Trump vs Xi: Who blinks first in the tariff tug-of-war? The endgame scenarios

File photo of US President Donald Trump and China's President Xi Jinping.

The tariff war between the world's two largest economies is spiraling into uncharted territory. What began as a trade skirmish has now turned into a full-blown economic standoff. After China hit back with a 34% tariff in response to US President Donald Trump's initial duties, Trump doubled down with an additional 50%, taking the total US tariff burden on Chinese goods to a staggering 104%. Beijing hit back by raising tariffs to 84% — only to face a fresh escalation, as Trump pushed rates even higher to 125%, while simultaneously suspending duties on all other countries in a clear bid to economically isolate China.

What's unfolding is no longer just a trade dispute - it's a geopolitical chess match with enormous economic stakes. With each retaliatory move, the risk of global supply chain disruption, inflationary pressure, and diplomatic fallout intensifies. This escalating confrontation could reshape the future of global trade and force countries, including India, to make tough choices.

Amid the tariff tug-of-war, all stakeholders - from investors to businesses to economies - are wondering what will be the endgame in this one-upmanship. Especially when it seems unlikely that Chinese President Xi Jinping will cave in to Trump's aggressive posturing.

But before we delve into worst-case scenarios that could emerge from this intensifying conflict, it is crucial to analyse the possible strategy driving Trump's aggressive tariff imposition on Beijing.

Pressure tactics for favourable negotiations: Trump's tariff imposition seems to be hinging on the belief that by exerting maximum economic pressure, he can force China to capitulate to US demands. He aims to disrupt China's export-driven economy, weaken its manufacturing base, and ultimately extract concessions on intellectual property, market access and trade imbalances.

Revitalization of domestic industries: The tariff may be an attempt to encourage the reshoring of manufacturing jobs by making imported goods from China substantially more expensive. This aligns with Trump's broader "reindustrialization" agenda aimed at bolstering domestic production capacities.

Exploiting perceived Chinese weakness: Trump may perceive China as being economically vulnerable, particularly given its slowing growth and reliance on exports. He might believe that China will ultimately buckle under pressure to avoid a full-blown economic crisis.

Possible worst-case scenarios

Global economic recession: The escalating tariff imposition, if they continue, will trigger a massive disruption in global supply chains. Chinese exports to the US will plummet, leading to factory closures, job losses and economic contraction in China.

The trade war will ripple through the global economy, impacting countries that rely on trade with both the US and China. Global trade volumes will decline, investment will dry up, and a worldwide recession will ensue. Financial markets will experience extreme volatility, with stock markets plummeting and currencies fluctuating wildly. The uncertainty will further exacerbate the economic downturn.

Speaking to Moneycontrol, a senior Indian diplomat, on condition of anonymity, said: "Two of the world's biggest economies - one is the world's biggest consumer, one is world's biggest producer. Instead of getting along, they are engaged in a trade war, just imagine what happens to the rest of the world. Supply chains will take the worst hit."

However, Manindra Tiwari, a chartered accountant and market expert, rejected any such possibility of global recession. "It will be more compatible in fact, and now the scenario of economic powers should be changed from US and China, and one of the players will be India. It has a fair chance to emerge as an alternative to China," Tiwari told Moneycontrol.

Collapse of multilateral trading system: The World Trade Organization (WTO) will become increasingly irrelevant as countries abandon multilateral trade rules in favour of protectionist measures.

China has strongly condemned the US tariffs, labelling them as actions that disregard global consensus and cautioning that they risk severely undermining the established, rules-based international trading system. The continuation of unilateral trade measures by major economies, bypassing WTO mechanisms, threatens to erode these norms, leading to a more fragmented and unpredictable global trade landscape.

Broader geopolitical conflict: Beyond economic implications, the intensifying trade war could spill over into broader geopolitical tensions. Both nations may resort to non-economic measures, such as strengthening military postures in contested regions, forming exclusive international alliances, or engaging in cyber confrontations.

'Things may settle down'

Tiwari, however, predicts that things will settle down between the two countries gradually. "What America is doing, it's as per their own norms and economic reforms. As EU has saturated market, China has taken clear benefit out of this tariff war earlier. So I believe, America is doing all these things to punish China and curtail its power. Diplomatically, I believe, there will only be some shift of power, nothing more than that."

How does this end?

With the situation evolving in unforeseen ways since April 2 announcement of "Liberation Day" tariffs by Trump, the "ugly endgame" of this trade war is inherently unpredictable.

Speaking to Moneycontrol, the senior Indian diplomat predicted that the trade war will end soon through diplomatic channels. "They will work out a deal, and it's about declaring victory. In this battle, China will win, but victory will be declared by America."

Another possible outcome in this ongoing trade conflict could see US legislators and the Senate agreeing on a resolution to invalidate the tariffs. Subsequently, the Supreme Court might uphold this resolution. If this sequence of events were to unfold, a swift return to the status quo could be possible, potentially within a timeframe of thirty days or less.

While the current US-China tariff escalation paints a grim picture of fractured global trade, history shows that even the most volatile economic standoffs eventually find a path to resolution.

Both nations, despite their aggressive posturing, are deeply interwoven into the global economy-and each knows that prolonged conflict could inflict lasting damage on their own interests. The good news is that tariffs, no matter how dramatic, are reversible. Behind the fiery rhetoric lies room for negotiation, and diplomatic backchannels are likely still open.