How Does the Trade War End?

The result could be an “armed” trade truce where escalation is avoided because the costs of total confrontation are too high. (posted 29 June 2025 on LI reposted 28 October 2025)

By Richard Baldwin, IMD Factful Friday, 29 June 2025. (reposted 28 October 2025)

Introduction.

This is not a Hollywood thriller, but it reads like one.

Scene opens: Two superpowers stare each other down across a rickety table in a dimly lit basement; steam leaking from the heating pipes.

Premise: Each holds a gun loaded with deadly trade policy.

Central Tension: Neither wants to pull the trigger, but both want to get their way.

This is the Trade Cold War as I called it in my 20 June 2025 Factful Friday column.

In this war, leverage comes from political economy pain. Not just for the US and China, but for the whole world. As in the US–Soviet Cold War, today’s warring parties are wielding weapons that threaten the whole planet. The US gun (tariffs) is pointed at the whole world as is the Chinese gun (rare earth export measures).

How did we get here?

America’s declaration of war on the rules-based trade system.

On 2 April 2025, President Trump declared war on the rules-based world trade system. With a single signature, he broke all the rules and every trade promise America had made to anyone anywhere. Every trade agreement. Every multilateral commitment. All smashed with sweeping US tariffs unilaterally imposed on allies and rivals alike.

The world was stunned.

• Allied governments watched in disbelief as decades of trust were cast aside.

• Rivals couldn’t believe their luck as the US President trashed American credibility.

• Companies scrambled to assess the damage as tariffs threatened ties with customers and suppliers.

• Stock markets plummeted. The dollar dived. Bond yields spiked toward panic territory as the chaotic rule-breaking rocked faith in the US-centred world financial architecture.

Most countries blinked. China didn’t.

The Cold War begins with the unveiling of a new Chinese trade weapon.

Beijing immediately struck back with one-for-one retaliatory tariffs on US exports. But it did much more than that. Simultaneously, it revealed a trade weapon of global consequence – an export control regime for rare earths and products based on them.

The new armament came with a dull name, “Announcement Number 18”. But its dull name belies the awesome power. It gives Beijing a precision-strike trade weapon.

As of 4 April 2025, every Chinese export of rare earth magnets requires a government permit. If your factory uses them anywhere outside of China, you now need Beijing’s permission because China controls over 90% of global production.

This weaponisation of supply chains won’t work forever. Countries are pushing hard to develop alternative sources, and companies are redesigning their products to reduce dependence. But both efforts will take years – more years than President Trump has left in office according to estimates.[i]

But what are rare earth magnets?

Rare earth magnets are critical to high-performance electric motors, which, in turn, are critical to many manufactured goods. Products ranging from autos and robotics to fighter jets and missiles can’t be made without them. In late May 2025, for instance, a shortage of them forced Ford into a week-long stoppage of its Explorer SUV assembly line in Chicago. No rare-earth magnets; no Explorers.[ii]

In the automotive sector, all cars use them for electric seats, and the steering, braking and sensor systems. Electric vehicles need them for their high-performance electric motors. In renewable energy, they’re at the heart of wind turbine generators, especially offshore ones where weight and reliability are critical.

In aerospace and defense, they are used in guidance systems, actuators, and radar. In electronics and robotics, they enable compact, efficient designs of everything from smartphones and hard drives to industrial robots.

To stay with the trade war metaphor, the Chinese government now has a panel of company-by-company “kill switches” that allow it to selectively disrupt advanced manufacturing all across the world.

In short, Announcement Number 18 turned President Trump’s unilateral war on the trade system into a two-way global trade war.

This tees up the core question addressed by today’s Factful Friday.

Where does this end?

The original US-USSR Cold War never turned hot because each understood that a nuclear first strike would unleash a retaliatory apocalypse that would obliterate both. Such logic makes perfect sense to game theorists, but to most people, the idea of keeping peace by preparing for war sounds “MAD.” And indeed, it came to be known as the MAD doctrine (Mutually Assured Destruction). From the 1950s right up to the dissolution of the USSR, the world had a “MAD peace”. The fear of total annihilation kept the peace.

