Trump’s trade war with China worsens US economy, while Xi resists pressure, strengthening China’s self-reliance and long-term strategy despite escalating tariffs and economic challenges.
LONDON: ‘We should always be aware of the demagogues who are ready to declare a trade war, weakening our economy, our national security and the entire free world, all the while cynically waving the American flag”, said President Ronald Reagan almost 40 years ago. Today America has a president who is doing exactly what Reagan warned against. Giving all the appearances of a demagogue, Trump has started a trade war with friends and foe alike, all the while cynically waving the American flag and yelling his well-known MAGA mantra “Make America Great Again”. Many economists are worried that Trump is about to “Make America Poor Again”.
Even the celebrated conservative economist and Trump supporter, Art Laffer, said in an interview with Axios last month that President Trump’s tariffs could cause a significant downturn in the US economy. “I don’t know anyone looking at the facts could argue that protectionism doesn’t create downturns”, he said. “Once you screw around with supply chains, production facilities, all of that, it’s very hard to reverse. What you’ve got here is something that is very time sensitive”, he warned before adding “you will find out whether I’m right to be scared or right to be hopeful probably in 90 days – there’s not a lot of time”.
It was clear during the interview that Laffer, who in 2019 received from Trump the Presidential Medal of Freedom for his contributions to economics, was very uncomfortable in criticising his friend. Almost as an afterthought he quickly added that “the president is a great negotiator” and is “the single best president of his time”. While he was optimistic that Trump would secure trade deals and eventually reduce tariffs, Laffer’s clear message was that Trump’s behaviour could wreak havoc with America’s economy, which is reckoned to be on a knife-edge.
Sure enough just days after Laffer’s interview it was reported that the US economy shrank in the first 3 months of Donald Trump’s second term as president. Gross Domestic Product, a key measure of overall growth in the US economy, fell by 0.3% on an annualised basis, down from 2.4% in the last quarter of 2024. The contraction, the first since the start of 2022, puts the US on the brink of a technical recession, defined by two quarters of negative growth. Economists say that the drop in activity comes amid a huge fall in consumer sentiment, which last month dropped 32% to its lowest level since the 1990 recession.
“Not my fault”, screamed Trump on his Truth Social website desperate to deflect the blame. “This is Biden’s Stock Market, not Trump’s”, he claimed. “I didn’t take over until January 20th. Tariffs will soon start kicking in, and companies are starting to move into the USA in record numbers. Our Country will boom, but we have to get rid of the Biden ‘Overhang.’ This will take a while, has NOTHING TO DO WITH TARIFFS, only that he left us with bad numbers, but when the boom begins, it will be like no other. BE PATIENT!!!”, claimed Trump.
As usual, the Donald was being economical with the truth. Take a look at the official ‘Quarterly GDP growth’ charts and you will find that it rose every quarter during the Biden era, from a low of +0.3% in Q2 2022, to a high of +4.4% in Q3 2023. Democrats in Congress were quick to emphasise Biden’s success, arguing that this month’s drop in GDP was a damning verdict on the new administration’s handling of the economy. Senator Jeff Merkley said last week “Trump has been in office for only 100 days and costs, chaos and corruption are already on the rise. The economy is slowing, prices are going up, and middle-class families are feeling the pinch”. Voters agree. From an approval rating of +11.7% on taking office 100 days ago, Trump has fallen to -9.1% today. Other indices show clearly how badly Donald Trump is doing. Take the ‘Stock Market’ performance, for example. After the first 100 days of Joe Biden’s presidency, the S&P 500 index was up 9.5%. For Barack Obama it was up 7%. Even for Trump 1.0 it was up 5%. Today, under Trump 2.0 the index is down 9%, having been as low as -18% the day after he announced his “liberation day” tariffs. Art Laffer is right to be worried; so should be all Americans. Because of Donald Trump’s super-ego and miscalculations, America’s economy is in trouble.
