Understanding Tariffs: U.S. and China Economic Dynamics, Trade Imbalances, and Impacts on Canada

At Real Clear Path, we empower clients with clarity through Strategic Financial & Wealth Planning, Business & Life Transition Coaching, Peak Performance Health & Wellness Coaching, and Strategic Communication & Influence Skills. Understanding economic policies like tariffs, especially amidst the U.S.-China trade war and China’s economic challenges, is crucial for financial planning. This educational blog post explores tariffs, the U.S. economic strategy, China’s economic issues—including its collapsing real estate sector—historical trade imbalances, overlooked fees like value-added taxes (VAT), and how these affect Canada’s global trade position. Our transparent, client-first approach, rooted in our “walk our talk” ethos, guides this analysis to help you navigate these complexities.

U.S. vs. China Economy in 2025: A Snapshot

In 2024, the U.S. economy reached $29.2 trillion in GDP, growing at 2.8%, driven by consumer spending (70% of GDP), technology, and services. China’s economy, the world’s second-largest, hit $18.9 trillion (RMB 134.9 trillion), growing at 5.0%, fueled by manufacturing and exports but hampered by domestic issues. The U.S. economy is 54% larger than China’s, with a per capita GDP of $86,600 versus China’s $13,870, reflecting higher U.S. living standards. While China’s growth rate outpaces the U.S., its economic challenges—real estate collapse, low consumer confidence, and trade tensions—threaten its trajectory, with 2025 growth projected at 4.0–4.4% compared to the U.S.’s 0–0.5% due to tariff impacts.

What Are Tariffs?

Tariffs are taxes on imported goods, typically a percentage of value (ad valorem) or a fixed amount per unit, aimed at raising revenue, protecting local industries, or altering trade flows by making imports costlier. They often raise consumer prices, with near 100% pass-through to U.S. consumers (Richmond Fed, 2025). In 2025, tariffs are central to U.S.-China trade tensions, impacting global markets and Canada’s trade role.

Historical Context: U.S. Tariffs and Trade Imbalances

Tariffs shaped early U.S. policy. The Tariff Act of 1789 funded the government and protected industries, contributing 80–95% of federal revenue until 1860. High tariffs (50% average) from 1861–1933 shielded Northern industries but sparked regional tensions. The Smoot-Hawley Tariff Act of 1930 raised duties by 20%, triggering global retaliation, slashing trade by two-thirds, and worsening the Great Depression. Post-World War II, the U.S. championed free trade via the General Agreement on Tariffs and Trade (GATT), reducing global tariffs from 20% to under 5% by 1994 (WTO).

The U.S. trade deficit—imports exceeding exports—grew from $13 billion in 1980 to $971 billion in 2023, driven by a savings-investment gap (low U.S. savings require foreign capital). China’s trade surplus, nearing $1 trillion in 2024, reflects weak domestic demand and overcapacity, exacerbating imbalances. Tariffs, like 2018–2019 U.S. duties on China, reduced the U.S.-China deficit but increased deficits with others (e.g., Vietnam), shifting trade rather than resolving the gap.

China’s Economic Challenges in 2025

China’s economy faces severe headwinds, undermining its 5% growth target for 2025:

• Collapsing Real Estate Sector: Real estate, 70% of household wealth, has been in crisis since 2020’s “three red lines” policy curbed developer borrowing. Giants like Evergrande defaulted, leaving unfinished apartments and eroding consumer confidence. Housing prices fell in 2024–2025, with new starts down 68% from peak levels. Stabilization is fragile, with 2025 growth in household consumption projected at 3.5–4.5%, contributing only 1.5–2.0% to GDP.

• Low Consumer Confidence: The property crisis and post-COVID recovery failures have slashed spending, with private consumption at 50% of GDP (vs. U.S. 70%). Deflation risks loom, with CPI expected at 0% and PPI down 1.6% in 2025, driven by excess supply from tariff-hit exporters flooding domestic markets.

• Overcapacity and Debt: China’s industrial strategy, prioritizing production over consumption since the 1980s, creates overcapacity (e.g., steel, solar panels), pushing prices below global break-even points. Local government debt (280% debt-to-GDP ratio) and household deleveraging strain investment. Stimulus measures, including 1 trillion yuan in bonds, aim to boost demand but prioritize inefficient investment over consumption.

• Trade Tensions: U.S. tariffs, reaching 145% on Chinese goods in 2025, are projected to cut China’s growth by 0.7%, with exports to the U.S. dropping significantly. China’s retaliation (125% tariffs on U.S. goods) and yuan depreciation aim to offset impacts, but global trade diversion (e.g., to Vietnam) limits effectiveness.

Despite strengths in high-tech exports (e.g., electric vehicles, AI platforms like DeepSeek), China’s growth is constrained, with J.P. Morgan forecasting 4.4% GDP growth in 2025, down from 4.6% pre-tariff.

Current U.S. Tariff Strategy

Under the Trump administration, 2025 tariffs aim to address trade imbalances and bolster U.S. manufacturing:

• 10% global tariff on most imports, with USMCA exemptions.

• 25% tariffs on non-USMCA Canada/Mexico goods.

• 145% tariffs on Chinese imports to curb reliance.

• Paused escalations: A 90-day freeze on some tariffs (except China) facilitates EU talks.