Could the threats of supply chain and market access disruptions compel Washington and Beijing into a trade war détente? Or will the arm-twisting inflame nationalist outrage, pushing leaders into a cycle of destructive retaliations? Maybe the answer doesn’t lie in traditional trade policy thinking?

A framework for trade war analysis: “Theory of Victory”.

I’ve been scratching the surface of the military strategy literature, like William Martel’s 2011 book, Victory in War: Foundations of Modern Strategy[iii] And Liddell (1991).[iv] I am a rank amateur on this, but it is fascinating stuff. Not a million miles from game theory. I found it really handy for organising my thoughts about today trade conflicts.

There are many versions of this framework but all of them include explicit consideration of the “ends, means, ways, and mechanism of success” that each combatant will use in the conflict. Here is the military version:

• Ends: What does victory look like politically and militarily?

• Ways: How will you fight? Attrition, denial, coercion?

• Means: With what tools? Troops, airpower, sea power, alliances, sanctions? Do you have the staying power to use them for long enough to win?

• Mechanism of success: The expected chain of events linking ways and means to ends. The causal narrative of how the war is won. Will the enemy collapse economically or politically, surrender to avoid further pain, be annihilated, or be pushed to accept a peace deal?

Here’s my application to a standard trade war:

• Ends (goals): Reshore jobs, punish rivals, shift income to favoured interest groups, please voters, or secure supply chains.

• Ways (strategy) Go it alone or form a coalition. Target one sector or all sectors. Target one nation or all nations. Block the exports of critical tech or inputs.

• Means (tools): Tariffs, rules of origin, quotas, domestic subsidies, taxes and regulations, export restrictions, legal cases. Do you have the domestic political support to withstand the political economic pain long enough to win?

• Mechanism of success: Trade partner acquiesces to avoid tariff threats.

Case study: Theory of Victory applied to a familiar game.

These don’t perfectly map into game theory, but let’s see how the classic game of predatory pricing maps into the Theory of Victory framework.

• Ends: Drive a competitor out of the market to raise prices and profitability in the long run.

• Ways: Lower prices below cost (predatory pricing) until opponent exits market. Raise prices to recoup losses and extract monopoly rents.

• Means: Deep financial reserves or cash flow sufficient to absorb short-term losses. Leverage a cost advantage to sustain lower prices. Can you endure a price war longer than your competitors?

• Mechanism of success: The predator absorbs short-term losses, relying on deeper financial resources or cost advantages. The competitor, lacking comparable resources or willingness to sustain losses, faces increasing pressure and eventual exit or reduced market presence. Once competitors exit or retreat, the predator raises prices to recoup losses and capture monopoly rents.

To further illustrate the usefulness of the framework, I transcribed US-China trade war of 2018-2020 into the ends, means and way set up. See the Annex.

US & China “theories of victory”.

Using this lens, let’s have a gander at the Trade Cold War we are now living through.

The US Theory of Victory: aggressive, unilateral, emotional, loud and proud.

We start with the weirdness of the Trump Administration’s goals in this trade war. As I argued at length in my recent book, The Great Trade Hack, President Trump’s approach to trade war is not economic; it is emotional.[v]

• Ends (strategic objectives):

To restore a sense of national strength, to assuage deep-rooted grievances and to end the sense of victimhood held by the President and America’s middle class. As Trump put it in a speech: “I am your warrior. I am your justice. And for those who have been wronged and betrayed, I am your retribution.” The main goal is to provide that justice and retribution.

These goals were front and centre in the presidential speech that launched the 2 April tariffs. They are clearly written down on the first page of “The President’s 2025 Trade Policy Agenda.[vi]

But is that it? Are there no traditional goals?

The President’s trade agenda also mentions more traditional goals like boosting manufacturing and raising middle class real incomes. But the actual conduct of trade policy suggests these are not driving the show. They are decorative, not directive.

