By Eric Vandenbroeck and co-workers

How China Armed Itself for the Trade War

How did the world’s two largest economies stumble toward a trade war that neither truly seeks and which the rest of the world can’t afford? Following U.S. President Donald Trump’s “Liberation Day” ceremony on April 2, during which he unveiled tariffs of varying levels on all of Washington’s trade partners, the United States and China have engaged in several rounds of tit-for-tat escalation, driving tariffs between the two countries to prohibitively high levels. By April 11, tariffs on Chinese goods entering the United States had reached 145 percent, while U.S. goods entering China reached 125 percent. Unless the two countries carve out broad exemptions, the $700 billion in annual bilateral trade between them could shrink by as much as 80 percent over the next two years. Markets have responded negatively to the looming trade war, and many economists and analysts have struggled to explain what the Trump administration is trying to achieve.

The best way to understand the current standoff with China is as the product of faulty assumptions and missteps on both sides. Within Trump’s orbit, powerful players and factions misjudged the resilience of China’s economy and wrongly assumed that Chinese leader Xi Jinping would rush to make a deal to avoid a domestic backlash. As a result, China hawks in Washington failed to anticipate how resolutely Beijing would react to Trump’s tariffs.

In China, meanwhile, a deficit of skilled diplomacy has left the country more adept at signaling defiance than at shaping outcomes. Beijing has failed to address the legitimate concerns among many in the United States and beyond, and a renewed surge of low-cost Chinese exports would produce a second “China shock” by further eroding the industrial bases of other economies. And bellicose rhetoric—such as the declaration made in March by China’s embassy in Washington that China is “ready to fight till the end” in “a trade war or any other type of war”—does little to sway international opinion, and fails to convey the Chinese leadership’s long-standing desire to avoid external conflict. Xi also has pushed China in directions that have increasingly placed it at odds with its neighbors, regional powers.

The Trump administration is now trying to salvage a situation of global economic chaos, which, by many indications, it did not plan for—by pivoting from a full rewiring of the global economic system to a more targeted frontal assault on the Chinese economy. Xi and the rest of the Chinese leadership harbor no illusion that China can win a trade war with the United States. But they are willing to risk one that Trump might lose.

 

Faulty Formulas

The view that the Chinese leadership was desperate to negotiate a trade deal, to avoid economic pain that could destabilize Chinese society and threaten the Chinese Communist Party’s monopoly on power, is common among China hawks in the United States. This analysis is partly accurate, but it has led many to draw false conclusions.

China’s economic growth is weaker today than at any point in the last three decades. But it is not, as Treasury Secretary Scott Bessent has repeatedly stated, in a “severe recession, if not depression.” Growth decelerated from double-digit annual rates two decades ago to rates in the high single digits in the 2010s to rates of around five percent today (discounted by many China watchers to closer to two percent, to account for the CCP’s tendency to exaggerate).

But China’s slowing growth does not automatically give the United States an advantage. Advanced economies grew an average of 1.7 percent last year, with the U.S. economy leading the pack at 2.8 percent. That momentum, however, is fading. The financial services firm JPMorgan now forecasts negative U.S. growth in the second half of 2025, while projecting that China’s official growth will slip to 4.6 percent.

In early March, Commerce Secretary Howard Lutnick told NBC News, “Donald Trump is bringing growth to America. I would never bet on a recession. No chance.” Such hyperbole, taken at face value, has contributed to the Trump administration’s overestimation of the chances that tariffs would force China to the negotiating table. Its strategy has backfired, greatly diminishing the possibility of direct negotiations in which China might be willing to offer meaningful concessions. Beijing has shown a strong capacity for retaliation and a tactical openness to negotiation, but not a willingness to kowtow.

The Trump administration seems to believe that a comprehensive trade deal can be thrashed out through direct personal dialogue between Trump and Xi. But Xi does not negotiate deals; he maintains an imperial aloofness, offering his blessing to agreements crafted by others and standing above the fray of daily governance. Trump, by contrast, draws political capital from commanding media attention; every achievement must be visibly and vocally his. He has cast himself as the “negotiator in chief,” personally driving the tariff agenda.

This asymmetry in leadership styles presents a serious logistical challenge to diplomacy. It is difficult to imagine Trump exercising the restraint necessary to avoid framing the dispute as a personal contest between two great leaders. Yet that very framing is anathema to the Chinese side—and likely to cause Beijing to disengage altogether. Beijing thinks that a meeting between Xi and Trump would be unlikely to guarantee substantive results, and sees it as a concession to Washington with little upside and considerable risk. Even a carefully choreographed summit could damage Xi’s image and, by extension, the party’s standing. Chinese officials still vividly recall how Trump launched a trade war almost immediately after what they had considered a warm and fruitful state visit to Beijing in 2017. Moreover, Beijing does not want to risk a blowup such as the one that occurred when Ukrainian President Volodymyr Zelensky visited the White House in February.

