By: Nabhjyot Arora, Research Analyst, GSDN
The United States (US) and The People’s Republic of China (China) stepped back from trade decoupling, as the US reduced tariffs from 145 percent to 30 percent, however, the 50 percent tariffs remain on goods exported from China.
China is reducing the tariffs to 10 percent from 125 percent based on the talks organized in Geneva. It was predicted by “The World Trade Organization (WTO)” that the US-China trade could fall by more than 80%, where decoupling includes a separation of ties and dismantling of trade and investment relations.
Modifications in Tariffs
Tariffs imposed before April 02, 2025, known as the “de-minimis rule” would continue, however, ease of tariffs can be attributed to:
- Raising of the US Treasury Yield to 4.5%
- Loss of credit ratings
- Debt ceiling crisis in the US
High debt in the US could result in a default by August 2025 if Congress fails to act. The tariff modifications include the following:
The United States will:
(i) Modify the application of the additional ad valorem rate* of duty on articles of China (including articles of the Hong Kong Special Administrative Region and the Macau Special Administrative Region) set forth in Executive Order 14257 of 02 April 2025, by suspending 24 percentage points of that rate for an initial period of 90 days, while retaining the remaining ad valorem rate of 10 percent on those articles pursuant to the terms of said Order; and
(ii) Removing the modified additional ad valorem rates of duty on those articles imposed by Executive Order 14259 of April 08, 2025 and Executive Order 14266 of April 09, 2025.
Ad valorem: An ad valorem rate refers to a tax or duty based on the assessed value of an item.
Role of China in the Modification of Tariffs
China will make the following modifications:
(i) Modify accordingly the application of the additional ad valorem rate of duty on articles of the United States set forth in Announcement of the Customs Tariff Commission of the State Council No. 4 of 2025, by suspending 24 percentage points of that rate for an initial period of 90 days, while retaining the remaining additional ad valorem rate of 10 percent on those articles, and removing the modified additional ad valorem rates of duty on those articles imposed by Announcement of the Customs Tariff Commission of the State Council No. 5 of 2025 and Announcement of the Customs Tariff Commission of the State Council No. 6 of 2025; and
(ii) Adopt all necessary administrative measures to suspend or remove the non-tariff countermeasures taken against the United States since April 2, 2025.
Fentanyl Tariffs in China
China is still under “Fentanyl Tariffs” which were imposed in February 2025 and March 2025, however, there is a possibility of a reduction or halt in tariffs after the 90-day lapses. The 90 days is based on the “Geneva Talks” which states that reciprocal tariffs could be based on negotiations with other countries, with the possibility that the US could impose prohibitive tariffs on China. High tariffs could result in adding products including electric vehicles, steel and aluminium, and rare earth minerals to the controlled export list.
China initiated an anti-dumping probe into chemical firm DuPont’s <Dupont De Nemours Inc>, in addition to, the blacklisting of the US defense and tech firms. Elimination of firms from the list which barred trade and investment in China, in addition to the elimination of countermeasures, and stalling anti-dumping investigations could revive trade between the two countries.
The US-China Contention & Drug Transit
The fentanyl crisis is a point of contention between the two countries, where Beijing considers the US responsible for the crisis. The US kept 20% of tariffs in place citing the inaction of Beijing in stopping the export of chemicals used in protection of the opioid. The synthetic drug is manufactured from a combination of chemicals, which was approved by the US regulators in medical settings as a pain reliever in the 1960s.
Fentanyl, however, emerged as a key drug responsible for opioid overdose deaths in the US; it is mixed with illicit drugs, which resulted in the expansion of global supply chains making it harder for law enforcement and policymakers. The chemicals are reported to be sourced by traffickers and turned into finished products in labs in Mexico, before being smuggled into the US. The drug transit is undertaken via the northern border of Canada and the southwest border of Mexico, in addition to the sea routes or checkpoints.