As I argued in my eBook, The Great Trade Hack, the tariffs alone can’t reindustrialise America since that requires things like trained factory workers, worldclass infrastructure, coordinated investment, and predictable trade policy. The way the 2 April tariffs were announced by surprise and have been erratically changed subsequently indicates that reindustrialisation is not a priority for this President.

Three facts suggest that talk of boosting real wages is ornamental: (1) tariffs only protect jobs in goods-producing sectors, (2) fewer than 10% of Americans work in those sectors, and (3) the resulting price hikes cut real wages for everyone.

I see the true objective of the Trump Administration’s trade policy not as economic transformation, but emotional restoration. A muscular performance of American dominance, of the humiliation of foreign leaders by getting them to kowtow to the President and accept his capriciousness, of retribution for perceived slights, and of the projection of unchallenged American power.

In short, Trump’s trade war isn’t about fixing the economy. It’s about making MAGA America feel like it’s winning again.

Importantly, the oddity of this goal is precisely what makes US trade policy so resilient politically. Almost any event can be spun as a win. A viral clip of the British PM picking up papers that President Trump dropped is an American triumph in this trade war.

• Ways (operational strategy):

Impose sweeping tariffs unilaterally; change them erratically to assert imperial power. Turn trade diplomacy settings into media spectacles. Humiliate allies (e.g., Canada as the “51st state”) to reframe hegemony as righteous vengeance. Quietly retreat when domestic pain mounts while spinning it as tactical genius.

Avoid coalitions; treat all nations as rivals to reinforce America’s dominance. Reaffirm exceptionalism through symbolic wins; prioritise the appearance of victory; substance is secondary.

• Means (resources and tools):

Tariffs and the size of the US market gives leverage over foreign nations who care about retaining access. Global media access and a cult of personality allow the President to generate spectacle-driven “wins” for low cost. Emotional fuel from elite backlash is useful and cheap. Policy elite and global leaders protesting the tariffs and erratic policy reinforce Trump’s narrative of standing up against the elite and for forgotten Americans.

Ability to sustain modest tariffs indefinitely due to the US’s relatively closed economy (goods imports only 11% of GDP), but deeper economic pain is intolerable.

• Mechanism of Success (causal narrative):

Shock-and-awe tactics (massive, sudden, and erratic tariff moves) and creation of the impression that US is playing a “mad dog” strategy psychologically destabilize foreign leaders, pushing them toward concessionary behaviour. Use chaos weaponised as leverage.

Spectacles of humiliation, rhetorically outrageous presidential statements, and transactional diplomacy create domestic political victories irrespective of material outcomes. Reframing of foreign concessions or adjustments, no matter how small, are cast as decisive evidence of US strength and the President’s wisdom, cleverness, and historical uniqueness. Use the absence of objective benchmarks is an advantage is used, since without metrics, any story can be spun as a win.

Victory is attained when the MAGA base feel good about America.

For instance, President Trump called the UK-USA trade deal as a “full and comprehensive” agreement and said: “This should be a very big and exciting day for the United States of America and the United Kingdom.” In fact, the agreement involved modest UK commitments (duty free access for 1.3 billion litres of US ethanol, and 13,000 tons of US beef).

It was not “fully and comprehensive” and it wasn’t even a trade agreement (it wasn’t legally binding). But it was spun as a victory. Precisely the kind of symbolic win that defines Trump’s goals.

Chinese Theory of Victory: defensive, precision protection, patient timing, crafty public diplomacy.

Beijing’s approach couldn’t be more different.

• Ends (strategic objectives):

Reduce or reverse US trade aggression, especially the 2025 tariffs, but also the Biden and Trump restrictions aimed at hobbling development of the Chinese semiconductor and advanced AI sectors. Preserve the global trade system that has been so important to China’s economic power and prosperity. Dissuade third countries from siding with the US or including anti-China clauses in trade deals. Signal to the world that trade now has two superpowers, thus advancing the broader goal of restoring China’s historic role as a great civilization and great power.

