“We’re doing fine with China,” Donald Trump said yesterday, after his Treasury Secretary, Scott Bessent, reportedly told a private investor event that the US trade war with Beijing was unsustainable. Mixed messages: classic Art of the Deal!
Trump still claims he has a winning hand in his escalating trade war with China. His reasoning is simple: China has a massive goods-trade surplus of nearly $300 billion with the US, so it needs access to the US market much more than the US relies on China’s. Indeed, China’s goods exports to the US were $438.9 billion last year (2.3% of China’s GDP), three times as much as US goods exports to China of $143.5 billion (0.5% of US GDP). Cutting off trade between them would therefore seemingly harm Beijing more, and ultimately force it to back down.
But that simplistic calculation is incorrect.
Although China will lose more exports, it can readily replace its imports from the US, whereas the US is much more reliant on its purchases from China.
Tesla, Starbucks and other US multinationals also have huge operations in China that Beijing can sanction; apart from TikTok, which Trump is loath to shut down, Chinese businesses largely don’t have equivalent operations in the US.
Beijing has ample scope to mitigate the pain of its lost exports by cutting interest rates and fiscally stimulating its economy, whereas the US faces a toxic combination of stagflation, market mayhem and capital flight that cannot be remedied by policy easing.
In the face of Trump’s aggression, moreover, patriotic Chinese people are likely to be more willing to endure suffering than American voters, to whom Trump promised lower prices, not higher ones.
Trump is also a terrible negotiator: he has already blinked several times and now seems desperate for a deal, while Xi Jinping seems resolutely prepared for a long stand-off.
To cap it all, Trump has alienated US allies and trading partners who might otherwise have helped him pile pressure on China.
In short, Trump has a losing hand that he is playing badly.
This essay expands on eight reasons why Trump won’t win his trade war in China. More broadly, China is likely to end up a big beneficiary of Trump’s trashing of the old US-led world order, as I explained in my Broken World essay.
Lose-lose
Start with the basics. No country wins from a trade war economically; tariffs inflict costs on both sides.
Contrary to Trump’s misplaced view that imports are bad and exports good, international trade is mutually beneficial. Selling products to foreigners enables the US to purchase from them goods and services that it can’t make as cheaply, or doesn’t produce at all – such as iPhones.
Since Americans buy products from foreigners because they want them, taxing those purchases makes Americans poorer: they must either pay more for, say, Chinese-made gadgets, or pay more for gadgets made elsewhere, or make do without new gadgets altogether. And because tariffs make Americans poorer, that means they also have less to spend on other things, including going to see American films or eating at local restaurants.
Taxing Chinese goods that US-based businesses rely on to make their own products is particularly self-defeating; as well as pushing up their costs, it erodes their productivity, costs jobs and harms exports too.
To put it differently, no Republican thinks putting up taxes would make Americans better off. Since tariffs are taxes, why should the result be any different?
So, yes, since China exports much more to the US than vice versa, it will suffer more than the US as an exporter. But since the US imports much more from China than vice versa, it will suffer much more than China as an importer – and that is likely to matter more, not least because of what each imports.
No substitute
Importantly, the cost of a tariff war depends not just on the scale of trade disruption, but also on the availability (or not) of substitutes. Now that US tariffs on imports from China are 145% and China’s reciprocal ones are 125%, pretty much all bilateral trade will dry up. So, the availability of alternatives is critical.
The US used to export lots of high-tech products to China that China couldn’t produce itself or source elsewhere, such as high-end Nvidia AI chips and the Android operating system on which Huawei smartphones ran. But export sanctions started by Trump in his first term and then greatly increased by the Biden administration have strangled that trade.
Those tech restrictions were painful for China initially, although it has since innovated around them. Huawei smartphones now have their own proprietary operating system, and China developed its cheap and efficient DeepSeek AI model with lower-grade Nvidia chips. While Trump has now decided to further restrict lower-grade Nvidia chip sales to China, the impact of these additional curbs is likely to be much more limited.
The upshot is that for the most part the US’s remaining exports to China are eminently replaceable. The top category is agricultural produce, notably soybeans, which China can also buy from Brazil.
In second place are aircraft and engines, which China can also obtain from Europe’s Airbus. Indeed, Beijing is so confident that it can do without American imports that it has ordered Chinese airlines to stop accepting deliveries of airplanes from Boeing and plane parts from American companies.
In contrast, the US is highly reliant on many of its imports from China. America’s top category of import from China is smartphones, notably iPhones, followed by computers. Apple mostly assembles those in China; those made in India aren’t sufficient to meet US demand.
