Xi has a plan to ease tariff pain. What about Trump?

By Shuli Ren

Xi Jinping is standing up to Donald Trump. Throwing away past restraints, China’s tit-for-tat response to the 34 per cent tariff the US imposed on April 2 is unnerving global investors. What prompted Xi’s change of tactic? Is a grand bargain between the two presidents off-the-table?

Make no mistake: Both countries will suffer from Trump’s punitive measures. Exports have been a rare bright spot in China. US tariffs announced this year, which bring the total effective rate on Chinese goods to 58 per cent, could drag economic growth down by 1.7 percentage points, according to Goldman Sachs Group Inc. estimates. The actual impact is probably larger. Since Trump’s first trade war in 2018, Chinese companies have been rerouting and selling to the US through Vietnam and Mexico, which have also been slapped with higher levies. Meanwhile, economists are seeing stagflation in the US. JPMorgan Chase & Co. and Barclays Plc are forecasting an outright economic contraction this year.

But the similarity ends here. Anticipating more tariffs, Beijing has since late last year mapped out a feasible plan to ease economic pain. Ironically, the White House — the instigator of a global trade war — has no backup measures to avoid a recession.

China is now looking inward. Boosting domestic demand has become the government’s holy grail. It’s a low-hanging fruit. Private spending, especially in services, is weak by international standards. Plus, past experiments with consumption subsidies have been met with enthusiasm. Trade-in programs have incentivized consumers to buy new smartphones and home appliances. Restaurant vouchers that city governments handed out were snapped up. All these measures can be repeated and amplified to lessen damages created by higher levies.

Beijing is looking to expand fiscal spending this year. The government plans to allocate more than 8 per cent of gross domestic product to stimulate demand, up from 6.6 per cent in 2024, according to Bloomberg Intelligence.

On the other side of the Pacific, fiscal realignment is also happening, but to the dismay of consumers. Tariffs are a type of taxation. If the April 2 levies all come into effect, it would be the largest tax increase since 1968, analysts say. As such, the question now is whether the White House has any stimulus measures to offset the impact.

Congressional Republicans are now hoping to extend Trump’s 2017 tax cuts that would otherwise expire at the end of 2025. Even if they succeed, American households will only get to avert a tax hike next year. Cash is not coming into consumers’ wallets — with tariffs kicking in immediately, things will inevitably cost more.

In other words, while China is in a fiscal expansion mode, the US is contracting. An escalating trade war has no winners, but this policy divergence buffers the Chinese economy better.

In his first term, Trump slashed taxes before beginning a trade war. Now, it’s the other way around, and his tariffs are much bigger and broader in scope. He’s got no viable plan to soften the blow to American consumers.

In fact, Xi may be betting that Trump will not come to the negotiating table and honor his side of the bargain until his most powerful weapon — the resilient American consumer — is resilient no more. This perhaps explains why Xi is hitting back. Trump is playing his cards in the wrong order.