content and Global Market Impact
At 4 p.m. on April 2, 2025, local time, Trump formally signed an executive order in the White House Rose Garden to launch the reciprocal tariff plan. According to the statement released by the White House, the U.S. will impose a 10% “minimum benchmark tariff” on export products from all countries, which took effect at 00:00 Eastern Time on April 5. Meanwhile, the U.S. will impose higher differentiated tariffs on countries with the largest trade deficits with the U.S., effective from 00:00 on April 9. This policy, without exempting any major economy, adopts a “carpet-bombing” comprehensive imposition plus “one country, one tariff rate” model, covering over 60 major economies with trade relations with the U.S.
On the basis of a uniform 10% tariff increase, different countries are subject to varying degrees of additional tariffs, directly reflecting the “reciprocal” principle claimed by the Trump administration. According to the presidential executive order and the tariff comparison chart displayed by Trump on that day, the U.S. has set different total tariff rates for major trading partners: among them, the total tariff rate on Chinese goods has been raised to 34%, the EU is 20%, Japan 24%, South Korea 25%, India 26%, Taiwan region of China 32%, Thailand 36%, Vietnam 46%, Cambodia as high as 49%, and the UK is 10%, etc. Canada and Mexico, as neighbors of the U.S., continue to enjoy the duty-free treatment under the framework of the United States-Mexico-Canada Agreement (USMCA) under the new policy, but only for goods that meet the rules of origin; exports to the U.S. that do not comply with USMCA rules still have to bear an additional 25% tariff. In addition, Trump also announced on the same day the imposition of a 25% tariff on imported cars (effective from April 3), as well as a 25% tariff on imported beer and empty aluminum cans (effective from April 4) and other supporting measures to expand the scope of protection. It is worth noting that some goods have been temporarily excluded from the reciprocal tariff list, such as steel, aluminum, and automobiles and parts that have already been taxed under the “Section 232” clause, as well as energy, metal resources, and gold, copper, pharmaceuticals, semiconductors, wood products, etc., which are not produced in the U.S. The Trump administration plans to increase tariffs in these areas in the future, but the specific implementation time and tariff rates have not yet been announced.
The global asset market reacted strongly to this unprecedented tariff move. Before and after the announcement, investor panic spread, causing violent fluctuations in asset prices. Although the U.S. stock market managed to close higher before the official announcement, U.S. stock index futures plunged immediately after the news broke: the S&P 500 stock index futures fell nearly 1.9%, and the Nasdaq futures dropped 2.7%. Asian markets were also dragged down, with major stock markets such as the Nikkei index and South Korea’s KOSPI experiencing a sharp drop after opening on April 3. Meanwhile, safe-haven assets like gold surged, with New York gold futures prices once breaking through the historical high of $3,200 per ounce. It can be said that the “reciprocal tariff” news caused a huge shock to the global market, with capital fleeing to safety and waiting on the sidelines. The Economist magazine of the UK commented that Trump’s so-called “liberation day” will go down in history - but not as the victory day he intended to celebrate, but as “the highest level of economic malpractice.”
II. The Concept, Logic, and Controversy of “Reciprocal Tariffs”
The so-called “reciprocal tariffs” (Reciprocal Tariffs) is a unilateral trade measure proposed by the Trump administration, aimed at ensuring that the tariff rates imposed by the U.S. on imported goods from various countries are “roughly equivalent” to the tariff rates imposed by those countries on U.S. goods. Trump has long criticized other countries for using high tariffs and trade barriers to cause the U.S. to face a huge trade deficit and manufacturing outflow. Therefore, he attempts to force other countries to reduce tariffs and barriers through the imposition of “reciprocal” tariffs, ultimately promoting the return of manufacturing to the U.S. His administration claims that this is the end of foreign countries “taking advantage of the U.S.,” will achieve so-called trade fairness, and revitalize the U.S. domestic industry.
However, the concept of “reciprocal tariffs” itself is highly controversial. From the perspective of multilateral trade rules, the differences in tariff levels among countries are mostly determined by historical reasons and negotiated results, and developing countries often have the right to higher tariff levels to protect emerging industries. The unilateral approach of the Trump administration, which superficially emphasizes “reciprocity,” is in fact a forced correction of other countries’ autonomous trade policies according to U.S. standards, ignoring the trade structures and stages of economic development of different economies. This approach has been widely criticized as a “beggar-thy-neighbor” protectionist measure and is not truly reciprocal.
