Trump tariffs: China's strategic response

Since Donald Trump's return to the White House, he has been ramping up his protectionist agenda.  April 2, 2025, Trump's "Liberation Day" marked the formal launch of sweeping tariffs on imports from almost every country in the world, including the uninhabited Heard and McDonald Islands off the coast of Antarctica. His tariffs were labelled as "reciprocal" despite they bore no relationship to any tariffs or other trade barriers these countries imposed on US exports.

While Trump tariffs are limited to goods, their effects are expected to ripple across the broader economy, including services trade. A decline in the volume of goods traded will lead to weaker demand for freight shipping and logistics services and a whole range of other related services for the movement of trade in goods across national frontiers.

Trump believes trade is a zero-sum game. Countries with trade surpluses are winners and with trade deficits losers. That is why, he concluded that the US with a trade deficit of US$1.2 trillion last year has been ripped off by its trading partners. An extension of that belief led him to conclude that China with a trade surplus of US$296 billion is ripping of the US. 

But trade does not work in that simplistic way, it confers benefits on all trading partners. In the case of China-US trade relationship, China benefits from increased employment and economic activity generated by exports and the US benefits from access to cheaper goods and equipment which either it does not produce or could produce only at an exorbitant cost. As such, Americans enjoy a much higher standard of living with trade than without it.

Though rarely stated outright, Trump aims to break the dominance of China's export led economic model. It is also a part of his strategic initiative to reshape global trading system to forestall China emerging as the dominant regional power in East Asia.  Also, trade decisions on this scale are not about trade alone. In his executive order, Trump declared that "large and persistent trade deficits constitute an unusual and extraordinary threat to the national security and the economy of the United States".

Trump imposed a 145 per cent tariff on imports from China last month and as the US steps up its trade war, China is also hitting hard almost matching the US tariff hikes with 125 per cent tariffs on imports form the US as well as restricting exports of critical minerals. Beijing officials described the US imposed tariffs as "blackmail". China also added US entities to its export control list, restricting them to do business in China.

Less than 14 hours after Donald Trump's "reciprocal tariffs" took effect, Trump announced a 90-day pause except for China, a stunning reversal from a President who had insisted historically high tariffs were here to stay. However, baseline 10 per cent tariffs remain in place.

While many countries including Bangladesh opted not to retaliate, favouring negotiation and dialogue, there are no indications that China is reconsidering its stance, nor does it appear to be pursuing negotiations or discussions. The two countries are now locked in an all-out high intensity trade stand-off. And China is showing no sign of backing down. China is much better prepared than most countries to handle the fallout from Trump's trade war.

China is also trying to woo other countries, presenting itself as a stable partner in contrast to a capricious US. "China notes that some economies are also in talks with the US," China said a couple of weeks ago, adding, "We need to stress that appeasement cannot be turned into peace, and compromise cannot be respected".

Trump tariffs have provided an opportunity to China to diversify its export destinations. In fact, China has been exactly doing that since Trump's 2019 trade war to reduce its dependence on the US market. As a result, the importance of the US market for Chinese exports declined significantly. At the start of the first Trump trade war in 2018, US bound exports from China accounted for 19.8 per cent of total exports and by 2023 that figure  had fallen to 12.8 per cent. The World Trade Organisation (WTO) estimates that Chinese exports to the US, which were worth US$ 440 billion (amounting to roughly 3 per cent of China's GDP) last year, will fall by 77 per cent this year if the tariffs remain in place.

If the trade war continues, China will lose export income leading to reduced economic activity causing job losses and factory closures. According to data published last week by China's National Bureau of Statistics, the official purchasing managers' index dropped to 49 for April down from 50.5 in March. A level below 50 indicates contraction. The index for export orders dropped even further to 44.7, it is the lowest since December 2022.

Paradoxically, the US will suffer more because of the size of its deficit. Imports for the first quarter 2025, surged by 41 per cent, and the trade deficit hit a record high of US$162 billion in March. This indicates the extend to which Americans consume more and save less than the Chinese.

Very recently the IMF has provided its revised growth estimates for the US and China. The revised growth estimate for the US now stands at 1.7 per cent for 2025, down from 2.7 per cent estimated in January. For China also the revised growth estimate now is 4 per cent for this year instead of 4.6 per cent estimated early this year. 

To put the overall situation differently is to say that China is likely to experience a demand shock because of its decline in exports due to diminished access to the US market and the US will experience a supply shock due to the increased tariff barriers especially against Chinese goods. In fact, the US could be plunged into a self-induced recession, even possibly into a stagflation-- a decline in growth that coincides with rising inflation caused by the shortages due to tariffs i.e., supply shock.

The US dollar has depreciated about 9.25 per cent since Trump assumed his office in January 20 as well as some capital flight in response to Trump's trade policies. While the market has now stabilised, but it shows how Trump's trade announcements can impact financial markets, especially the US dollar.

One can counterintuitively argue that the current downturn in the Chinese economy   has made it more resilient to shocks. It has pushed policy makers and businesses to factor in the existing and evolving economic and political realities, even before the impact of the current Trump tariffs flows through the Chinese economy.

China has at its disposal several strategic options to counter the effects of Trump tariffs on its economy. To that end, China has been talking to boost domestic consumption, increase R&D investment to increase self-sufficiency and supporting exporters with finance and reductions in regulatory costs. The Peoples Bank of China (China's central bank) has already expressed its capacity and willingness to lower interest rates and increase credit availability within the banking and financial system. China retains the ability to target key US agricultural export products such as poultry and soybeans which are heavily dependent on Chinese demand and concentrated in Republican leaning states. These are the key strategic options for China now, but it has more options available to counters the effects of US tariffs.

Furthermore, China can use Trump tariffs as a useful external threat allowing to rally public sentiment behind the government shifting the blame for the economic slowdown on US economic aggression. China can also play victimhood to draw sympathy across the globe and ramp up a diplomatic campaign with other victims of Trump's trade war. China and the EU are contemplating to strengthening their previously strained trade ties with implications for transatlantic ties. China, Japan and South Korea already hosted their first economic dialogue in five years and Xi visited Vietnam, Malaysia and Cambodia.

China has also called on India to collaborate in opposing Washington's new trade policies, which Beijing has described as 'abusive'. However, New Delhi has made it clear that it will not impose retaliatory tariffs. Indian Foreign Minister S. Jaishankar announced that India plans to negotiate a trade deal with the US by Fall and is keeping an open dialogue with the US administration.

On April 23, Trump said during a White House news conference that high tariffs on goods from China will "come down substantially, but it won't be zero". Trump's remarks were in response to earlier comments on the day before by Treasury Secretary Scott Bessent, who said that the high tariffs were unsustainable and that he expects a "de-escalation" in the trade war between the world's two largest economies. Bessent further described the current situation as a trade embargo, and not a US goal to decouple from China.

President Trump said on last Wednesday (May 7) that he would not pull back tariffs on Chinese goods to get China to the negotiating table, countering speculation that he might lower hefty 145 per cent tariffs to break the ice. Trump's hard-line stance came as top US and Chinese officials are scheduled to meet in Switzerland this weekend to hold trade discussions, boosting hopes for a potential de-escalation in the US-China trade war.

According to the official sources Chinese Vice Premier He Lifeng will attend the talks in Switzerland from 9 to 12 May and US Treasury Secretary Scott Bessent and US Trade Representative (USTR) Jamieson Greer will represent the US at the meeting. But global trade experts consider that they expect negotiations to take several months.

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