Why China could win Trump’s trade war
Beijing probably can keep its economy afloat until the U.S. midterm—which is likely all it needs.
You might think China is already losing the trade war. It isn’t—and it might even manage to come out on top, at least in the short term.
Wednesday brought reports of plunging industrial activity in China as Mr. Trump’s 145% tariffs start to dig in. The country’s official Purchasing Managers’ Index reading, which surveys companies’ current activities and near-term plans, recorded the steepest drop in 16 months, signaling a decline in production. Anecdotal evidence is accumulating of Chinese factories slowing output, Chinese workers laid off or furloughed—an economy in crisis.
At first glance, this appears to vindicate Trump officials such as Treasury Secretary Scott Bessent, who argue the U.S. holds most of the cards in a global game of trade poker. “Remember that the history of trade is we are the deficit country. The deficit country has an advantage. They are the surplus countries. 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’s got part of a point. The longer the trade war drags on, the worse for China’s economy. Tariffs of the Trump level imply a decoupling of the two countries, which could leave a $300 billion hole in China’s economy, if not more. American politicians and economists of a protectionist bent fret about what they perceive as America’s decisions over several decades to make its economy more vulnerable to China. The vulnerability, however, flows in both directions. China could lose what at times may feel like the monopsonist consumer of its exports, and America’s sheer economic heft means the gap will be tough to fill with new sales elsewhere.
The problem with this theory—and it’s a big one—is time. Beijing has it. Mr. Trump doesn’t.
Bizarrely, it appears that the Trump administration never considered that America’s trade-war “leverage" can be exploited only by forcing frustrated American consumers to pay more for everything. Markets figured this out in a hurry, which explains why Mr. Trump enjoys the dubious distinction of notching the worst first 100 days performance of the S&P 500 stock index of any president in five decades.
In a democracy, where economics leads, politics always follows close behind: Voters are starting to lose patience with the trade wars as they wonder why the guy they elected to get inflation under control is promising to make things more expensive. Republicans have less than 18 months to turn the ship around lest they crash on the rocks in the 2026 midterm elections.
Xi Jinping, by contrast, anticipates facing his voters, well, never. He can’t afford to impoverish the Chinese people permanently, given the Communist Party’s tenuous hold on any sort of governing legitimacy and the extent to which it relies on a promise of rising prosperity to justify its rule. But the apparatus of political repression he’s spent a decade bolstering allows him to ride out a trade war at least past a U.S. midterm election.
Time is on Mr. Xi’s side in other ways as well. The dog that has yet to bark here is additional “stimulus" for the Chinese economy, in the form of debt-funded fiscal transfers to households and businesses to boost consumption, or another credit expansion to stave off business bankruptcies and fund more public-works construction. Such spending packages—we’re now well into the hundreds of billions of yuan—have become Beijing’s main method for achieving economic “growth" in recent years. Another stimulus package seems inevitable if the trade war drags on.
Such policies won’t permanently replace lost U.S. demand for Chinese exports. Only a wholesale reorientation of China’s economy away from state-directed quasi-capitalism and toward productive private entrepreneurship can do that, and it won’t happen under the current leadership. But Beijing does have the fiscal capacity to prop up its economy for much longer than it would take for the American political system to come to its senses on trade. Tight controls on domestic capital and credit allow Chinese policymakers to suppress normal indicia of economic distress, such as insolvencies, for as long as they deem expedient.
That the ability to play this kind of waiting game is only a tactical, and not a strategic, advantage for Beijing. Most of China’s economic problems today arise precisely because the party has built up a political and economic system incapable of generating and then responding to quick feedback on policy errors. America’s greatest advantages always have been the relative brutality of its market economy and its voters’ relative intolerance for failure.
But President Trump has chosen to pursue a tactical rather than a strategic trade policy. In so doing, he’s playing right into Beijing’s hands.
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