Secondly, from the perspective of the international trade legal framework, “reciprocal tariffs” clearly violate the most-favored-nation (MFN) treatment principle advocated by the World Trade Organization (WTO). These principles stipulate that any preferential treatment granted by a country to a trading partner must be applied without discrimination to all members, and tariff reductions must be achieved through multilateral negotiations. Trump’s tariff measures, however, are unilaterally decided by the U.S. in terms of the objects and levels of taxation, undermining the multilateral rule system and constituting a serious violation of the existing international trade rules. If continued, this approach is tantamount to dismantling the global trade system that the U.S. itself helped create.
In addition, the U.S. “reciprocal tariff” policy ignores the special circumstances of developing countries. Under WTO rules, developing countries should be entitled to special and differential treatment, allowing them to reduce tariffs at a more gradual pace to protect domestic industrial development. However, the Trump administration disregards the differences in stages of economic development and demands that all countries reciprocate with the U.S. without distinction. This effectively deprives developing countries of the right to use tariffs to support their domestic industries, which will lead to a further widening of the North-South economic gap.
In terms of economic effects, “reciprocal tariffs” are also widely questioned. Most economists believe that high tariffs will lead to an increase in the prices of imported goods in the U.S., fuel inflation, and weaken consumer purchasing power. Goldman Sachs and Deutsche Bank, among other institutions, have estimated that if the U.S. fully implements its tariff policy, it will significantly slow down the U.S. economic growth and push up inflation. At the same time, retaliatory measures from trading partners will severely damage U.S. export industries, undermine business confidence, and harm the investment environment. Major media outlets such as the Associated Press and the Financial Times of the UK have warned that this policy will not only fail to achieve the goal of reducing the trade deficit but may also push the U.S. economy into recession.
In the United States, “reciprocal tariffs” have also sparked huge controversy. Supporters argue that President Trump has the authority to take necessary trade measures on the grounds of national security. However, opponents point out that the power to impose tariffs belongs to the U.S. Congress, and the president’s move may be unconstitutional. Moreover, the U.S. business community and consumer groups generally oppose the new tariff policy, arguing that it is a disguised tax increase that will harm employment and public interests. The House Minority Leader Jeffries was even more outspoken, criticizing Trump’s “liberation day” as an “economic recession day,” arguing that it would push the U.S. into an economic quagmire.
In summary, whether from the perspective of policy logic, international trade rules, economic effects, or legal basis, “reciprocal tariffs” have serious flaws. The implementation of this aggressive unilateral trade policy by the Trump administration challenges the bottom line of the existing international trade system and brings profound uncertainty to the global trade order.
III. Impact on China’s Export Trade and Cross-border E-commerce
The reciprocal tariff policy announced by Trump will pose a relatively significant challenge to China’s outward-oriented economy. The U.S. is one of China’s main export markets, with bilateral trade volume still reaching tens of billions of dollars in 2024. Under the new policy, the additional tariffs imposed by the U.S. on Chinese import goods will reach 34%, and with the existing tariffs already in place, Chinese goods exported to the U.S. will face higher cost pressures. This change may affect the competitive edge of Chinese goods in the U.S. market in the short term, especially for traditional foreign trade enterprises such as electronics, machinery, clothing, and furniture, whose order volumes and profit margins are expected to be affected to a certain extent.
Moreover, the uncertainty brought about by the new policy also interferes with the export confidence of Chinese foreign trade enterprises. This year, the continuous escalation of Sino-U.S. trade frictions has somewhat suppressed corporate export expectations, and some export enterprises may therefore delay or adjust their export plans to the U.S., attempting to explore other overseas markets or increase domestic market layout. However, finding a complete alternative to the U.S. market in the short term is not an easy task, so some enterprises may become more cautious in their production and investment plans.
It is worth noting that this round of U.S. tariff policy has also introduced new restrictive measures specifically targeting cross-border e-commerce, canceling the long-standing duty-free treatment for small goods under $800 that the U.S. has provided. This duty-free policy has in the past greatly facilitated the direct sales of Chinese goods to the U.S. through cross-border e-commerce platforms, driving the rapid growth of platforms such as Shein, Temu, and AliExpress. However, with the implementation of the new rules, a large number of Chinese small goods entering the U.S. market will bear additional tariffs or fixed fees, which will increase the final selling prices of some goods and have an adverse impact on the competitive advantage of cross-border e-commerce enterprises in the short term. It is estimated that more than 1 billion small goods packages from China may be affected each year, especially small sellers relying on direct mail may face more direct pressure. Some enterprises may therefore adjust their business models, choosing to warehouse and ship in the U.S. or increase product added value to alleviate the cost pressure brought by tariffs, but this process requires a certain period of adaptation.
