Why U.S. Will Feel Tariffs First—and Why China Won’t Break as Expected

This is Essay 1 in a new essay series "Stress Test, exploring how the same tariff shock will propagate differently in two economic systems - America and China

🔧 A note before we begin:

A few days ago, I wrote about Trump’s tariffs not as a political move, but as a multi-pronged play to change structural power. That essay sparked a wide conversation—because many were asking the same thing:
Does America have a real plan? Or just tools with nowhere to land?

Since then, I’ve shared shorter pieces on how governments have responded. But this essay marks a return to the deeper layer: how economic systems absorb pressure—and what that reveals about the design limits of national power.

It launches a new series: Stress Test.
We’ll look across the U.S., China, emerging economies, and global institutions to trace not just what’s happening—but what’s structurally possible.

And we start where the pressure is loudest:
Tariffs. Inflation. U.S.–China.
Let’s begin.

Tariffs are back. But the pain is landing in America first.

In April 2025, the United States raised tariffs on Chinese imports well over 100% —a bold move designed to push back against China’s export power and protect key U.S. industries.

It was a hard line—and one many Americans believe will create leverage over China. But the aftershocks on America aren’t delayed. They are showing up fast: in factory orders, retail prices, hiring plans, and warehouse quotes.

That isn’t a sign of weakness. It’s a sign of how the American economy works.

We run an open, competitive system where prices adjust quickly, supply chains run lean, and firms face market forces head-on. In that kind of system, pressure gets transmitted fast.

This essay is about understanding how that happens—and why, despite the headlines, China won’t feel it the same way.

I. Why U.S. firms feel the tariff first

1. Our economy is market-driven—and that means exposed

Roughly 97% of American manufacturing is privately owned. Firms are responsible for their own margins, payrolls, and competitiveness.

So when costs jump—like a 104% duty on Chinese inputs—they have only a few options:

• Pass the cost to customers

• Absorb the loss in margins

• Cut back on hiring, investment, or expansion

Most do some of each.

In industries where alternatives are limited—electronics, batteries, auto parts—there’s nowhere to run. A Michigan parts supplier or a Texas HVAC firm is now choosing between shrinking margins or raising prices.

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2. Even firms not importing from China feel it

Supply chains are networked, not linear. A surprising 2024 study found that U.S. firms with indirect China exposure—who sell to someone who sources from China—lost more market value than direct importers.

It's like being a secondhand smoker:

You don’t need to light the tariff to inhale the cost.

Meanwhile, Vietnamese exports to the U.S. now contain 21% more Chinese content than they did before the trade war began. Rerouting doesn’t remove China from the supply chain. It just scrambles the invoice trail.

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II. But didn’t we want this to hurt China more?

Yes—and that’s an honest expectation.

Most Americans assume that tariffs, especially at these levels, will cripple Chinese exports and force economic concessions. That was the bet in 2018—and it’s part of the thinking in 2025.

But here’s what the data shows:

The U.S. feels the cost first—not because we’re weaker, but because our system is designed to be open, fast-moving, and price-responsive.

China isn’t immune. But its system absorbs pressure differently. Understanding that difference is the real key to knowing what comes next.

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III. Why inflation shows up here—fast

🧠 [Embed Infographic: “Trade War: Buffering Strategies”]

The U.S. doesn’t have broad structural tools to soften the blow. China does.

Let’s walk through the mechanics.

1. Pass-through is near-total

In a landmark study (Cavallo et al., NBER), researchers found that when tariffs rise, 95–100% of the cost is passed to the end buyer. A 10% duty meant a 8–10% jump in store prices, within months.

The Tax Foundation pegs the current cost to U.S. households at $1,300/year.

2. Elasticity matters—but not always

Some goods—like clothes or furniture—have substitutes. That slows price hikes.
But others—like semiconductors, wiring harnesses, home goods—don’t. That’s where costs rise instantly, and firms either raise prices or eat the loss.

3: The Fed can’t easily step in—politically or structurally

In theory, the Federal Reserve could soften the tariff blow by cutting rates. But in practice, it faces two hard limits:

• Structural: Tariffs are a cost-push shock—they raise prices without boosting demand. Cutting rates now could stoke inflation just as it's starting to stabilize.

• Political: With an election on the horizon, pressure is mounting on the Fed to ease, particularly from voices aligned with Trump. But the Fed has warned—explicitly—that the April 2025 tariffs alone may add a full point to core CPI, making rate cuts “considerably less likely” before 2026.

Tariffs raise prices in a system where the central bank is tasked with keeping prices down. That creates a collision between economic discipline and political pressure—a collision we’ve seen before.

In China, the PBOC doesn’t face this. It can ease liquidity, extend credit, and steer policy in sync with the central state—without market blowback or electoral risk.

That difference matters. Not just for inflation—but for what kind of macro toolkit each system can reach for in a crunch.