Objectives:

• Reduce Deficits: The $1.2 trillion goods deficit (2024) reflects lost manufacturing (17.4% of global output vs. 28.4% in 2001).

• Re-shore Jobs: Tariffs seek to revive 5 million lost manufacturing jobs since 2000.

• Security: Reduce dependence on Chinese supply chains, especially in defense.

• Revenue: Tariffs could raise $1.4 trillion (2026–2035) to fund tax cuts.

Impacts:

• Consumer Costs: Tariffs add $1,300 per U.S. household in 2025, with inflation up 2.3%.

• Retaliation: China’s 125% tariffs and past trade wars cost U.S. exporters $27 billion (2018–2019). A 2025 trade war could cut U.S. GDP by 1.6%.

• Limited Deficit Reduction: Tariffs shift deficits (e.g., to Mexico) but don’t address the savings-investment gap.

Canada’s Position in Global Trade

Canada, the U.S.’s top trading partner ($1 trillion in goods traded in 2024), faces unique challenges and opportunities amidst U.S.-China tariff wars and China’s economic woes:

• U.S. Tariff Impacts: The 25% tariff on non-USMCA Canadian goods (e.g., energy) threatens exports, as 75% of Canada’s exports go to the U.S. The Budget Lab at Yale estimates a 0.9% GDP reduction for Canada in 2025 if tariffs persist. However, USMCA exemptions for compliant goods (e.g., autos) mitigate some losses.

• China’s Economic Slowdown: China’s faltering demand (4.4% growth) reduces Canada’s commodity exports (e.g., oil, minerals), as China accounts for 4% of Canada’s trade. The real estate collapse lowers construction-related demand, impacting Canadian lumber and metals.

• Trade Diversion Opportunities: As U.S. tariffs divert Chinese exports to Canada, Canadian consumers benefit from cheaper goods (e.g., electronics), but domestic manufacturers face competition. Canada’s 3% goods export exposure to the U.S. (vs. Vietnam’s 27%) insulates it from severe tariff shocks.

• Global Positioning: Canada’s stable economy (2.5% growth projected) and USMCA membership strengthen its role as a reliable trade hub. However, aligning with U.S. policies risks alienating China, while EU trade talks (post-tariff pause) offer diversification. Canada must navigate neutrality to maintain its 10th-ranked global trade status.

Overlooked Fees: VAT and Non-Tariff Barriers

Value-Added Taxes (VAT): Common in Canada (5–15% GST/HST) and 170+ countries but absent in the U.S., VAT taxes each production stage. Exports are exempt, and imports are taxed equally to domestic goods, making VAT trade-neutral. Misconceptions that VATs act like tariffs (e.g., Canada’s GST on U.S. imports) fuel U.S. reciprocal tariff rhetoric, risking trade wars. Canada’s VAT system ensures competitive exports but complicates U.S. trade relations.

Non-Tariff Barriers:

• Regulations: Canada’s strict environmental standards can limit Chinese imports, protecting local industries but raising costs.

• Subsidies: China’s support for steel undercuts Canadian producers, prompting anti-dumping duties.

• Currency Practices: China’s yuan depreciation boosts its exports, challenging Canadian competitiveness.

These barriers exacerbate U.S.-China imbalances and pressure Canada to align with U.S. protectionism or seek alternative markets.

Do Tariffs Work?

Tariffs aim to revive U.S. manufacturing but face limits:

• Deficit Persistence: The savings-investment gap drives deficits, not just trade policy. Tariffs shift flows (e.g., to Canada) but don’t shrink the $1.2 trillion gap.

• Consumer Costs: U.S. tariffs raise prices, hitting households hardest, while Canada faces spillover inflation.

• Retaliation: China’s tariffs hurt U.S. and Canadian exporters (e.g., canola, lumber), risking a 1.6% global GDP drop.

• Alternatives: Enforcing IP laws, boosting savings, or adopting a U.S. VAT could address imbalances with less disruption.

For Canada, tariffs disrupt U.S. trade but open doors to EU and Asian markets, requiring strategic diversification.

Implications for You

For Real Clear Path clients:

• Financial Planning: Tariff-driven inflation ($1,300/household) and market volatility demand diversified portfolios, guided by our fee-for-service planning.

• Business Owners: Supply chain disruptions and Chinese competition require agile strategies, supported by our transition coaching and communication training.

• Wellness: Economic stress impacts health; our wellness coaching builds resilience to stay focused.

• Canada-Specific: Canadian clients face export risks but can leverage cheaper imports and USMCA benefits, with our planning ensuring financial stability.

Conclusion

The U.S. ($29.2T) dwarfs China’s ($18.9T) economy, but China’s real estate collapse, low consumption, and overcapacity threaten its 2025 growth (4.4%). U.S. tariffs (145% on China) aim to curb deficits and re-shore jobs but raise prices and risk retaliation, minimally impacting China’s structural issues. Canada, caught in the crossfire, faces U.S. tariff pressures but benefits from USMCA and trade diversion. VAT and non-tariff barriers complicate dynamics, requiring nuanced strategies. At Real Clear Path, our services—financial planning, coaching, and communication training—equip you to thrive in this uncertainty. Book a free consultation to forge your path today.