Overall, this U.S. tariff policy has formed a double challenge to China’s foreign trade in the fields of traditional trade and cross-border e-commerce. However, Chinese enterprises are actively exploring market diversification strategies, upgrading supply chains, and increasing layout in other regional markets along the “Belt and Road” and other areas to cope with changes in the external environment. At the same time, the Chinese government is also expected to introduce relevant measures, such as increasing export tax rebate intensity, optimizing export structure, and strengthening financial support, to help enterprises better get through the current difficult period.
IV. Challenges to Chinese Enterprises’ Overseas Capacity Layout
Faced with the constantly escalating trade barriers in recent years, many Chinese enterprises have chosen to transfer part of their production links or capacity overseas to bypass U.S. tariff barriers. However, the implementation of Trump’s new round of reciprocal tariffs has put these previous overseas layout strategies into a dilemma. Especially for Chinese enterprises that have invested and built factories in Vietnam, Mexico, and other places, they now find that the “safe harbor” to avoid tariffs has turned into a new storm center, and overseas capacity arrangements face new uncertainties.
Since the outbreak of the Sino-U.S. trade war in 2018, Southeast Asia has become the preferred destination for the outward transfer of Chinese manufacturing. Among them, Vietnam, with its cheap labor and geographical advantages, has taken in a large number of Chinese factories and is regarded as one of the “biggest beneficiaries” of the Sino-U.S. trade dispute. Many Chinese enterprises, especially labor-intensive industries (such as textile and apparel, footwear, furniture) and some electronic assembly industries, have relocated part or all of their production lines to Vietnam to take advantage of its duty-free or normal tariff rate for exports to the U.S. Between 2017 and 2024, Vietnam’s exports to the U.S. surged, with its trade surplus soaring from $38 billion to over $104 billion, nearly tripling. By 2024, Vietnam had become the fourth-largest economy with a trade surplus with the U.S., after China, Mexico, and the EU. This phenomenon is partly due to the “China + 1” strategy - many multinational companies have retained their bases in China while adding production lines in Vietnam as a backup to disperse risks and avoid U.S. tariffs on China. In the northern and southern parts of Vietnam, a large number of factories with investments of hundreds of millions of dollars have risen, turning former rice fields into manufacturing workshops for electronic products, clothing and footwear, and furniture and wood products. The supply chains of well-known brands such as Apple, Nike, and Gap have all settled in Vietnam. It can be said that, under the trade war pressure during Trump’s first term, Vietnam found the “sweet spot in the global economy between China and the U.S.,” emerging as a winner in undertaking industrial transfer and exporting to the United States.
However, this time, Vietnam has become one of the key targets of Trump’s reciprocal tariffs. Due to Vietnam’s large trade surplus with the U.S. in recent years and its relatively high tariff levels, the Trump administration has set its additional tariff rate at 46%, even higher than the 34% imposed on China. Cambodia and other small Southeast Asian countries have also been levied with a tariff as high as 49%. As a result, the tax-avoidance strategy of Chinese enterprises previously transferring production to Vietnam and Cambodia and then exporting to the U.S. is no longer effective. These enterprises are now in a dilemma: staying in Vietnam means that products entering the U.S. still have to pay a high tariff, and the cost advantage no longer exists; if the production capacity is withdrawn back to China, domestic products still have to bear a 34% tariff, which is only slightly lower than staying in Vietnam and offers limited competitiveness improvement. Moreover, if they transfer to other third countries, Trump’s tariffs leave almost no safe havens among the main alternative countries. For example, some enterprises consider moving to Indonesia, Malaysia, and other countries, but it is uncertain whether these countries will be put on the higher tariff list by the U.S. in the future. The global tariff barrier situation leaves enterprises at a loss.
The situation in Mexico is similar. Geographically adjacent to the U.S. and forming the USMCA free trade zone with the U.S. and Canada, Mexico has always been a popular destination for Chinese enterprises to bypass the U.S. market. In recent years, some Chinese manufacturers (such as home appliances, electronics, and automotive parts industries) have set up factories in Mexico, using the North American regional origin rules to try to make their products meet the USMCA origin requirements and enter the U.S. market duty-free. However, the reciprocal tariff policy has set a uniform additional tariff rate of 25% for Mexico (for goods that do not meet USMCA rules). Although products that meet the origin conditions can still enter the U.S. duty-free, to meet strict requirements such as regional value content, enterprises need to increase local procurement of parts and the proportion of local inputs in Mexico. This undoubtedly increases production costs and supply chain management difficulties. Some Chinese enterprises may have only moved the assembly link to Mexico before, with parts still imported from China. Now, in order to avoid a 25% tariff, they have to consider building a more complete supply chain in North America. This is not realistic for enterprises with weaker financial and technical strength. Therefore, a considerable part of the products produced by Chinese enterprises’ factories in Mexico will still be subject to a 25% tariff when entering the U.S. market in the short term, and the advantage compared to direct export from China is not obvious. Moreover, if the U.S. adjusts the USMCA exemption policy or increases tariffs on Mexico in the future, these investments will also face risks.
