Xi better prepared for Trump, even as 60% tariffs risk chaos

When Donald Trump first launched a trade war with China in 2018, Beijing was confused and unsure how to respond. This time, President Xi Jinping is better prepared to fight, although he has more to lose.

Trump, who won a second presidential term in Tuesday’s election, has threatened to impose tariffs on Chinese goods of 60%, a level that Bloomberg Economics says would destroy trade between the world’s largest economies. That’s on top of a series of advanced technology export controls that the Biden administration has only tightened since Trump left office.

During this time, China has taken strategic steps to ensure greater resilience and better retaliatory capabilities. Key to this has been the expansion of its toolkit, which now includes controls on the export of critical raw materials, as well as tariffs on agricultural goods and a list of entities that can target key US companies.

“China is much more prepared psychologically to face it again,” said Zhou Bo, a retired People’s Liberation Army senior colonel and senior fellow at Tsinghua University’s Center for International Security and Strategy. Xi Jinping congratulated Trump on his victory and called for “healthy and stable” ties between the countries, state media reported.

However, Xi would prefer to avoid a tariff battle that risks being far more damaging than the first round. China relies on exports of goods such as electric vehicles and batteries to prop up an economy plagued by deflationary pressures and real estate problems, and Chinese lawmakers are meeting this week to formulate measures to boost growth.

If Trump follows through on his tariff threats, Chinese authorities will have to do much more to help the economy. Goldman Sachs Group Inc said last week that tightening trade restrictions on China could force Xi Jinping to support domestic consumption, something the Communist Party has traditionally sought to avoid.

The yuan weakened the most in two years on Wednesday and Chinese stocks fell, giving investors a taste of the volatility that lies ahead once Trump becomes US president. The offshore yuan fell 1.3% against the dollar, its biggest one-day fall since October 2022. Chinese shares listed on the Hong Kong Stock Exchange bore the brunt of the selling, with the Hang Seng closing 2.6% lower.

“China is unlikely to be able to respond to 60% tariffs,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA. “What China will do is announce larger stimulus to counteract this so that the market doesn’t punish China.”

During Trump’s first term, roughly two years of threats, tariffs and negotiations ended with an agreement signed in January 2020 that included China’s promise to buy $200 billion of American goods to try to correct the trade imbalance with the United States. However, the Covid outbreak around the same time quickly soured relations between the countries, and China never came close to meeting its goals as Chinese exports soared during the pandemic.

The resumption of the trade war threatens to further damage global trade. Last year, Chinese companies exported $500 billion worth of goods to the United States, or about 15% of the value of their total exports. If the U.S. were to impose high tariffs on all or most of these products, it could wipe out those sales and further hurt firms facing a weak domestic economy and falling prices.

While Chinese officials are reluctant to overreact to Trump’s new tariff threats, they are also wary of appearing weak, said Scott Kennedy, a senior adviser at the Washington-based Center for Strategic and International Studies who travels frequently to China. Potential options for Xi’s government, he said, include targeting US companies with significant interests in China, selling US Treasuries, devaluing the yuan and expanding into Europe and Latin America.

“They’re tired of being treated like a piñata and they want to fight back,” Kennedy said of China. “They are ready to deal with Trump and, if necessary, fight fire with fire.”

One unexpected revelation for China is the emergence of Elon Musk as a major supporter of Trump’s presidential campaign. Tesla Inc.’s billionaire chief executive has extensive business interests in China, raising the possibility that he may favor a softer approach. Trump praised Musk as he announced his victory early Wednesday morning in the US.

But if a trade war does break out, China will be ready to strike back, and U.S. agricultural exports could once again be the first target. Since Trump’s first term, Brazil has strengthened its position as China’s largest soybean supplier and is now also the largest source of corn imports, replacing a large surge in US exports to China under the 2020 trade deal. In 2016, the US supplied more than 40% of China’s soybean imports, but that figure fell to less than 18% in the first nine months of this year.

China’s slowing economy is also providing Beijing with an additional buffer as demand for pork, as well as corn and soybeans to feed pigs, has fallen sharply. This means the country is less dependent on imports and can more easily shift purchases from the United States to other countries.

“There should be no doubt about China’s retaliatory measures,” Zhou Xiaoming, a researcher at a Beijing think tank and former deputy representative of China’s UN mission in Geneva, said a decade ago. “Easy targets include corn and soybeans. The country is in a better position than in 2018 to take countermeasures as China has turned Brazil into a reliable alternative supply source and has been able to reduce imports from the US.”

At the same time, however, China has fewer obvious targets to hit. The country’s imports from the United States have fallen from their peak in 2021, and Beijing has not signed a deal to buy new Boeing Co planes in years, meaning it has one less threat. In addition to weakening trade relations, direct investment ties between the US and China are also declining: Chinese investment in the US fell 28% last year from its peak in 2019, according to the United Nations.

This raises the possibility that China could try to devalue its currency, making exports cheaper. Although China’s last official devaluation occurred in 2015, at the height of the first trade spat from mid-2018 to mid-2019, authorities allowed the yuan to fall to nearly 7.2 per dollar, making exports cheaper and providing some cushion for Trump’s tariffs.

The Chinese currency is currently at about the same level, but falling further risks irritating other trading partners around the world, who in turn could impose their own tariffs on Chinese goods. The flood of cheap steel has already prompted countries to raise barriers to the metal, and that could spread to more products in the overall trade war.

One of Xi’s main new tools is export controls, which the US often uses against China. Last year, Beijing restricted overseas sales of gallium and germanium, two metals widely used in chip manufacturing, communications equipment and the defense industry. China may now try to impose restrictions on critical raw materials needed by the United States for strategic technologies, such as antimony, which is used in some semiconductor devices.

China also now has a more formal process for sanctioning foreign firms. In September, authorities said China would investigate PVH Corp, the parent company of Tommy Hilfiger and Calvin Klein, for not sourcing cotton from the far western region of Xinjiang, where the United States has restricted trade over human rights concerns. Beijing also sanctioned a US drone company for supplying to Taiwan, preventing it from sourcing parts from China, according to the Financial Times.

Ultimately, China would prefer to make a deal with Trump. The new president has signaled that he would be open to Chinese investment in the United States, which could potentially form the basis for some kind of agreement, according to Henry Wang Huiyao, founder of the Center for China and Globalization research group in Beijing.

“Trump is a pragmatic politician who focuses on solving specific problems,” Wang said. “China is leading the way in electric vehicles and clean technology,” he added. “There is a huge opportunity that Chinese companies can help make America great again.”

However, Beijing understands that China should hope for the best and prepare for the worst. And there aren’t many options if Trump wants to deal with extreme threats that would also hurt the US and raise prices for American consumers.

“We’ve talked a lot about what China can do to prepare for this scenario, but in the end there’s really not much that can be prepared,” said Tu Xinquan, a former adviser to China’s Ministry of Commerce who is now president. Professor and Dean of the China Institute of WTO Studies at the University of International Business and Economics in Beijing.

“There is no silver bullet,” he added. “We can only deal with a problem when it arises.”