IV. Why China Doesn’t Break the Same Way

China doesn’t escape the pressure. But the way it absorbs the tariff shock is structurally—and philosophically—different.

At first glance, the state’s economic tools seem to blunt the hit:

• State-Owned Enterprises (SOEs) still account for ~28% of industrial output. These firms don’t need to chase profit in the short term. They’re instructed to maintain output, even when margins shrink.

• The government activates automatic fiscal levers—raising VAT rebates across over 1,400 product lines, floating local bonds to support payrolls, and channeling cheap credit through state policy banks.

• The People’s Bank of China moves quickly to ease liquidity and direct capital—without the constraints of electoral scrutiny or inflation optics.

This structural contrast shows up clearly: China socializes trade shocks, while the U.S. transmits them to firms and households. That’s not necessarily more efficient—but it’s more insulated.

But this insulation is not immunity.

1. Factory pain is building—quietly but visibly

Recent reports from Reuters and AP suggest that many Chinese factories are feeling the hit, especially those producing for U.S. markets. Some have paused shipments. Others are seeking new customers in Europe, Australia, or ASEAN. Still others are pivoting to direct-to-consumer sales via platforms like TikTok, bypassing traditional U.S. retail altogether.

2. Front-loaded exports may signal a coming slump

China’s industrial output surged 7.7% in March 2025—but analysts attribute much of that to pre-tariff stockpiling, not organic strength. Exporters raced to fulfill orders before the U.S. duties took effect. That bump could be followed by a hangover in Q2 and Q3, as global buyers adjust.

3. State support delays—but doesn’t erase—pressure

While SOEs and policy tools can carry the burden longer, they don’t make it disappear. Losses get transferred to local government debt, hidden in overcapacity, or deferred through credit extensions. These trade-offs can be absorbed in the short run—but they accumulate systemic risk over time.

4. Their central bank has room to act—without political drag

The People’s Bank of China (PBOC) can cut reserve ratios, expand credit, and ease liquidity with remarkable speed. There’s no Senate oversight. No 18-month election cycle. No Wall Street narrative to manage.

In moments like this, that discretion becomes a strategic advantage. While the U.S. Federal Reserve is boxed in by inflation fears and political crossfire, the PBOC can respond to shocks in sync with Beijing’s industrial goals.

In short: where the U.S. system transmits pressure, China’s system absorbs it—at least at the surface level.

But that absorption comes at a cost. Credit risk is kicked forward. Local government debt swells. Asset bubbles simmer. These are not free moves—they’re just hidden ones.

We’ll return to these growing imbalances later in the series. For now, what matters is this:

Short-term pain shows up faster in America—but long-term strain builds quietly in China.

So yes, China is feeling the impact—but not in the same way, or at the same speed. Their system allows them to buy time, spread costs, and keep export volumes flowing—while the U.S. system shows the stress on the surface right away.

This doesn’t mean China “wins.” It just means the pressure hits different—and how each system carries that weight reveals what kind of power it’s built for.

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V. This isn’t the old tariff war—it’s something new

The first trade war (2018–20) was about bargaining. The U.S. used tariffs to push China to the table over IP theft and trade imbalances. Tariffs came in rounds, with public comment periods.

This time, Washington skipped the staircase and jumped off a cliff.

• A 104% blanket duty on all Chinese imports

• No exceptions, no negotiations

• Plus: outbound investment controls, chip bans, EU lobbying on EVs

The goal now isn’t leverage. It’s disruption—to push the world away from Chinese exports altogether.

This is a longer game.

• U.S. moves target demand sabotage: chip bans, Shein crackdowns, export control.

• China’s counters are asymmetric: hit red-state exports, expand credit to undercut pricing, and reroute trade through ASEAN.

It’s chess. And the board is global.

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VI. What this teaches us about American strength

This isn’t a story of failure. It’s a story of design.

System LayerUnited StatesChinaOwnership97% private28% SOEsFiscal toolsAd hoc & targeted (e.g. farm bailouts)Broad, automatic (VAT, credit)Monetary toolsInflation-constrainedPolitically unconstrainedPrice visibilityImmediate to consumersBlunted through policyMarket reactionReal-timeManaged

America’s openness is its strength. But it’s also its exposure.
If we’re going to use tariffs as a long-term tool, we need long-term cushioning to match.

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The bottom line

Tariffs are seductive. They promise reindustrialization, leverage, power.

But unless we understand our own system, we risk building policy on assumptions—and feeling the shock long before our rivals do.

This isn’t about backing down. It’s about matching strategy to structure.
And making sure the system that leads also knows how to carry the weight.

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🧭 This is the first in Stress Test, a series on how major economies will absorb tariff shocks through structure, not politics. Each essay builds on the last to decode what’s really shaping global power.

I research and write these solo—if it brought clarity, do subscribe on Substack & X to support the work!