US President Donald Trump announced new tariffs on Chinese imports, increasing the chances of China responding with its own retaliatory measures, which could escalate tensions between the two largest economies in the world.

Trump shared on social media that starting March 4, China will face an extra 10% tariff. He pointed to the ongoing flow of drugs from neighbouring countries in North America, which he described as "very high and unacceptable," and blamed China for being involved in this issue. The new tariffs add to a 10% duty that was already introduced earlier this month. These tariffs are part of Trump’s broader actions against China, covering trade, technology and investment. In response, Beijing took targeted measures but hinted that it could take stronger actions if necessary. Chinese stocks listed in Hong Kong dropped by up to 2.4%, marking their biggest one-day decline since January 2. Meanwhile, the CSI 300 Index, which tracks major stocks in mainland China, fell by 0.7% and is set to record its first weekly loss in a month.

“Trump may be pressing his luck,” said Chang Shu, chief Asia economist for Bloomberg Economics. She noted that the risk is that China’s restraint so far “could shift to a more strident retaliatory stance — and a much more damaging trade war.” China’s Ministry of Commerce and Foreign Ministry have not yet responded to requests for comment. Trump’s new measures were announced without warning, catching Chinese officials off guard. The tariffs are set to take effect on Tuesday, just one day before President Xi Jinping attends the year’s most important political meeting, where his team will outline their economic plans for 2025. While the economic growth target and fiscal policies for this year have already been decided and are unlikely to change immediately, the new tariffs could create uncertainty ahead of the meeting.

As tensions rise, Xi has urged his top officials to remain calm. Interestingly, major Chinese state media outlets like Xinhua News Agency and People’s Daily had not reported on the US leader’s statements as of Friday morning. According to Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd., "the additional levy would increase the average tariff of Chinese goods to the US to about 33%." Yeung anticipates that this will slightly slow China's GDP growth. China's response to these potential challenges could actually benefit its economy. Measures such as boosting consumer spending, investing in technology, supporting the yuan, and helping the private sector are expected to strengthen economic growth. According to Bloomberg economist Maeva Cousin, the impact of current and upcoming tariffs on China's economy should be manageable. She explains that only a small portion—just over 2%—of China's total economic output is linked to exports to the U.S. 

“In the medium term, it is also likely that China will find new markets for its exports — although this may be met with resistance from partners in the rest of the world, already concerned about Chinese overcapacity in some sectors,” Cousin wrote in a note on Friday.  There is already some resistance to China's steel exports. In the past week, both South Korea and Vietnam have imposed tariffs on Chinese steel, following the lead of the United States, to curb the rising influx from the world's largest steel producer. As a result of US restrictions, China may need to introduce extra financial support ranging from 500 billion yuan ($69 billion) to 700 billion yuan to stay on track with its economic growth targets, according to Michelle Lam, an economist at Societe Generale SA. “Now investors will focus on whether there will be more fiscal stimulus to deal with additional tariffs at next week’s NPC,” she said, referring to the National People’s Congress session that starts March 5. “The news increases the chance of policymakers doing sufficient measures on the margin, but alternatively, they may still wait to assess the impact and see if future trade talks with the US can bring down tariffs.”

The new tariffs will likely make US imports more expensive because Chinese companies may pass on the extra costs to American customers. This impact could be even greater than expected, according to new research from the US Federal Reserve. The study suggests that official US data might be underestimating how much is actually imported from China. In the past week, the US has taken several steps to tighten trade restrictions with China. These include new limits on investment between the two countries, proposed fees for shipping goods to the US on Chinese-made vessels, and discussions with Mexico about introducing similar tariffs on Chinese products. Despite these rising tensions, both China and the US seem eager to maintain their relationship. Last Friday, Chinese Vice Premier He Lifeng spoke with US Treasury Secretary Scott Bessent, marking the second high-level discussion since Trump took office. Additionally, China’s Defence Ministry announced on Thursday that military talks between the two nations are being planned.

Trump has also mentioned his personal relationship with Xi, saying last week that a new trade deal with China could be possible. Although he suggested in early February that he would be speaking with Xi "very soon," that conversation still hasn’t happened.