Trump’s tariff war 2.0 looms. And China isn’t just watching

Inscrutable China

President-elect Donald Trump’s announcement last week to impose tariffs on Mexico, Canada, and China has rattled the countries concerned as well as the global markets. Mexico has already spoken about retaliatory tariffs. However, China’s response is going to be more concerted: defy and increase costs for the US, divide Trump’s camp, diversify trade towards the Global South, build a “united front” with like-minded countries, make tactical concessions to neighbours on core interests, or even tempt a grand bargain with Trump.

On November 25, Trump stated that he will impose 25% taxes on products from Mexico and Canada, and an additional 10% tariffs on goods from China as his first measure after taking over as the President in January. This is in addition to the 60% tariffs on all goods from China that Trump mentioned in his election campaign.

This is a significant development as these three countries are the largest exporters to the US with Mexican exports to the US in 2023 touching $480 billion, Canadian $440 billion while that of the Chinese more than $500 billion. Trump also linked this issue to any progress on curbing the smuggling of fentanyl drug from China, and immigrants. Fentanyl kills over 100,000 Americans every year.

One of the friction points is trade surpluses. The US had trade surpluses against China only in 1979, when a trade agreement was signed between the two countries, till 1981, with a balance of nearly $4 billion. However, since 1982, when the third communique was signed between the two countries, China had an uninterrupted surplus posted against the US – cumulatively to a whopping figure of nearly $7 trillion.

China’s trade surpluses with the US turned from double figures to triple figures consistently since China joined the World Trade Organisation after the then Clinton Administration extended support. China consistently denied access to many of its domestic segments not only to the US and European Union members but also to Indian pharma and software sectors.

China is no stranger to tariff increases on its exports. Trump, during his first term, imposed tariffs ranging up to 25% since 2018 on Chinese goods worth $360 billion. The Biden Administration continued tariffs on China, in addition to announcing 100% tariffs on Chinese electric vehicles. China retaliated by imposing tariffs on US goods like soya bean, pork, and other products. However, according to a study conducted by Fudan University researchers at Shanghai, it damaged China’s economy more than that of the US. China’s manufacturing export profits will be drastically curtailed. Its economic growth forecasts have been lowered to nearly 3%. The country is already facing headwinds due to growing unemployment, sluggish domestic consumption, local debt, real estate bust, and low manufacturing output.

While China’s immediate response to the tariff hike has been mild and defensive, it is likely to adopt a multi-pronged approach to address the looming trade war. President Xi Jinping issued “red lines” to President Joe Biden on the sidelines of the 31st Asia-Pacific Economic Cooperation (APEC) meeting at Lima on November 16, emphasising on China’s path of development. China’s commerce ministry released a slew of measures five days before the new tariff announcement to help the country’s export sector including credit insurance coverage, financial support, and enhanced cross-border e-trade.

China is likely to diversify trade towards the Global South. In September, China organised the Forum on China Africa Cooperation by inviting leaders from 51 countries. Today, it is Africa’s largest trading partner ($282 billion). At the meeting, China also signed deals to export EVs and solar panels to Africa. While China is pitching Africa against the US, Beijing is also aware that 22 African countries are in debt to China. Likewise, China’s trade with South America increased to $489 billion.

Expecting a hardline posture from Trump, China is making tactical adjustments with major powers in Asia, notably India, Japan, Indonesia, and Vietnam. Even before the US elections, on October 23, Xi met Prime Minister Narendra Modi on the sidelines of the BRICS Summit in Kazan, Russia. Two days earlier, China agreed to disengage troops at Depsang Plains and Demchok. Xi also met Japanese Prime Minister Shigeru Ishiba on November 15 on the margins of the APEC meeting in Lima. On October 22, China promised to withdraw the drifting buoys at Japanese-administered Senkaku islands.

Apart from these softening approaches, a pragmatic faction in the Communist Party of China may also make a grand bargain with Trump. They suggest that entering into business deals with Trump can help overcome trade frictions, as China did in his first term with $250 billion in offers. Meanwhile, there are others who believe that Premier Li Qiang’s closeness to Elon Musk and Musk’s businesses in Shanghai can be leveraged.