China, the world’s second largest economy, is also struggling, although it’s not behaving like a nation facing the prospect of economic pain. President Xi Jinping has made it clear that Beijing will not back down. “For more than 70 years, China has always relied on self-reliance and hard work for development. It has never relied on anyone’s gifts and is unafraid of any unreasonable suppression”, he said last month. Nevertheless, Donald Trump’s brinkmanship and tariff hikes are pushing on pressure points that already exist within China’s own struggling economy. There has been a collapse in the housing market, in which many Chinese had invested their life savings, only to watch prices plummet in the past five years. Chinese families are also concerned about whether the government can offer them a pension. Over the next decade, about 300 million people who are currently aged 50 to 60, are set to leave the Chinese workforce and, according to the state-run Chinese Academy of Social Services, the government pension fund could run out of money by 2035.
With a population of 1.4 billion, China has in theory a huge domestic market. The problem is that Beijing cannot simply flip a switch and move from selling goods to America and selling them to local buyers. In any case, while the country’s economic outlook is uncertain, people are reluctant to spend money. “Replacing exports with internal demand will take time”, said Professor Nie Huihua of Renmin University. “In the short term, certain Chinese exporters will be greatly impacted”, he added, “but Chinese companies will take the initiative to adjust the destination of exports to overcome difficulties imposed by tariffs”. It was the trade war during Trump 1.0 that encouraged China to look elsewhere for buyers, exploiting the growing Belt and Road in not only South East Asia but also in the Global South. The reward of the efforts of diversification is that more than 145 countries now do more trade with China than they do with the United States, according to the Lowy Institute. As if to make the point, on Friday it was reported that despite a tariff-induced 18% drop in exports to the US, the value of China’s exports grew by 8% in the year to April, driven by 21% higher exports to south-east Asia.
But the fact remains that following the rapid escalation of tit-for-tat tariffs of 145% on Chinese goods entering the United States and 125% on American goods entering China, unless the two countries carve out broad exemptions, the $700 billion in annual bilateral trade between them could shrink by as much as 80% over the next 2 years, according to many experts. Economists and analysts are struggling to explain what the Trump administration is actually trying to achieve. Many believe that powerful players and factions in the White House misjudged the resilience of the Chinese economy and wrongly assumed that Xi Jinping would rush to make a deal in order to prevent a domestic backlash.
As a result, China hawks in Washington failed to anticipate how resolutely Beijing would react to the Trump tariffs. Donald Trump, who considers himself as the greatest deal-maker that ever lived, was certain that the Chinese leadership was desperate to negotiate a trade deal to avoid the kind of economic pain that could destabilise Chinese Society and threaten the Chinese Communist Party. Trump either forgot or was totally unaware that Xi Jinping’s political career has been distinguished by two strengths: resisting foreign coercion and mastering domestic power struggles. For the Chinese, the experience of decades of humiliation at the hands of the West remains vivid and provoking and, far from weakening Beijing’s hand, Trump’s confrontational trade policies have paradoxically reinforced Xi’s narrative. Washington’s threat provides cover for the Chinese Communist Party’s ongoing economic reorientation and justifies the state’s push for greater self-reliance. Also, as the CCP has full control over information, particularly regarding foreign affairs, any encounter with the Trump administration will be framed domestically as Xi standing firm against foreign bullying.
Donald Trump convinced himself that China was a pushover and so he behaved like a New York property billionaire making a deal. Far from being a pushover, however, Beijing knows that Trump is in an untenable position and, according to one expert, is “letting the Energiser Bunny run down his batteries while they sit on the sidelines”. Trump has already blinked when, just hours after he imposed them, he suspended higher tariff rates on countries other than China for 90 days. Then, following numerous complaints from US industries, he blinked again on Friday when he suggested cutting China tariffs to 80%, still much higher than many had hoped. Watch him blink yet again in the next few days following Saturday’s hastily arranged talks between the US and China in Switzerland.
Xi Jinping is unlikely to blink. He knows that time is on his side.
John Dobson is a former British diplomat, who also worked in UK Prime Minister John Major’s office between 1995 and 1998. He is currently a visiting fellow at the University of Plymouth.