China has hit back hard in the mounting trade war with the United States by announcing unexpectedly escalatory measures against Donald Trump’s tariffs. These included an additional 34 per cent tariff on all imports from America to match those listed by Trump on 2 April for imports from China, as well as other measures. China’s response is comprised of three things: pique at Trump’s “unilateral bullying” tariffs, a call to arms to other nations to fight back against Washington, and to pressure the US to the negotiating table to make a “deal”. The last thing the government in Beijing wants right now, given its fractious economy, is a full-blown trade war.
While the method and tactics of the US administration have been met with disappointment and disdain, it is important not to forget what Trump is after – a complete reordering of the global trading system. His task may not be possible or at least may be much messier than envisaged, but, leaving aside revenues and leverage, Trump’s tariff policy is designed to break the China-centric supply chains that have been created over decades. This includes circumventing China’s practice of “trans-shipment”, which is to say, the use of third countries to ship Chinese goods to the US and other nations, for example, to promote China’s commercial footprint, obscure country-of-origin branding, or bypass trade barriers and export controls.
Note that among the highest tariffs announced by Trump on 2 April, other than for China, were on Vietnam, Cambodia, Indonesia, Thailand and Bangladesh, as well as India. Over the weekend, it was reported that Vietnam, Cambodia and India were in negotiations with the US to get lower tariffs in return for yet unknown concessions. These concessions will almost certainly include action, including possibly tariffs, against Chinese goods and investment.
On the specifics of US-China trade, Trump’s administration has left little doubt that while it is probably still open to a negotiation at some point, a fundamentally poor trade relationship has become even more tense. The average US tariff on all Chinese goods imports – which were about $440bn in 2024 – is now about 65 per cent, comprising the 34 per cent announced last week, the two 10 per cent increases announced earlier this year and a pre-existing 11 per cent. Some goods carry a much higher tariff, such as EVs which are 100 per cent. It should be noted that the US also has an intricate system of controls and restrictions on certain exports to China, especially in advanced technology, named companies, and investment flows to and from the country.
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China’s retaliation against the latest Trump tariffs was stronger than expected. It takes the average Chinese tariff on US goods imports– which were about $143bn in 2024 – to about 50 per cent (comprising the 34 per cent tit-for-tat, and a pre-existing level of 15 per cent). China’s announcement on 4 April was accompanied by a raft of additional measures that targeted some specific American firms, launched anti-monopoly and competitive investigations into others, and imposed export controls on seven rare earths.
The one-sided nature of the trade relationship means that Chinese exports to the US subject to new tariff levels amount to about 2.3 per cent of China’s GDP, while US exports to China are a mere 0.5 per cent of America’s GDP. The tariff hit, therefore, is much greater for China. Even so China’s $20trn economy should be able to absorb it, especially if it takes remedial actions to mitigate the effects on export firms and hundreds of thousands of jobs in the predominantly export-oriented coastal provinces.
Beijing could, for example, channel the tariff revenues collected to its own export firms, including state enterprises. It will almost certainly allow the yuan to decline to lower Chinese export prices and so defuse some of the price rises caused by the tariffs in the US. It will most likely add to the monetary and fiscal policy easing that is already baked into the 2025 economic outlook.
We should expect, then, further reductions in China’s already low interest rates and other monetary relaxation, along with more borrowing by local governments, and additional assistance for the beleaguered housing sector. Many economists hope Beijing will use this trade war moment to bolster stronger consumer demand within China, but the government’s firm commitment to industrial policy and exports means its political capacity to embrace meaningful changes to income and wealth redistribution and the distribution of economic and political power is weak. And China will certainly find it harder to defray the effect of tariffs by exporting more to and investing more in third countries, given that many of these are now either subject themselves to high tariffs or will agree deals with Trump which favour the US rather than China.
There are also other tensions at play, including the (now extended to June) ban of TikTok in the US unless it is sold to an American company, and the sale of more than 40 ports including in Panama by Hong Kong’s CK Hutchison to US asset manager, BlackRock. Are there any bright spots in the unremitting gloom arising from commercial conflict and trade wars?
One is the possibility that the economic fallout might be less draconian than the carnage implied by the recent plummeting of financial markets. It won’t go unnoticed that we have seen marked declines in the value of the US dollar, bond yields and the price of oil, which can at least be viewed as offsets to the tariffs, if not stimulus.
The other is that it is still more likely than not that in the months to come, the US and China might still want a “deal” under which they would call off the trade dogs of war to a degree temporarily in exchange for concessions. That’s when we’ll see who holds the stronger cards: the US customer or the Chinese supplier.
[See also: Trump’s tariffs are designed to extend American power]
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