Why China may win Trump’s trade battle
One might conclude that China is currently experiencing setbacks in the trade war. It is not—and it may even succeed in emerging as the leader, at least in the near term. On Wednesday, reports emerged indicating a significant decline in industrial activity in China, coinciding with the implementation of Mr. Trump’s 145% tariffs. The official Purchasing Managers’ Index reading for the country, which assesses the current activities and near-term plans of companies, has experienced its most significant decline in 16 months, indicating a downturn in production levels. Anecdotal evidence is mounting regarding the deceleration of output in Chinese factories, alongside reports of Chinese workers being laid off or furloughed—indicative of an economy in distress.
At first glance, this seems to support the position of Trump officials like Treasury Secretary Scott Bessent, who contend that the U.S. possesses the majority of leverage in the international trade arena. “It is important to acknowledge that historically, we have been the country with a trade deficit. The nation with a deficit possesses a distinct advantage. These nations are characterized by their surplus economies. “The surplus countries, traditionally, always lose any kind of trade escalation,” Mr. Bessent said on April 2 after Mr. Trump’s “liberation day” tariff announcement. He possesses a portion of a valid argument. The prolonged duration of the trade war is increasingly detrimental to China’s economic landscape. Tariffs at the level implemented during the Trump administration suggest a significant decoupling between the two nations, potentially resulting in a $300 billion deficit in China’s economy, if not greater. American politicians and economists with a protectionist perspective express concern regarding what they view as America’s choices over the past several decades that have rendered its economy increasingly susceptible to China. The vulnerability, however, operates in both directions. China risks losing what can often seem like a monopsonist consumer for its exports, and the substantial economic weight of America indicates that bridging this gap with new sales in other markets will be challenging.
The issue with this theory—and it is a significant one—lies in the dimension of time. Beijing possesses it. Mr. Trump does not. It is perplexing that the Trump administration seemingly overlooked the fact that the “leverage” in America’s trade war can only be realized by compelling discontented American consumers to incur higher costs across the board. Markets quickly recognized this, which accounts for Mr. Trump’s notable distinction of recording the poorest first 100 days performance of the S&P 500 stock index among any president in the last fifty years.
In a democracy, where economics leads, politics invariably trails closely behind: Voters are increasingly expressing frustration with the trade wars, questioning the rationale behind the elected official’s commitment to controlling inflation while simultaneously suggesting measures that could lead to higher costs. Republicans face a critical period of less than 18 months to alter their trajectory, or they risk a significant setback in the 2026 midterm elections.
In contrast, Xi Jinping appears to foresee a scenario in which he will never confront his electorate. He cannot afford to permanently impoverish the Chinese populace, considering the Communist Party’s fragile grip on any form of governing legitimacy and the degree to which it depends on a commitment to increasing prosperity to validate its authority. However, the mechanisms of political repression he has fortified over the past decade enable him to endure a trade war, at least until the U.S. midterm elections. Time is advantageous for Mr. Xi in additional respects as well. The dog that has yet to bark here is additional “stimulus” for the Chinese economy, manifested through debt-funded fiscal transfers to households and businesses aimed at enhancing consumption, or through another credit expansion designed to prevent business bankruptcies and finance further public-works construction. Such spending packages—now reaching well into the hundreds of billions of yuan—have emerged as Beijing’s primary strategy for fostering economic “growth” in recent years. Another stimulus package appears unavoidable if the trade conflict persists.
Such policies will not serve as a lasting substitute for the diminished U.S. demand for Chinese exports. A comprehensive shift in China’s economic framework, moving from state-directed quasi-capitalism to a model that fosters productive private entrepreneurship, is essential for progress, yet such a transformation is unlikely under the existing leadership. However, Beijing possesses the fiscal capacity to sustain its economy for a significantly longer duration than it would require for the American political system to regain rationality regarding trade. Strict regulations on domestic capital and credit enable Chinese policymakers to mitigate typical signs of economic distress, including insolvencies, for as long as they find it necessary.
The capacity to engage in this type of waiting game represents merely a tactical, rather than a strategic, advantage for Beijing. Many of China’s current economic challenges stem from the establishment of a political and economic framework that is unable to produce and react to rapid feedback regarding policy missteps. The primary strengths of America have consistently stemmed from the inherent harshness of its market economy and the electorate’s notable lack of patience for failure. However, President Trump has opted for a tactical approach instead of a strategic trade policy. In so doing, he is aligning perfectly with the interests of Beijing.