More than doubling the price of iPhones in the US would not be a popular move, to say the least. Trump eventually realised that himself when he decided to rescind his new tariffs on smartphones and computers (although he then threatened to impose additional sectoral tariffs on electronics and semiconductors some time soon).
Many other imports from China are lower-tech ones in which the country nonetheless enjoys a near-monopoly. As Gideon Rachman put it in the FT:
Trump will have to hope that it is not a hot summer because about 80 per cent of the world’s air conditioners are made in China; along with three quarters of the electric fans America imports. The White House will certainly want the trade war to be over by Christmas because 75 per cent of the dolls and bicycles that the US imports are also made in China.
Moreover, the US doesn’t just depend on many imports of consumer goods from China; it also relies on crucial business inputs from there.
For instance, China dominates global production and processing of many rare earths and minerals that are needed to make all sorts of essential industrial products, including high-end magnets and military aircraft. Beijing recently flexed its muscles by restricting its exports of several rare-earth minerals that Trump had deliberately excluded from his tariffs.
At an even more basic level, the raw materials needed to make antibiotics and other pharmaceutical drugs often come from China too.
It is arguably unwise for the US to be so dependent on China for such critical imports now that they have become geopolitical rivals. But it was asinine of Trump to target crucial Chinese supplies before the US had built up adequate stocks or developed alternative sources.
US businesses’ vast operations in China provide another source of leverage for Beijing. Whereas most Chinese products sold in the US are made in China, many of the goods and services that US businesses sell in China are made or provided there. According to The Economist, revenues in 2024 for American listed companies that report Chinese sales were around $300 billion, whereas Chinese firms in America brought in just $50 billion in revenues last year.
Tesla, for instance, makes electric cars for the Chinese market at its huge factory in Shanghai. Starbucks coffee shops are ubiquitous in the country. Other US service providers, such as financial firms and legal partnerships, also have large operations in China.
While those sales aren’t directly affected by the tariff war, they give Beijing ample scope for retaliation through a regulatory clampdown. Tesla is particularly vulnerable. China no longer needs Elon Musk’s company; BYD, the leading Chinese electric vehicle and battery maker, now makes much cheaper electric cars with much better batteries than Teslas. Remarkably, they can add 400km (249 miles) of range in just five minutes’ charging.
Among Chinese companies that do have large US operations, TikTok stands out. Before Trump was elected, Congress voted to shut down the social media giant unless its Chinese owners sold it to Americans. Since Beijing doesn’t want such a prize possession to be sold, this could have provided Trump with leverage. But he has a huge following on TikTok and doesn’t want to antagonise its 136 million US users, so he keeps giving the Chinese company a stay of execution. So, one less card for him to play.
In short, while both sides will lose from their trade war, the US is more vulnerable economically than China is.
Policy, markets and pain thresholds
America’s vulnerability is compounded by a lack of good policy options, the market mayhem Trump’s chaotic actions have triggered, and most US voters’ unwillingness to endure tariff pain.
China has much more scope to mitigate the tariff blow to economic growth by boosting domestic demand than the US does.
For China, the trade war is mostly a negative demand shock: US demand for its exports is plunging. While its retaliatory tariffs will push up prices somewhat, the impact is likely to be small because its imports from the US are low and alternatives such as Brazilian soybeans don’t cost much more than American ones. At the same time, falling demand for its exports will tend to have a deflationary effect, lowering prices.
Moreover, China has plenty of scope to lower interest rates to boost domestic demand. Inflation is non-existent in China; consumer prices actually fell 0.1% in the year to March. Beijing can also soften the blow with a fiscal stimulus. While its budget deficit was a relatively high 5% of GDP last year, it still has ample fiscal firepower. The upshot is that insofar as China can’t find alternative foreign markets for exports it no longer sends to the US, it can prop up its economy by boosting domestic spending instead.
For the US, in contrast, the trade war is mostly a negative supply shock: the supply of Chinese imports that it needs and wants is collapsing. And remember that Trump has also slapped 25% tariffs on cars, steel and aluminium from around the world and 10% tariffs on almost all other US imports, while erratically threatening to impose new tariffs left, right and centre.
That combination of higher tariffs and crippling uncertainty is likely to lead to stagflation: a toxic combination of higher inflation and lower growth (or recession). This is much harder for policymakers to address, since many measures to stimulate growth also tend to raise inflation.
Jay Powell, the chair of the Federal Reserve, has already signalled that the US central bank won’t be cutting interest rates any time soon. US inflation was 2.4% in the year to February, above the Fed’s 2% target. More importantly, Trump’s tariffs have caused inflation expectations to soar. Trump is now resorting to publicly insulting Powell as a “loser” and threatening to fire him for being “too late” to cut rates. While markets still expect the Fed to loosen policy eventually as the economy slows and unemployment rises, it is increasingly conceivable that the Fed will instead need to raise rates to quell surging inflationary pressures.
