China’s Response to Trump’s Tariffs Tantrum

China is better prepared this time around

I wrote this one together with my colleague Tan Chia How of the East Asian Institute. Hope you enjoy it,

Trump’s Tariff Tantrum

For United States president Trump “Tariff is the most beautiful word in the dictionary”[1].It came as no surprise, therefore, that he used tariffs on the earliest occasion. The surprise was that he used it first against some of his closest trading partners in USMCA, Canada and Mexico, as well as against China. Moreover, the stated reason for using tariffs was border security, not trade.

On the 1^st of February, 2025 the Trump administration declared a national emergency under the International Emergency Economic Powers Act (IEEPA). This, Trump used as the legal basis for to issuing executive orders imposing trade tariffs on Canada, Mexico and China. These measures purport to hold these countries “accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country (the US)”[2]. However, the underlying reason seems to be trade. President Trump appears to view any country that runs a trade surplus with the US as working against his “America First” agenda, (mis)characterising US bilateral trade deficits with its trading partners as a “subsidy” from the US. Irrespective of this flawed premise, the impact of the tariffs can be real.

The Trump administration announced a 25 percent import tariff on goods from Mexico and Canada, with the exception of energy export from Canada, on which a 10 percent tariff was announced. An additional 10 percent tariff was announced on imports from China on top of the existing tariffs. For good measure, the Trump administration also threatened to escalate the tariffs if any of the three countries retaliates.

Canada and Mexico reacted sharply to Trump’s violation of the USMCA. Canadian Prime Minister Justin Trudeau announced plans to retaliate with a 25% tariff on an estimated CAD 155b (USD 106b) of US imports[3]. Mexican President Claudia Sheinbaum promised retaliatory tariffs on US imports in an escalating tit-for-tat exchange. The U.S. tariffs, which were to take effect from February 4, were subsequently suspended for a “minimum of 30 days”, after Trump held calls with Trudeau and Sheinbaum, during which they promised stricter border enforcement on illegal migration and drug flows[4], including the deployment of more security personnel and establishment of joint working groups with the US to tackle issues of security and trade. This puts the trade war within USMCA on hold.

In contrast, US tariffs on Chinese imports, proceeded as planned on February 4. US duties on China come on top of the existing tariffs, which currently amount to 14.5% on average, bringing the total effective tariff to approximately 25%. Bills for small packages shipped from China by shippers such as DHL now include charges for the corresponding tariffs.

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China’s Response

China’s initial response was restrained. It has procedures at the WTO to counter Trump’s tariffs, and along with WTO compatible countermeasures to address the issue of US tariffs. A performative act, given that U.S. refusal to appoint new members to appellate body has rendered the WTO’s dispute resolution process nonfunctional. China announced a 15% tariff on US LNG and coal exports, while crude oil, agricultural machinery, large cars and pickup trucks would receive a 10 per cent tariff[5]. Based on trade data from WITS[6], Chinese retaliatory tariffs will affect an estimated 16.2% of merchandise imports (12.3% of total imports) from the US, or USD $20.4bn[7], a relatively limited response. In addition, China’s commerce ministry announced export controls on “25 rare metal products and technologies”, which will take effect shortly[8]. These export controls do not ban exports, but subject them to a license. Finally, China has put a few US companies on their “entities list” and has stated an anti-monopoly investigation against Google.

China has kept most of its powder dry for now, as Trump has threatened much higher tariffs on China during his campaign. Furthermore, President Xi Jinping saw no need at this stage to talk to Mr. Trump at this stage, even though the latter had announced the two would talk in the days after the tariff announcement. Xi probably saw little use of talks at this stage, as it was unclear what China could do to reduce America’s fentanyl epidemic, and much more trade tension is coming down the line.

The dog that did not bark yet

The 10 percent tariff the Trump administration imposed on China’s exports is not the “big one.” Candidate Trump had threatened a 60 percent tariff on China’s exports, and 10 percent of imports from everywhere else. And one of his first executive orders has started the preparatory for this much larger assault on America’s trading partners.

Trump “America First” trade policy memo, issued on the day of his inauguration, ordered the Commerce Department, the US treasury and Trade Representative Office to investigate the causes of the US’s “large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits, and recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits.”[9] The investigation was to be completed by April 1.

US import tariffs may go up even earlier that that. During a meeting with Japanese Prime Minister Ishiba, Mr. Trump announced “reciprocal trade” by “next week”. i.e. the week of February 10. It was not exactly clear whether Mr. Trump implied reciprocal tariffs or whether he meant that the US should run balanced trade with every country on earth. Irrespective, Mr. Trump’s priors are that the US trade deficits are the fault of other countries. Economists would say that the US trade deficits—in existence for every year since the early 1970s—is the result of the persistent shortfall of US domestic savings over investments. Tariffs do not change that.

China’s armoury

China comes better prepared to Trump Trade War 2.0. China today is far less economically reliant on trade for growth than in the past. In 2023, China's exports were only 20.7% of its GDP, half the level of the mid-2000s. Exports to the U.S. accounted for only for 14.7% (USD $524 billion) of total exports in 2024, down from a peak of 19.3% in 2018. Thus, the US market is smaller than ASEAN (16.2%), roughly on par with the EU (14.4%) and not much larger than the combined markets of Brazil, India, Russia and Mexico (11.1%).