Sinaloa Cartel & Money Laundering
China is not the key source of illicit fentanyl supply to the US; however, it is the key supplier of precursor chemicals used in the production. Any imposition of export controls by Beijing could disrupt global pharmaceutical supply chains. Mexico is reported to be the hub of supply of the drug, where the Sinaloa Cartel undertakes tactics to conceal shipments that incorporate chemicals amongst legitimate goods, mislabelling of containers, and shipping via third-party countries.
The US initiated domestic enforcement of regulations to contain drug smuggling and money laundering, in addition to, increased surveillance. China classified fentanyl as a narcotic in 2019, however, trade in chemicals involved in the manufacturing of the drug remains unrestricted, which could potentially result in evading the law.
Encrypted platforms and cryptocurrency payments are misused to undertake illicit transit of drugs, which is backed by “The House of Representatives Committee Report on China” stating that “subsidies in the form of value-added tax rebates are provided to companies which manufacture and fentanyl and synthetic narcotics outside the country.”
Role of World Trade Organization (WTO)
China dismissed the accusations and scheduled fentanyl analogs as controlled substances in 2019. The Embassy of China in Washington undertook a special campaign to control the illegal smuggling, manufacturing, and trafficking of fentanyl in cooperation with the US authorities. A counter-narcotics group was formed to work on curbing fentanyl production and export; however, concealment of financial transactions, bureaucratic procedures, and money laundering pose a challenge to contain the crisis.
China, in addition, filed a lawsuit at the World Trade Organization (WTO) against the US tariffs and implemented countermeasures. China has established legal and administrative systems for scheduled precursor chemicals, where authorities expand the control list of precursors of fentanyl-related substances and supervise their production, sales, purchase, transportation, and export. The customs departments proceed with export clearance with declaration documents and the export permit, there have been no reports of recorded applications for export or selling of fentanyl-related substances abroad by Chinese enterprises. (The Embassy of the People’s Republic of China in New Zealand).
The WTO can undertake active measures against trade protectionism and align multilateral frameworks. The International Monetary Fund (IMF) cautioned that the US growth could fall below the baseline forecast of 2.2% in 2025, where increased protectionism could result in high unemployment, and dampen domestic consumption. The Peterson Institute for International Economics stated that 90% of the costs from the US tariffs on China harm businesses operating in the US, and any escalation of the tariff war could reduce global growth by 0.8% points in 2025 and 1.3% points in 2026 as per the IMF 2025 Global Economic Outlook.
Role of India – Trade Deal & Tariff Exemptions
India is known as the “Pharmacy of the World” and supplies vaccines and medicines on a global scale, however, India’s Anti-Terrorist Squad (ATS) reported exporting illicit fentanyl to Mexico and Guatemala. The US Department of Justice indicted pharmaceutical companies in India for importing ingredients to make illicit fentanyl.
The ATA Report introduced complexities in the US-India trade relations, which could lead to enactment of targeted tariffs. The US was India’s largest trading partner in 2024, accounting for USD120 billion of bilateral trade, however, a lack of regulatory procedures poses a risk to the reputation of pharmaceutical industry manufacturing and exports. There has been an escalation in the movement of manufacturers from China to India, relocating operations due to weaker regulations and challenges in monitoring.
The US-India discussions have moved to the evolving military and security situation in the Indo-Pacific, operating around “Operation Sindoor”, with any disruptions on tariffs on halt until August 2025. India and the US are undertaking a bilateral trade pact by July 08, 2025, reiterating a mutually beneficial trade agreement to boost investment and manufacturing in India.
New Delhi put forth the demand of undertaking an interim deal for a full exemption of 26% reciprocal tariffs imposed by the US on Indian goods, which is currently under suspension with exporters to pay only 10 percent of the baseline tariff until July 09, 2025. New Delhi seeks permanent suspension of tariffs, which is based on the approval of the Congress to reduce the tariffs below the Most Favoured Nation (MFN) rate, however, the administration holds the executive authority to lift reciprocal tariffs, New Delhi, meanwhile, offered to drop all tariffs on the US goods.