Fiscal policy can’t help much either. Since the US has a huge budget deficit of $2.2 trillion in the year to February (7.3% of GDP), it has little scope to stimulate its economy fiscally. Even so, Trump is still angling for taxing cuts and a Republican Congress is likely to deliver them. While these would boost spending, they would also likely raise inflation, precipitating higher interest rates.
One source of relief for the US economy may be the falling dollar, which is down by over 10% this year against a basket of major currencies. Over time this would usually tend to boost exports (and reduce imports), while also exacerbating inflationary pressures. That said, the uncertainty that Trump’s wild policymaking has generated will make businesses think twice about investing to meet a potential rise in exports that his trade war could crush.
Moreover, China, which controls its currency’s moves against the dollar, has allowed the yuan to depreciate somewhat against the otherwise-declining dollar. And because trade matters more to China’s economy (exports plus imports are 37% of GDP) than it does to the US (25%), that is likely to deliver a bigger boost to China’s economy in the medium term.
Negative market reactions are also a bigger dampener for Trump. Whereas US share prices keep falling, Chinese shares have largely regained their losses since Trump launched his global trade war on April 2nd. In any case, most Chinese people don’t own shares, whereas most Americans do – and they are unhappy with the stockmarket declines since “liberation day”.
More importantly, while US government bonds are normally a safe haven in a storm – even ones that originate in the US, as the global financial crisis in 2008 did – this month US Treasuries and the dollar have sold off together, as investors flee dollar assets for gold, Swiss francs, Japanese yen and the euro.
Higher borrowing costs for the US government in turn entail higher interest rates for all US borrowers, from businesses to households seeking mortgages. More alarmingly, Trump’s mayhem could spark a financial crisis as investors flee US assets. Already capital flight from America forced his hand into pausing his misnamed “reciprocal” tariffs on April 9th.
China itself could, of course, contribute to this capital flight, since it owns $760 billion in US Treasuries itself. But it seems unlikely to add fuel to the fire. It has instead been running down its Treasury holdings gradually for years, so as to maximise the price it gets for them.
Perhaps most importantly, China has a much higher pain threshold than Americans do. The Chinese Communist Party doesn’t have to worry about elections, and in any case Chinese people are likely to be more willing to suffer for patriotic reasons when feeling under attack by Trump. In contrast, MAGA Republicans face midterm elections in less than 19 months, and most Americans voters are unlikely to reward them for delivering economic chaos.
The independent voters who backed Trump over Kamala Harris last November largely did so for economic reasons, because they were angry about price rises under President Biden. Trump said he would cut prices; now they are going up instead. No wonder polls already show Trump’s approval ratings plunging, and support for his economic management tanking.
In short, not only is the US more vulnerable economically, policy and market moves seem likely to amplify the pain, which American voters are less likely to accept than Chinese people.
Deal-making doofus
Trump not only has a bad hand; he is also playing it badly.
Trump seems so desperate for a deal that he is unlikely to get a good one. Far from standing firm and hanging tough, he keeps having to reverse course when the costs of his mistakes become unbearable. Bond markets forced him to pause his “reciprocal” tariffs; Apple’s lobbying convinced him to reverse his iPhone tariff error. If Xi and Trump are engaged in a game of chicken, Trump has already swerved, twice.
Even if he did enjoy the leverage he thought he did, he would hardly win concessions from Xi by advertising how much he wants a deal. He keeps inviting China to make the first move, then expressing bemusement at Xi’s failure to do so. Yesterday he deployed his typical negotiating incompetence by saying that he would be “very nice” with China and not play hardball with Xi. No doubt Xi will be keen to repay the weakness kindness.
Last but not least, Trump has undermined his leverage with China by alienating potential allies. He would have more bargaining power with Beijing if he could muster an anti-China alliance, as President Biden tried to do. But launching a trade war against friends and foes alike, then flip-flopping repeatedly, is hardly conducive to encouraging other countries to rally round and go out on a limb for him. Indeed, they’d be mad to come to Trump’s aid, since he would sell them out in a minute.
Final word
Since both sides lose out economically from their trade war, at some point a tariff-lowering deal is likely. But neither side wants to lose face, so any agreement needs to be sold as a win for both sides.
In his first term, Trump trumpeted a cosmetic trade deal with China as a huge triumph. Given the weakness of his negotiating hand now, any eventual deal with Xi is likely to be just as vacuous – and even more hyped as an unprecedented win.