Shipping containers at port in Oakland, California, April 2025

 

Xi’s Long Game

Xi’s political career has been distinguished by two throughlines: resisting foreign coercion and mastering domestic power struggles. His instincts were forged during the Cultural Revolution, during the 1960s and 1970s, when his family fell from grace and he was sent to toil in rural Shaanxi. Xi’s core political message—captured in the concept of chi-ku, or “eating bitterness”—calls on Chinese citizens, especially youth, to endure hardship in the service of national rejuvenation. His invocation of the CCP’s historic mission to overcome China’s “hundred years of humiliation” is not a mere rhetorical flourish. It is the scaffolding of his legitimacy.

Trump’s confrontational trade policies, though designed to weaken Beijing’s hand, have paradoxically reinforced Xi’s narrative. The external threat provides cover for the CCP’s ongoing economic reorientation and justifies the state’s push for greater self-reliance. It also allows Xi to deflect blame for past policy missteps, particularly his administration’s often punitive stance toward private enterprise. That shift is evident in the symbolic restoration of favor toward billionaire entrepreneurs who had previously fallen out with the state, such as prominent businessman Jack Ma, who largely disappeared from public view after criticizing China’s financial regulatory system in 2020 but who has been politically rehabilitated in recent months.

The CCP holds a monopoly on power in China’s political system, and Xi maintains a near-monopoly within the party itself. This concentration of authority allows the Chinese leader to make sweeping policy decisions unchallenged—and to reverse course just as swiftly. And as a result of the party’s control over information, particularly regarding foreign affairs, any encounter with the Trump administration can be framed domestically as Xi standing firm against foreign bullying.

China’s reaction to U.S. tariffs is less about saving face than about executing a long-calibrated strategy. Unlike U.S. allies, many of which have been caught off guard by Trump’s tactics, Beijing has spent years preparing for confrontation. Since 2018, China has weathered a low-level trade war, gaining experience in managing the deepening U.S.-Chinese rivalry and learning how to circumvent Washington’s economic restrictions.

In response, Beijing has pushed local officials and state-owned enterprises to strengthen supply chain resilience and cultivate overseas markets. To cushion the blow to small businesses and stave off unemployment, it has unveiled targeted fiscal and monetary measures to support them amid uncertainty. At the latest National People’s Congress, in March, Chinese leaders emphasized boosting domestic demand as the key to future growth, with new policies to strengthen consumer spending and improve the domestic business environment. They have also promoted the international use of renminbi-based payment systems to reduce China’s exposure to coercive U.S. financial sanctions.

Simultaneously, China has rolled out a suite of new laws—ranging from the Anti-Foreign Sanctions Law to the Export Control Law and anti-espionage regulations—that create legal bases for retaliatory measures and put international businesses in an impossible bind. Firms can either comply with U.S. sanctions and risk violating Chinese law, or vice versa.

On the diplomatic front, China has sought to blunt Western protectionism by deepening regional ties. It has accelerated negotiations on a free trade agreement with the Arab states of the Gulf Cooperation Council. Regarding the European Union, Chinese Foreign Minister Wang Yi described a March meeting with French counterpart Jean-Noël Barrot as “constructive,” and China and France are planning three high-level dialogues this year. In the days before the Trump administration’s tariff announcement, ministers from China, Japan, and South Korea resumed their economic and trade dialogue after a five-year hiatus, agreeing to explore a more comprehensive free trade agreement among the three countries, to collaborate on reforms to the World Trade Organization, and to welcome new members to their regional free trade agreement, the Regional Comprehensive Economic Partnership. Earlier this month, Xi visited Southeast Asia for the second time in less than two years, to strengthen ties with Vietnam and other key neighbors that have become transshipment hubs for Chinese goods.

There is no question that high tariffs will erode Chinese exporters’ access to the U.S. market. But from Xi’s vantage point, the Chinese economy is better positioned than ever to endure the pain. Compared to the shocks of the COVID-19 lockdowns, a trade rupture with the United States would be a tolerable disruption. The lockdowns demonstrated how far the CCP can push hardship on its people without destabilizing social control—its paramount concern. More important, Xi’s measure of national rejuvenation is not GDP; it is scientific and technological development. Trump’s “America first” policy agenda only reinforces Xi’s argument for indigenous innovation and greater self-reliance. Unlike during the first Trump administration, China is now, if necessary, ready to decouple from the United States.

 

No Sure Bets

Setting aside near-term inflation concerns, the greatest variable reshaping global supply chains today is whether the United States can still be counted on as a stable, long-term economic partner. This doubt among traditional U.S. partners has not gone unnoticed in Beijing, where officials have swiftly taken advantage of the shift in international attention away from Xi’s centralization of power and departure from Deng Xiaoping’s vision of “reform and opening up.” In early April, the CCP’s official newspaper, People’s Daily, invited foreign investors to “use certainty in China to hedge against uncertainty in America.”

