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Iran Tariffs Threaten to Unravel the U.S.-China Trade Truce

Iran Tariffs Threaten to Unravel the U.S.-China Trade Truce

Trump's 25% levy on Iran's trading partners puts the fragile October deal with Beijing at risk

Today: China Vows Retaliation

Overview

For three months, the world's two largest economies operated under a fragile ceasefire. The Trump-Xi trade deal struck in South Korea last October reduced U.S. tariffs on Chinese goods from a peak of 145% to 47%, while China suspended its rare earth export controls. On January 12, Trump imposed a 25% tariff on all countries doing business with Iran—a measure that primarily targets China, which purchases over 90% of Iran's oil exports.

Beijing responded within 24 hours, vowing to 'firmly safeguard its legitimate rights and interests' and take 'all necessary measures.' If implemented, the Iran tariff would raise total U.S. duties on Chinese goods to 72%, effectively ending the October truce. The timing adds another variable: the Supreme Court is expected to rule any day on whether Trump's emergency tariff powers under IEEPA are legal at all.

Key Indicators

47%
Current U.S. tariff on Chinese goods
Set under the October 2025 truce, down from 145% peak in April
72%
Potential combined tariff if Iran levy applied
Adding 25% Iran tariff to existing 47% rate
90%+
China's share of Iranian oil exports
Making Beijing the primary target of the secondary tariff
$22.4B
Chinese imports from Iran (2022)
World Bank figure; China is Iran's largest trade partner

People Involved

Donald Trump
Donald Trump
President of the United States (Issued 25% secondary tariff on Iran trading partners)
Xi Jinping
Xi Jinping
General Secretary of the Chinese Communist Party (Faces decision on whether to retaliate)
Jamieson Greer
Jamieson Greer
U.S. Trade Representative (Leading trade negotiations and tariff implementation)
Mao Ning
Mao Ning
Chinese Foreign Ministry Spokesperson (Delivered official response to Iran tariffs)
SK
Scott Kennedy
Senior Adviser, CSIS (Analyzing U.S.-China trade dynamics)

Organizations Involved

Office of the United States Trade Representative
Office of the United States Trade Representative
Federal Agency
Status: Administering tariff policy

The executive agency responsible for developing and coordinating U.S. international trade, commodity, and direct investment policy.

EM
Embassy of the People's Republic of China in the United States
Diplomatic Mission
Status: Issued retaliation warning

China's diplomatic mission responsible for official communications with the U.S. government.

Supreme Court of the United States
Supreme Court of the United States
Judicial
Status: Reviewing IEEPA tariff authority

The highest court in the federal judiciary, currently weighing whether IEEPA grants presidential authority to impose tariffs.

Timeline

  1. China Vows Retaliation

    Response

    Chinese Foreign Ministry warns it will 'firmly safeguard its legitimate rights and interests' and take 'all necessary measures.' Embassy spokesperson calls tariff 'illicit unilateral sanctions.'

  2. Trump Imposes 25% Tariff on Iran Trading Partners

    Escalation

    Trump announces via Truth Social that all countries doing business with Iran face 25% U.S. tariff 'effective immediately.' China, which buys 90%+ of Iranian oil, is the primary target.

  3. Iran Protests Begin

    Context

    Protests erupt in Iran over economic conditions and currency collapse. Death toll reaches 1,850+ over following weeks as government imposes internet blackout.

  4. Supreme Court Hears IEEPA Arguments

    Legal

    Justices hear oral arguments in Learning Resources v. Trump. Chief Justice Roberts and Justice Gorsuch express skepticism about executive tariff authority.

  5. Trump-Xi Summit in South Korea

    Agreement

    Trump and Xi meet in Busan for first in-person summit of second term. Agree to one-year truce: tariffs set at 47%, China suspends rare earth controls.

  6. Federal Circuit Rules IEEPA Tariffs Illegal

    Legal

    U.S. Court of Appeals for the Federal Circuit rules 7-4 that Trump exceeded authority under IEEPA. Administration appeals to Supreme Court.

  7. Geneva Truce: 90-Day Pause

    Agreement

    U.S. and China agree to 90-day de-escalation in Geneva. U.S. tariffs drop to 30%, China's to 10%.

  8. Tariffs Hit 145% Peak

    Escalation

    After rapid tit-for-tat increases, U.S. tariffs on Chinese goods reach 145%. China responds with 125% tariffs on U.S. goods and suspends rare earth exports.