More broadly, China has diversified its export markets away from the U.S. and its traditional allies. Based on IMF DOTS data[10], Chinese exports to Belt and Road countries exceeded exports to G7 and EU countries for the first time in 2023. China has emerged as a key trading partner for ASEAN, becoming ASEAN's largest trading partner in 2009, with trade between the two economies surging fourfold by 2022.

Part of the shift in China’s exports towards emerging economies was a consequence of Trump 1 Tariffs. Chinese exporters have been rerouting of some Chinese exports through 'economic bridges' like Mexico and Vietnam, which saw a surge in exports to the U.S. As a result, the value-added contribution of China to U.S. consumption has remained stable[11]: China still remains the 2^nd largest exporter to the United States after Mexico. China’s exports to the U.S. still constitutes some 2.5 percent of GDP, enough to hurt China’s economy if tariffs were to eliminate it, but not enough to bring it to a halt.

In recent years, Beijing has developed an arsenal of defensive policy instruments beyond tariffs, including the unreliable entity list, the anti-foreign sanction law, and the export control law. The latter can be of particular importance in any trade dispute with the US. Because China imports far less from the US than vice versa, China is more vulnerable in a dispute involving trade alone. However, limiting exports of critical inputs into the US supply chains, such as rare earths or car parts and chips, would be damaging for the US. Moreover, despite reduced trade and investment between the two, U.S companies such as Tesla and Apple still have large economic interests in China, which could be affected if tensions were to grow.

Unlike the response to Trump 1 tariffs, China has not yet used its exchange rate as a mechanism to defend against tariffs. In 2018, the RMB depreciated some 10 percent against the US Dollar, but this time the RMB strengthened a bit against the dollar after Trump’s announcement of the 10 percent tariff. In contrast, the dollar strengthened against most other currencies since the tariff announcement. China may still revert to using the exchange rate, but its preferences have changed since 2018. President Xi Jinping has called for a strong currency, and stability in the RMB would avoid increasing trade tensions with China’s other major trading partners. Moreover, a depreciation would further undermine China’s objectives to promote domestic demand, in particular consumption demand, so it will not be the weapon of first resort this time around.

China has been preparing domestic measures as well. Since last fall it has gradually implemented domestic stimulus package to counter slowing growth in the wake of a real estate bust and post-COVID lacklustre domestic demand[12]. During the Central Economic Work Conference held 11-12 December 2024, China signalled plans to intensify a package to counter the drag on growth, including raising its fiscal deficit ratio to 4%, exceeding its informal 3% deficit limit. This package could be further expanded, if Trump Tariffs start to really hurt he economy.

The Upside of Trump

Trump’s callous treatment of long-time neighbours and allies Mexico and Canada is a troubling show of how far the Trump administration is willing to go to pursue perceived grievances, even at the expense of long-time allies. His repeated dismissal of Canada’s sovereignty, threats to take back the Panama Canal, pressures on Denmark to give up Greenland, and demands on NATO members have changed the perception of the US as a reliable ally. Trump’s inclination to use tariffs for purposes beyond trade, undermining the principles of the WTO. The US departure from the WHO and Paris Climate Accord, as well as the abrupt suspension US aid programs around the world have added to the perception that the US will no longer play the role it once did in a world order largely of its own making.

Trump 2 will leave a vacuum in that international order. China, the US, and Asian nations, including ASEAN nations, have the strongest incentives to fill this vacuum. In putting America First, Trump 2 may well hasten the emergence of the multi-polar international order the U.S. had sought to prevent.

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[1] https://www.bloomberg.com/news/newsletters/2024-10-15/in-trump-s-economic-plan-tariff-is-the-most-beautiful-word

[2] https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-imposes-tariffs-on-imports-from-canada-mexico-and-china/

[3] https://www.bbc.com/news/articles/cn4z23kndlyo

[4] https://www.nytimes.com/live/2025/02/03/us/trump-tariffs

[5] https://www.mof.gov.cn/zhengwuxinxi/caizhengxinwen/202502/t20250204_3955222.htm

[6] World integrated trade solutions (WITS). https://wits.worldbank.org/about_wits.html

[7] Based on WITS data on US imports into China, reported by China.

[8] https://www.ft.com/content/5653e2d6-2316-4316-9a7c-72cf4f7d86e5?shareType=nongift

[9] https://www.whitehouse.gov/presidential-actions/2025/01/america-first-trade-policy/

[10] IMF Directions of Trade Statistics (DOTS). Retrieved Sept 2024. Includes exports from China (mainland) and Hong Kong. BRI Countries list: Nedopil, Christoph (2023): "Countries of the Belt and Road Initiative"; Shanghai, Green Finance & Development Center, FISF Fudan University, www.greenfdc.org. Retrieved Sept 2024

[11] (2024) Geopolitics and the geometry of global trade. McKinsey global institute. Retrieved from: https://www.mckinsey.com/mgi/our-research/geopolitics-and-the-geometry-of-global-trade

[12] https://www.reuters.com/world/china/china-will-sharply-increase-funding-treasury-bonds-spur-growth-2025-2025-01-03