President Donald Trump may have cut tariffs on allies, but he has only escalated his hostility toward China, raising tariffs on imports from the country to 145%. Given America’s reliance on Chinese goods, such restrictions will hurt corporations and small businesses alike. And tensions between the rival superpowers are unlikely to subside anytime soon.
Over the weekend, Trump’s Commerce Secretary, Howard Lutnick, signaled that Trump’s new exemptions for electronics may not last long, while China, which had already imposed 125% tariffs on American goods, announced it would suspend imports of certain rare earth minerals, which could seriously hamper American automakers. The Trump team’s strategy, to the extent it exists, has been characterized by impulsiveness.
But what does China think?
With this trade war, there is the political side and there is the economic side of the whole thing. And on the political side, Trump is acting like he has all the cards with China. He wants Xi to reach out to him, and Xi doesn’t seem interested in doing that. Both of these leaders hate to appear weak, but Trump has a long history of backtracking and Xi doesn’t. Xi is known to be firm.
Also, the feeling on the Chinese leadership side is that they don’t like negotiating with Trump, who is extremely volatile, often vague with demands, and also escalates too often. This is just an unpleasant experience for Xi.
On the other hand, America has enormous economic purchasing power, and China’s economy, which is quite dependent on exports and manufactures a lot of goods for export, would certainly not like to have tariffs of around 145% on goods in one of its major export markets forever. So there is certainly some incentive to reduce the pain for many Chinese companies to maintain some trade relationship and maintain economic growth when China’s economy has not fully recovered from the COVID years.
Saving Growth
It is also widely expected that the trade war will “really save Xi Jinping from having to take responsibility for the lack of economic growth in China. The Chinese who spent much of the last five years dealing with a really uncertain economic outlook know that the economy wasn’t doing so well before Trump’s tariffs.
In 2021, the Politburo announced a “structural reform.” That’s when they cracked down on a lot of online platforms and announced major restrictions on real estate development – that’s also one of the main things that made China’s economy really weak, which is a major slowdown in the real estate markets as well as construction. So, people are very aware that the economy has been pretty weak over the past five years.
Expected blow
Although this may also mean that China is more accustomed to these conditions and less likely to be shocked by them. Xi has been preparing China for tremendous economic pressures since he took office in 2012. It really accelerated during the first trade war. The Communist Party usually talks about such issues, but when Xi talks about extreme scenarios, we can wonder what he meant.
One possible scenario is the cessation of all economic relations in the event that Beijing starts some kind of conflict against Taiwan. That is why he has been trying to strengthen the Chinese economy over the past decade to reduce its dependence on many Western products, so that China is much more self-sufficient in technology, industrial goods, food and energy. In a way, we could say that Xi has been preparing for the disruption of economic relations with the US and the rest of the West for longer than Trump has been preparing for it.
The Trump message
The US President’s short-term pain now for supposed long-term gain is forcing Beijing to prepare to retaliate with short-term pain and long-term pain. In recent days, Beijing’s Foreign Ministry spokespeople have published quotes from Mao saying: “As long as the Americans want to fight in Korea, we will deal with them.”
The Korean War is the only conflict in which Chinese troops have faced American troops directly on the battlefield. But everyone forgets that the Korean War had hundreds of thousands of casualties for China, after they had just suffered hundreds of thousands of casualties from the Japanese invasion, as well as from China’s own civil war.
There is this sense that the Chinese are really capable of suffering. They have done so during the war, during the Great Leap Forward, during the Cultural Revolution. The future will be glorious, but there will be a lot of pain ahead. Something that Americans do not seem prepared for in this kind of message.
The US and China have a lot of trade with each other, but Americans are also very dependent on Chinese products, Chinese production, and Chinese manufacturers in every way. Americans are not known for their self-sacrifice, but Trump voters trust him to the extent that they could go along with him for a while. It’s also a bit unclear to what extent Trump voters are willing to take economic pain.
During the first trade war, prices didn’t rise as much and didn’t contribute to as much inflation. Tariffs are now much, much higher than before, and inflation is still stuck at the high end. During the first trade war, Beijing failed to target exporters to make Trump lose the 2018 midterm elections. And there are certainly goods in which China has a lot of leverage.
And by cutting off those markets, it could inflict enormous, concentrated pain on American farmers who make up a large part of Trump’s voting base.
The Pressure of Tariffs
Regarding Taiwan, this trade chaos and further separation from the West will make Xi more aggressive with his already aggressive territorial moves. Tariffs certainly make the situation more dangerous, but we do not believe that Beijing will launch military action or isolate Taiwan. In part, there are several significant deterrents for Xi to launch military action or isolate action.
One of them is that Xi would have to accept the severance of many economic ties, perhaps even most economic and financial ties, with the West – as we saw in the case of Russia’s invasion of Ukraine. But if tariffs are maintained for a long time, it looks like the West is throwing away one of the major deterrents against Beijing’s action.
In peacetime, what we might see is economic decoupling, so that it is less of a deterrent for Xi to take military action. That is not to say that there is no deterrent against military action.
It is possible that the PLA will lose, because Taiwan is a really difficult place to invade. And it is also clear that Xi does not fully trust the PLA as the capable force he needs, having not fought a war in almost 50 years. Xi has purged the second highest-ranking military officer in the PLA, who held a seat on the Politburo.
Russia’s Role
In Russia’s case, there has been a near-total cessation of economic activity with the West. Yet Russia has managed to survive, in large part because China has offered it an economic lifeline. But if China is cut off, what would be its lifeline?
China is a very, very big country. One of the things that the central planners in Beijing like to boast about is that it has, in its own terms, a relatively complete industrial chain, meaning that it is able to make almost anything except a few categories of semiconductors and higher-end jet engines.
It is certain that China has extremely sophisticated and extensive manufacturing capabilities. And that was also something that became quite evident during COVID-19, when China was able to scale up production of masks and other essential medical equipment extremely quickly in a way that the US really couldn’t. The value of China’s exports to the US is about 2% of GDP.
Smuggling
And between a lot of rerouting and smuggling, we don’t think there will be a complete halt to Chinese exports. So it is a problem, but it is not. Another point about China’s economy right now that we should consider: One of the criticisms of China is that it hasn’t done enough stimulus after the property crash or boosted consumer spending. And there’s plenty of room for that.
There are limits to how much the Chinese government can save its own economy, but that’s quite real and quite valid. There’s room for China to do more, and it really needs to do more now, because its exports are under a lot of pressure.
And that also includes giving people better pensions, better healthcare, better social spending in general. Xi has been saying for the last couple of months, and arguably the last couple of years, that China needs to be more of a consumer-oriented economy, and these tariffs give Beijing the kick it really needs to be much more serious about promoting domestic consumption.
Europe’s Role
On the question of whether China and Europe could come closer as the US drifts apart, the consensus seems to be that they probably can’t, because there are too many obstacles between them. Donald Trump and JD Vance have done their best to offend Europeans as much as they can.
And Europeans don’t like being burdened with nonsense. It was probably a coincidence that the Spanish prime minister visited Beijing last week, but it’s no coincidence that many European leaders will visit Beijing in July. Many countries will really have to weigh up — they’re trying to gain access to the American market, which is of course the largest consumer market in the world and the best trading partner for many countries.
And then China offers a slower kind of aggression and a lot less erratic policy than Trump does. It is not a very simple thing to say that all countries will either completely choose China or completely choose the US.