In this trade war, China is not seeking traditional trade market concessions from its trade partners. The goal is to return to the status quo ex ante (specifically, pre-2 April 2025).

• Ways: (operational strategy):

Retaliate swiftly and proportionately with escalating tariffs to demonstrate resolve and parity. Project sovereign dignity: never concede publicly, and demand respectful, peer-level treatment. Deploy export controls on critical inputs—especially rare earth magnets—framed in WTO-compliant, national security language to obscure retaliatory intent. Apply these controls multilaterally and with opaque administrative procedures to avoid direct targeting and deny the US a clear basis for countermeasures.

Use technocratic opacity to quietly apply pressure on global manufacturers—especially those in allied countries—to create indirect political pressure on their governments. Combine quiet diplomacy with implicit threats and carefully calibrated denials to encourage foreign firms and governments to distance themselves from US trade positions. Offer private, face-saving off-ramps to facilitate de-escalation without appearing to concede anything publicly.

• Means (tools and resources used):

Given China’s large domestic market, tariffs on foreign final goods are powerful tools. Given China’s dominance of many industrial supply chains, export restraints are powerful coercive tools. Export controls (especially on rare earth magnets) that have been in the making for years are the prime example as they involve inputs that are critical to advanced manufacturing all over the world.

Centralized economic control enabling China’s government to absorb and endure economic strain over time.

• Mechanism of Success (causal narrative):

China backs the US off its 2 April bilateral tariffs as China’s one-for-one tariff retaliation pushes President Trump to escalate beyond economically sustainable levels, triggering backlash from US manufacturers dependent on Chinese inputs. As domestic pressure mounts, China offers modest concessions and rhetorical ambiguity around export permits and a face-saving off ramp for reversing the April 2 tariffs. China plays along with the US claim that this climbdown was a victory.

Carefully deployed export controls, applied broadly and justified as national security measures, signal restraint while reminding global firms and governments of China’s leverage. The opaque process increases uncertainty without inviting WTO retaliation. Quiet diplomacy, strategic ambiguity, and WTO-compliant framing allow China to maintain pressure without escalation, discourage anti-China coalitions, and reinforce its image as a responsible global power.

Victory is achieved by restoring the status quo ex ante for Chinese firms, including preservation of rules-based multilateralism.

A MAD Peace?

Strange as it may seem, this isn’t a classic win-lose conflict. It’s not like the US is aiming to occupy Hong Kong, and China is plotting to annex Alaska. Because their definitions of victory diverge so fundamentally, both the US and China could plausibly claim “success” by the end of 2025. In fact, I think it’s likely.

The key lies in America’s symbolic definition of victory and China’s defensive, system-preserving one. Together, they make a MAD-style trade peace possible regardless of the fact that the underlying tensions will remain unresolved.

The outcome could be viewed as an armed truce. A situation where actual escalation is avoided because threatened escalation deters it. This mutually face-saving equilibrium resembles the Cold War’s MAD peace. Both sides possess powerful economic weapons. The US has its tariffs, and China has its rare earth export controls. But both understand that full deployment would be devastating.

In this scenario, the rest of the world could move on by adapting to the truce while preserving most of the multilateral, rules-based trade system.

Of course, the US will likely continue bullying smaller trade partners because it can, and because its President loves that sort of thing. But as I argued in my 13 June 2025 Factful Friday, Trump is likely to keep most US tariffs at 10%. He’ll pull a TACO but claim to be a rooster, not a chicken. He’ll crow that Brussels caved, Japan conceded, India folded, and Korea yielded. He’ll say the mere threat of higher tariffs brought the world to heel. The tariffs can remain at 10% because, rhetorically, America has already won.

We shall see, I believe, a real Trump classic. A climbdown spun into a chest-thump. And foreign governments, for their part, will have no interest in bursting this magical thinking bubble.

The NATO Case.