Overall, this round of reciprocal tariffs has brought new challenges to Chinese enterprises’ previous overseas layouts, and overseas production strategies need to be re-evaluated and adjusted. Looking ahead, Chinese enterprises’ global capacity layout will be under pressure in the short term and will need to find new breakthroughs. On the one hand, the U.S. imposing tariffs on major trading countries has almost made the strategy of “transferring production to avoid taxes” ineffective; on the other hand, geopolitical risks make dependence on a single market dangerous, and the uncertainty of trade policies in various countries is increasing. Chinese enterprises may have to seek more innovative responses, such as accelerating product upgrades to enhance premium capabilities and partially offset tariff costs; expanding into alternative markets such as Europe and ASEAN to diversify the proportion of exports to the U.S.; or directly investing in local market sales channels in the target export countries (to bypass tariff in trade form). However, in the short term, enterprises that have previously relocated to Vietnam and Mexico to avoid tariffs will face severe challenges and a period of pain. Some of them may choose to reduce exports to the U.S., shift their focus back to domestic or other regional markets, and wait for the opportunity for trade conditions to ease.
V. Impact on Foreign Investment Intentions in China
After Trump announced the reciprocal tariff policy, in addition to affecting China’s outward investment layout, it also brought new considerations to the investment decisions of foreign enterprises in China. For many years, relying on the complete industrial chain system and the continuously expanding domestic demand market, China has always been an important investment destination for global manufacturing and services. However, with the continuous evolution of Sino-U.S. trade frictions and the reconstruction of the global supply chain, some multinational companies have begun to carefully assess their layouts in China.
Under the current circumstances, some export-oriented foreign-funded enterprises may re-examine their expansion plans in China. Especially for enterprises with a high proportion of exports to the U.S., the cost of producing in China and selling to the U.S. has significantly increased due to the new tariffs, which to a certain extent affects the continuous attractiveness of the “Made in China - Export to the U.S.” model. Therefore, some enterprises may choose to allocate new capacity to countries with lower tariff burdens or stronger trade agreement guarantees. This trend has already emerged in the previous rounds of trade frictions and may further intensify now.
At the same time, more and more foreign-funded enterprises are turning to a localization development strategy centered on the Chinese market. For multinational companies that value the huge Chinese consumer market, trade conflicts have increased the necessity of “closed-loop” operations in China, that is, producing in China and directly selling to China or the surrounding markets, trying to avoid involvement in the dispute over exports to the U.S. For example, some German car manufacturers have recently invested in new factories in China, aiming to meet the needs of Chinese consumers and sell products to other Asian countries, rather than the U.S. market. Such investments are less affected by reciprocal tariffs, so we may see market-oriented foreign investment continuing to enter China and even increase, in order to capture a share of China’s domestic demand.
The weight of geopolitical factors has also risen in foreign investment decisions. Some countries have tightened foreign investment security reviews, with high-tech field investments involving China receiving more attention and restrictions. Under this background, enterprises not only need to assess commercial feasibility but also need to consider policy sensitivity from their own governments, public opinion, and other aspects. This complex factor overlap also poses higher strategic judgment requirements for the long-term layout of foreign-funded enterprises in China.
Despite this, China still has many advantages in attracting foreign investment. The huge consumption potential, the continuously optimized business environment, and the open economic policies still provide a good development space for foreign-funded enterprises. For example, some well-known multinational companies have continued to invest and expand in China recently, reflecting confidence in the prospects of the Chinese market. It can be预见 that in the coming period, the structure of foreign investment attracted by China will become more diversified - export-oriented investment will tend to be cautious, while projects serving the domestic market or facing regional cooperation are expected to gain new development opportunities. At the same time, China will further promote the improvement of the business environment and strengthen supply chain resilience to enhance its attractiveness to high-quality foreign investment. For key areas, China may also increase its own investment to enhance industrial autonomy to cope with the long-term challenges of external uncertainty.