  9. Trump Restarts Trade War

    Escalation

    10% tariffs on all Chinese imports take effect, the first major action of Trump's second term. Additional 10% imposed March 4.

  10. Phase One Agreement Signed

    Agreement

    U.S. and China sign Phase One trade deal, pausing escalation. Tariffs remain in place. China commits to $200 billion in additional purchases but fails to meet targets.

  11. U.S.-China Trade War Begins

    Escalation

    U.S. imposes 25% tariffs on $34 billion in Chinese imports under Section 301, citing intellectual property theft and forced technology transfer. China retaliates immediately with matching tariffs.

Scenarios

1

Truce Collapses: Tariffs Return to 100%+

Discussed by: Scott Kennedy at CSIS; Bloomberg and CNBC trade analysts

China retaliates to the Iran tariff with matching duties and reinstates rare earth export controls. The October truce unravels. U.S.-China tariffs return to April 2025 levels—or higher—choking bilateral trade and triggering supply chain disruptions in semiconductors, electronics, and critical minerals.

2

Negotiated Exemption: China Gets Carveout

Discussed by: Trade policy historians citing ILSA precedent; Bloomberg analysts

Following the pattern set by the Clinton administration's Iran-Libya Sanctions Act exemptions in the 1990s, the Trump administration offers China a negotiated carveout or delayed implementation in exchange for concessions on other trade issues or Iran pressure. The truce survives in modified form.

3

Supreme Court Strikes Down Tariff Authority

Discussed by: Georgetown law professor Greg Shaffer; Kalshi prediction markets (28% chance of administration win)

The Supreme Court rules that IEEPA does not authorize tariffs, invalidating both the Iran secondary tariff and other emergency-based duties. The administration scrambles to reimpose tariffs under alternative legal authorities while potentially facing $200+ billion in refund claims.

4

Limited Response: China Absorbs the Hit

Discussed by: Trade economists analyzing China's strategic calculus

China condemns the tariff but limits retaliation to targeted measures—antitrust investigations, unreliable entity list additions—while preserving the broader truce framework. Beijing calculates that maintaining access to U.S. markets outweighs the cost of the Iran trade relationship.

Historical Context

Iran and Libya Sanctions Act (1996)

August 1996

What Happened

Congress passed ILSA, mandating secondary sanctions on foreign firms investing more than $20 million in Iran's energy sector. European governments—particularly France and Germany—denounced it as extraterritorial overreach. The Clinton administration ultimately granted exemptions to European energy projects in Iran.

Outcome

Short Term

European companies received waivers; major energy deals proceeded despite the law.

Long Term

Set a precedent that U.S. secondary sanctions were negotiable, weakening their deterrent effect for decades.

Why It's Relevant Today

The ILSA precedent suggests that sweeping secondary tariffs often lead to negotiated exemptions rather than full enforcement, especially when targeting major trading partners.

U.S.-China Trade War Escalation (April 2025)

April 2025

What Happened

After Trump raised tariffs to 145% on Chinese goods, China retaliated with 125% duties and suspended exports of rare earth metals critical to defense and technology manufacturing. Trade between the world's two largest economies effectively froze for weeks.

Outcome

Short Term

Both economies suffered supply chain disruptions. Stock markets dropped sharply.

Long Term

The May Geneva truce and October Busan agreement walked tariffs back to 47%/32%, but underlying tensions remained unresolved.

Why It's Relevant Today

Demonstrates how quickly U.S.-China tariff disputes can escalate to trade-war levels—and the difficulty of maintaining truces when new flashpoints emerge.

Reagan's Soviet Pipeline Sanctions (1982)

June-November 1982

What Happened

Reagan imposed extraterritorial sanctions on European companies building the Siberian natural gas pipeline to Western Europe, attempting to deny hard currency to the Soviet Union. European allies refused to comply, and the administration eventually backed down.

Outcome

Short Term

The pipeline was completed. U.S.-European relations were strained.

Long Term

Established that secondary sanctions against allied nations are difficult to enforce without cooperation.

Why It's Relevant Today

Shows the limits of secondary sanctions when they target allies with competing economic interests—a dynamic now playing out with U.S. partners like the UAE and Turkey, who also trade with Iran.

12 Sources:
+6
Bloomberg CNBC CNN South China Morning Post Al Jazeera Council on Foreign Relations White House Center for Strategic and International Studies Tax Foundation NBC News Wikipedia CNBC