Uncertainty about U.S. stability, however, does not automatically make China a more credible alternative. Beijing has yet to resolve its own structural economic problems. There is no guarantee that its strategy of self-reliance and state-driven innovation will deliver results fast enough to prevent China from stagnating in the middle-income trap. As internal and external growth headwinds mount, Beijing faces the hard budget constraint of capital scarcity: more money for technology means less money for households.

But those born in the 1970s and afterward envisioned a future not of more struggle but of lasting prosperity. And younger generations have good reason to worry. They came of age in a China of rising affluence and opportunity, and COVID-19 was the first major national crisis many of them ever experienced. Now, as U.S.-Chinese tensions jeopardize access to global education and professional advancement, their sense of economic security is eroding.

In both China and the United States, policymaking is dominated by aging political elites. And in both countries, younger generations are increasingly aware that those in power are willing to mortgage their futures. For China, in the long term, the rallying cry of “eating bitterness” may no longer inspire a society that has grown up expecting sweetness.

 

Trump’s Bitter Pill

Trump’s “America first” approach to China need not translate into one of maximum pressure. Strong-arm tactics will only reinforce Beijing’s long-held suspicion that Washington seeks to contain China and ultimately topple the Communist Party. The better strategic play is to present Beijing with a dilemma instead of an ultimatum.

That dilemma begins by accepting a structural reality: the United States will always run a trade deficit with China because Americans have no desire to reclaim low-end manufacturing jobs from Chinese factories. The challenge Trump faces is how to structure that deficit in a politically durable way—to level the playing field in industries that will shape the future, such as artificial intelligence, quantum computing, and clean energy, and to ensure that China continues to recycle its surplus into U.S. dollar assets.

To do this, the United States should continue exporting large numbers of raw materials and industrial inputs, running a surplus that reinforces its position as an upstream supplier in global production chains and a critical partner in China’s industrial ecosystem. At the same time, Washington should accept a sizable deficit in low-end, small-scale manufacturing. Although domestic demand for these goods remains strong, bringing this sector back to the United States is both politically empty and economically unattractive. On the other hand, the Trump administration should aim to keep high-end, strategic manufacturing—in sectors such as semiconductors and industrial robotics—close to balanced, through formulaic reciprocal tariffs. With those tariffs, Washington could also create incentives for Beijing to narrow the net trade gap, by applying slightly higher tariffs in those high-end sectors at first and offering reductions as China purchased U.S. raw materials and industrial inputs. Such a framework would give both countries a victory to claim: Trump could say that he defended critical American industries, while Xi could argue that he preserved China’s manufacturing base and even secured modest tariff reductions. Crucially, it would shift the burden of adjustment onto Beijing, giving China the flexibility to rebalance its economy on its own terms while still aligning with U.S. interests.

To ensure that Beijing recycles its trade surplus into U.S. assets and maintains exposure to the dollar system—another quiet but potent point of American leverage—one practical opportunity lies in reversing the People’s Bank of China’s ongoing diversification away from U.S. Treasuries. Since 2016, the PBOC has cut its Treasury holdings by roughly 40 percent, shifting a portion of its reserves into gold. Redirecting even part of those recent gold purchases back into U.S. Treasuries could generate an estimated $43 billion in new investment in the United States, which would support the Trump administration’s desires to keep interest rates low and stabilize the bond market, critical components of its plan to refinance the $36 trillion U.S. national debt. Such a move would also signal Beijing’s continued commitment to the dollar system and dampen speculation about an emerging BRICS currency or a broader push toward de-dollarization.

Without a coordinated tariff regime among U.S. allies and partners, however, no strategy will be airtight. Chinese exporters will not sit still while Washington negotiates, especially given the glacial pace of past talks. It took two years, for example, to finalize the Phase One trade deal that the United States and China signed in January 2020, while the average lifespan of a Chinese small and medium-sized enterprise—the workhorse of the country’s exports—is just 3.7 years.

Even sustained tariffs won’t stop China’s global commercial expansion. Domestic overcapacity and brutal internal competition have already pushed Chinese firms to expand abroad in search of profit margins. That push has been reinforced by state support through financial incentives, regulatory streamlining, tax breaks, and easier access to overseas markets and supply chains.

The scope of a deal between Washington and Beijing—and the concessions Trump can extract from Xi—has likely narrowed over the past month. If Trump wants to secure an agreement, he may have to join the Chinese people in “eating bitterness” and accept some tough compromises. But with a recalibrated diplomatic strategy, he could still claim some small victories—and avoid the massive potential losses now facing the United States.

 

 

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