What makes this MAD peace even more likely is that foreign leaders have, by now, taken Trump’s measure. They understand that beneath the chaos lies a predictable logic. He can be influenced but not through confrontation or facts. Flattery and performative adulation is what works.

A striking example of this can be seen in the recent NATO summit.[vii] For years, Trump dismissed the alliance as obsolete and threatened to pull the US out. But a few days ago, a carefully orchestrated campaign by European leaders and the NATO Secretary General played to his instincts.

As Financial Times journalist Ben Hall put it: “optics are everything. The higher spending promise was designed to appeal to Trump’s vanity, as was his invitation to stay, unique among leaders, at the Dutch royal palace. This was not so much a Nato summit as a Trump summit, as US secretary of state Marco Rubio helpfully put it.”

The symbols were enough for the US President to reverse his long-held NATO hesitancy. Trump reassured his Nato allies he was “with them all the way” and that he no longer regarded the alliance as a “rip-off”. He signed up to a summit statement reaffirming its “ironclad commitment to collective defence”.

This episode illustrates the broader compatibility of the US and Chinese theories of victory. Trump can be persuaded to retreat or cooperate as long as the retreat looks like conquest, and China is happy to engineer quiet accommodations beneath a façade of mutual respect. Both parties, and many third countries, can walk away declaring success according to their own playbooks.

In such a conflict, where the combatants are not aiming for the same ground, it is entirely feasible for both to plant their flag and call it a win.

Summary and Closing Remarks.

This essay asserts that a MAD trade peace in 2025 is possible – indeed likely. The trick is that while the US and China are engaged in a trade war, they are not fighting over the same things. President Trump wants symbolic victories that play well with his political base. President Xi wants to roll back US trade policy against his country and boost China’s standing – all while maintaining the rules-based multilateral system.

Casting the trade war into the military strategy framework called the “Theory of Victory”, helped guide my thinking. It led me to an answer to the question in the title that I didn’t expect. “How Does the Trade War End?” The US and China both win on their own terms.

The arguments presented are, of course, speculative. Trade wars are not chess games, and real-world politics almost always defy tidy models. Still, even if every prediction made here turns out to be wide of the mark, I hope the framework proves useful.

Thinking through trade conflicts with the “Theory of Victory” framework offers a structured way to analyse what is otherwise a confusing, noisy tangle of headlines and provocations.

It doesn’t answer every question, but it helped me ask better ones. And in today’s trade environment, that’s no small thing.

And that it for today’s Factful Friday.

Annex.

---

[i] At least 5 to 10 years according to Barua Costa, R. (2025, April 8). Outlook 2025: Reshaping the rare earth elements supply chain amid soaring demand and strategic risks. Canadian Mining Journal. https://www.canadianminingjournal.com/featured-article/outlook-2025-reshaping-the-rare-earth-elements-supply-chain-amid-soaring-demand-and-strategic-risks/

[ii] Otts, C. (2025, June 23). Ford still scrambling to get rare-earth magnets: A deal to free up Chinese magnet shipments hasn’t sped up export approvals, carmakers say. The Wall Street Journal.

[iii] Martel, W. C. (2011). Victory in war: Foundations of modern strategy (2nd ed.). Cambridge University Press.

[iv] Liddell Hart, B. H. (1991). Strategy (2nd revised ed.). Penguin Adult.

[v] The Grievance Doctrine is the emotional logic behind Trump’s trade policy. It is a strategy rooted not in economic objectives, but in the righting of perceived wrongs. It channels the frustrations of America’s middle class and its political leadership into trade action aimed at humiliation, domination, and symbolic retribution. Under this doctrine, tariffs are not tools of negotiation or economic goals, but instruments of emotional release and theatrical power projection.

[vi] Executive Office of the President. (2025). The President’s 2025 trade policy agenda: A trade policy for the next great American century. United States Trade Representative.

https://ustr.gov

.

[vii] Hall, B. (2025, June 28). European security and the limits of Trump flattery. Financial Times. https://www.ft.com/content/7980509c-f6b3-4f22-bff4-d4727a193019