VI. Possible Retaliatory Measures by Other Countries and Subsequent Trends
The reciprocal tariff policy introduced by the Trump administration has sparked strong reactions in the international community, with major trading partners planning or implementing retaliatory measures one after another, and the risk of a full-scale escalation of global trade frictions. Faced with the U.S. unilateral tariff pressure, China, the EU, Canada, and others have taken the lead in expressing their determination to fight back, and more countries have been forced to get involved to defend their own economic interests. This multilateral game not only makes the global trade environment more tense but also has a profound impact on the Sino-U.S. trade pattern and global investment trends.
China was the first to retaliate, reaffirming its stance on maintaining the multilateral trading system. As soon as the U.S. announced a 10% tariff increase on some Chinese goods, China immediately took countermeasures by imposing tariffs on some U.S. products and filed a complaint with the World Trade Organization (WTO), accusing the U.S. of violating the most-favored-nation treatment obligation. With the U.S. raising the tariff level to 34%, China also quickly followed suit. On April 3, the Chinese Ministry of Commerce clearly stated its “firm opposition” and emphasized that it would take “firm countermeasures.” Although the specific list has not yet been announced, it is clear that China and the U.S. have entered a state of “tit-for-tat” confrontation. In the context of the WTO dispute settlement mechanism being paralyzed and the lack of effective channels for bilateral negotiations, Sino-U.S. trade may enter a new normal of long-term standoff.
The EU responded strongly, and the transatlantic trade relationship fell into tension. EU Commission President von der Leyen was the first to state that a “strong retaliatory plan” had been prepared. After the Trump administration announced a new round of tax increases, the EU immediately retaliated, stating that it would take reciprocal measures and proposed to impose tariffs on key U.S. export goods such as agricultural products, whiskey, and motorcycles, and may even expand to digital services or the technology industry. The leaders of core countries such as France and Germany publicly criticized the U.S. for undermining free trade and warned of the rising risk of a U.S.-EU trade war.Considering that the annual trade volume between Europe and the U.S. exceeds $700 billion, if a full-scale mutual imposition of tariffs occurs, European industries such as automobiles, aviation, and luxury goods that rely heavily on exports will be the first to be affected, and U.S. exports such as soybeans and energy will also be under pressure, resulting in a “lose-lose” situation. The EU has begun to join forces with other victimized countries to exert pressure on the U.S. together, in an effort to defend the multilateral rule-based system.
Canada and Mexico quickly followed suit, and the North American trade situation changed dramatically. Canadian Prime Minister Mark Carney, newly in office, made dealing with U.S. tariffs his top priority and explicitly stated that “the economic structure must be reshaped” to cope with the long-term challenge of a trade war. The Canadian side is brewing countermeasures on a scale equivalent to that of the U.S., focusing on key U.S. export products, and especially warned that if the U.S. imposes a 25% tariff on Canadian automobiles, Canada will resolutely retaliate against the U.S. automotive industry. While Mexico maintains compliance with the rules of the United States-Mexico-Canada Agreement (USMCA), it has also made it clear that it will not tolerate actions that disrupt the regional trade order and will counteract through both tariff and non-tariff means if necessary.
Other major economies’ attitudes are becoming more synchronized, and collective action cannot be ruled out. Although Japan and South Korea have relatively lower tax rates, they have expressed serious concern and may follow suit with tax increases or establish technical trade barriers if negotiations with the U.S. fail. India, after being hit with a 26% tariff, also quickly condemned the U.S. policy as “irresponsible” and is expected to continue its previous retaliatory practices against U.S. agricultural products.
The global trade pattern may be reshaped, and investment flows face uncertainty. Faced with the global diffusion effect of U.S. tariff policies, countries are gradually shifting from dependence on the U.S. market to strengthening regional cooperation and supply chain diversification. China and the EU join hands to defend the multilateral trading system, Asian countries accelerate the negotiation process of free trade agreements, and global companies re-evaluate their investment layouts to avoid the impact of geopolitical shocks.
Conclusion
The Trump administration’s tariff policy not only accelerates the reshuffling of the global trade pattern but also triggers systemic retaliation worldwide. In the future, the long-term game between the U.S. and China will become an important variable in the global economic trend, and the different coping strategies of various countries will also determine their positions in the new round of international economic competition to some extent. For enterprises, adapting to this new normal, planning ahead for regional diversification, and enhancing supply chain resilience will become important strategic directions to cope with global uncertainty.
With the comprehensive implementation of reciprocal tariffs still a week away, the Sinobravo policy research team will continue to monitor the subsequent trends.
References:
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