Xi plans to lean on China’s vast consumer base to help absorb the country’s manufacturing output. (Pool/Getty Images)
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President Xi Jinping’s decision to quickly retaliate against Donald Trump’s sweeping tariffs sent the world a clear message: If the U.S. wants a trade war, China is ready to fight.
After weeks of responding with only targeted measures and calling for dialogue, China signaled a tougher approach on April 4 by answering Trump’s “reciprocal” tariffs with blanket duties of its own and more export controls. The Communist Party’s official newspaper followed that up with an April 7 editorial declaring Beijing is no longer “clinging to illusions” of striking a deal, even as it leaves a door open to negotiations.
China’s response has jolted global markets, fueling fresh volatility as investors brace for a prolonged and disruptive trade war. Trump deepened those worries on April 7, threatening an additional 50% in tariffs if Beijing does not withdraw its planned retaliation. Trump also warned in a social media post that the U.S. would cut off all future meetings and negotiations with China if action wasn’t taken in the coming days.
The 50% charge would come on top of the 34% duty the president imposed on all Chinese imports — set to begin April 9 — as well as a 20% levy that he put in place earlier tied to fentanyl trafficking, according to a White House official.
As China confronts the reality that rising U.S. levies — now at a rate Bloomberg Economics says will mostly wipe out bilateral trade — are unavoidable, top leaders are ramping up efforts to bolster the domestic economy. Policymakers huddled in Beijing over the weekend to discuss plans to accelerate stimulus to boost consumption, Bloomberg News reported earlier, as Xi leans on China’s vast consumer base to help absorb the country’s manufacturing output.
‘Slapped My Face’
On April 7, Xi called for strengthened efforts to “fully unleash” the country’s consumption potential to spur growth. The Chinese leader said revitalizing consumption, expanding domestic demand and enhancing investment efficiency are on top of the country’s agenda, state-run broadcaster China Central Television reported on April 7, without specifying when and where he made those comments.
“We believe that before we can sit down to negotiate a deal we have to fight, because the other side wants to fight first,” Wu Xinbo, director at Fudan University’s Center for American Studies in Shanghai, said of China’s stance. On the possibility of a Trump-Xi call, Wu said: “You just slapped my face and I’m not just going to call you and beg your pardon.”
Stocks tumbled on concerns over the trade war’s impact on the global economy. Asia capped the worst day since 2008. A gauge of Chinese shares listed in Hong Kong fell into a bear market, while the city’s benchmark Hang Seng Index plunged the most since 1997. Europe’s Stoxx 600 tumbled more than 6% at one point.
Pressure and Pride
An escalation of tensions may dim the prospect of a leadership call in the near future. Trump hasn’t spoken with Xi since returning to the White House, the longest a U.S. president has gone without talking to his Chinese counterpart post-inauguration in 20 years.
“Trump and Xi are locked in a paradox of pressure and pride,” said Craig Singleton, a senior fellow at the nonpartisan Foundation for Defense of Democracies. “But here’s the dilemma: if Xi refuses to engage, the pressure escalates; if he engages too soon, he risks looking weak.”
RELATED: A Timeline of US-China Retaliatory Tariffs
The Chinese leader is walking a tightrope. He needs to project strength at home, while supporting an economy grappling with deflation. A major challenge is restoring consumer confidence, which has been deeply shaken by a years-long housing slump that wiped out a significant chunk of their wealth.
Several major global banks — including UBS Group AG, Goldman Sachs Group Inc. and Morgan Stanley — sounded the alarm over the weekend about the potential economic fallout from the U.S.’s steepest tariff hikes in a century. They warned that this could put even more pressure on China’s already modest 2025 growth forecasts, which are as low as 4%.
Growing Arsenal
Beijing has several tools it could reach for if tensions with Washington worsen. If past actions were any guide, it could let the yuan weaken to offset the impact of tariffs, tighten export controls on critical minerals or increase pressure on U.S. companies operating in China.
At the same time, China may widen its diplomatic outreach by building stronger economic ties elsewhere. Last month, trade officials from China, Japan and South Korea jointly called for open and fair trade. During a recent visit to Brussels, Chinese Vice Finance Minister Liao Min expressed a willingness to work with the European Union to defend the multilateral trading system. The Chinese Embassy in Ottawa also made similar overtures about partnering with Canada.
Xi’s expected visit to Southeast Asia later this month takes on added importance. Beijing will likely be watching what countries like Cambodia, Malaysia and Vietnam might offer Washington in hopes of tariff relief, and whether those moves could undercut Chinese interests.
“What may be tougher for China to manage would be the knock-on protectionist measures other economies will take to shield their industries from an expected flood of cheaper Chinese goods as demand in the U.S. and other key markets tighten,” said Lee Sue-Ann, senior fellow at the ISEAS-Yusof Ishak Institute.
Still, despite the increased pressure, there’s no clear sign that China is looking to fully decouple from the U.S. Instead, it seems to be asserting its position and bracing itself for a prolonged standoff, while keeping future options open.
“China wants to convey to the U.S. that it is not intimidated and is willing to stand its ground,” said Henry Gao, a law professor at Singapore Management University, who researches Chinese trade policies. “Rather than aiming to inflict significant damage, the goal seems to be to exert pressure and encourage dialogue.”
Reduced Reliance
China’s confidence this time around stems from the belief that it’s better prepared than it was during Trump’s first trade war, having learned from the past eight years. Beijing has broadened its network of trade partners, reducing its dependence on the U.S. for both imports and exports.
The U.S. took less than 15% of Chinese exports last year, down from 19% in 2017 before the trade war, although trade routed through third countries likely made up for some of the shortfall. Similarly, imports from the U.S. — already relatively small — have become less critical for China.
(Bloomberg)
Agricultural products are a prime example, with China seeking to reduce its reliance on U.S. soybeans. American exporters — which once dominated the Chinese market — saw their share fall to just 20% last year as China ramped up purchases from Brazil instead.
All this may buy China more time until the two sides agree to meet at the negotiation table.
Wang Yiwei, professor of international relations at Renmin University and a former Chinese diplomat, suggested that China expects Trump’s efforts will run out of momentum soon.
“Soldiers would be most willing to fight when the first battle drum sounds, but that begins to fade by the second round,” he told Bloomberg, citing an old Chinese saying.
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