On April 2, President Donald J. Trump announced sweeping reciprocal tariffs on nearly every country, ranging from 10 to 49 percent. Just a week later, the tariffs were suspended for all but one country: China. Beijing has responded in kind, matching each U.S. tariff hike step for step. After the initial 34 percent U.S. tariff, China imposed an equivalent countermeasure, prompting Trump to raise the rate to 84 percent, which Beijing matched once again. This tit-for-tat exchange culminated in the United States raising tariffs to 125 percent on April 10, with China immediately mirroring the increase the following day. When combined with existing tariffs, Chinese imports now face potential duties as high as 170 percent.
China is eager to broadcast its resolve to stand firm against U.S. pressure. To that end, it has launched a coordinated propaganda campaign emphasizing that it holds the stronger hand in the trade war. A prominent example is an editorial in People’s Daily, the official newspaper of the Chinese Communist Party. Titled “Focus on Doing Your Own Things,” the piece acknowledges that America’s “abusive tariffs” could hurt exports and add pressure to the economy in the short term—but insists that “the sky can’t collapse.”
The editorial goes on to lay out a detailed argument for China’s economic resilience amid rising U.S. pressure. It begins by emphasizing China’s vast economic scale and structural capacity to absorb external shocks, noting a clear trend of declining dependence on the United States—with exports to the American market falling from 19.2 percent in 2018 to 14.7 percent in 2024.
It further points to the asymmetry in the trade relationship: While China is diversifying away from the United States, American supply chains remain heavily reliant on Chinese intermediate and capital goods, with some sectors facing more than 50 percent dependency—making a full decoupling economically unfeasible.
China’s options are limited, and where it does have some initiative, its deteriorating economy makes it difficult to mount an effective response to the U.S.
To underscore this shift, the editorial highlights China’s expanding trade with other partners, including a rise in exports to the Association of Southeast Asian Nations from 12.8 to 16.4 percent and to Belt and Road Initiative (BRI) countries from 38.7 to 47.8 percent. This diversification helps insulate China from overexposure to any single market.
Equally important is the strength of China’s domestic economy. The editorial notes that 85 percent of export-oriented firms also serve the domestic market, with internal sales accounting for 75 percent of their revenue—offering a built-in buffer against external disruptions.
Yet even as the Chinese argument has some surface plausibility, many of its claims are dubious. While it’s true that China has sought to forge a new economic order through initiatives such as the BRI and agreements such as the Regional Comprehensive Economic Partnership—and that its exports to BRI countries now exceed those to the United States, the European Union, and Japan combined—these figures tell only part of the story. A significant portion of these exports are transshipments ultimately destined for the U.S. market. These transshipments can take various forms: simple repackaging of Chinese-made goods, basic assembly using Chinese components in third countries, or even falsified export documentation listing obscure jurisdictions like Heard Island and McDonald Islands as the country of origin. As a result, the apparent decline in China’s direct exports to the United States—from 19.2 percent in 2018 to 14.7 percent in 2024—is likely overstated. In reality, the volume of Chinese goods reaching the United States might not have fallen much, if at all.
In addition to downplaying the role of trade with the United States, the editorial attempts to present an overly optimistic view of China’s domestic economy, claiming that “China’s economy is stable and sound … domestic demand, investment, and consumption exceeded expectations… exports held up … and PMI [Purchasing Managers Index] rebounded.” Yet once again, the underlying data tells a more sobering story. According to figures quietly released by the National Bureau of Statistics last month, the recovery in consumption and investment remains weak. For the first two months of the year, household purchasing power and spending willingness were still lacking, and sales of several key commodities were sluggish. Industrial data paint a similarly bleak picture: Effective market demand remains low, corporate profitability is under pressure, and exports of industrial products face mounting headwinds.
Meanwhile, foreign investor confidence in China continues to deteriorate. As reported by Nikkei in February, China has seen a dramatic collapse in foreign direct investment, which has fallen by 99 percent over the past three years—dropping to its lowest level in three decades.
The People’s Daily editorial further asserts that China is better prepared this time to defend itself against American tariffs, having weathered eight years of trade wars. One key takeaway for Beijing seems to be that the impact of tariffs can be easily neutralized. When the United States imposed a 25 percent tariff in 2018, China offset much of the burden by devaluing its currency by about 10 percent and implementing cost-cutting measures—effectively keeping prices stable for U.S. buyers. Another lesson appears to be that breaching trade agreements carries little consequence. Despite failing to meet its obligations under the Phase One Agreement, China faced no meaningful penalties from the United States, reinforcing the belief that it can disregard commitments without facing repercussions.
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Finally, China seems to believe the economic damage from the trade war was less severe than expected. The post-trade war rebound—particularly the 8.4 percent GDP growth in 2021, the strongest in a decade—has contributed to the perception that the country can endure another round of tariffs with limited long-term harm.
However, all of these lessons are unlikely to hold in what might be called Trade War 2.0. First, with tariffs now reaching as high as 170 percent—or even 245 percent when including Section 301 duties—it would be virtually impossible for China to offset the impact through currency devaluation. Even an 85 percent devaluation would push the exchange rate to about 13 RMB (Chinese yuan) per dollar, a level that would almost certainly trigger panic across financial markets and the broader economy.
Second, China’s failure to meet its commitments under the Phase One Agreement went unpunished largely because it occurred during the Biden administration, which was broadly seen as inactive or conservative on trade enforcement. But as we have seen from the past two months, Trump will not hesitate to retaliate forcefully against perceived violations. Under Trump 2.0, noncompliance is far more likely to provoke swift and strong responses.
Third, China’s strong economic performance in 2020-21 was largely driven by its rapid and stringent lockdowns during the early stages of the COVID-19 pandemic—measures that were far easier to enforce under an authoritarian system. However, once the pandemic subsided, sustaining high growth rates proved far more difficult. In 2022, China’s official growth rate fell to 3 percent, barely ahead of the United States, at 2.5 percent. Moreover, given longstanding concerns about data transparency and statistical manipulation in China, it seems likely that official figures may overstate the true picture. Independent assessments, such as those from the Rhodium Group, suggest that China’s real growth rate could be much lower—ranging from -0.3 to -0.8 percent—potentially placing it well behind the United States in economic performance.
In terms of available tools, the People’s Daily editorial points to a range of economic measures, including a fiscal deficit target of 4 percent for the year and the use of national debt to support key sectors, stabilize markets, boost domestic consumption, and assist export-oriented firms in pivoting toward non-U.S. markets. However, rather than invigorating the economy, ambitious fiscal expansion may worsen China’s existing structural problems.
The precedent is not encouraging. The last major stimulus—the 4 trillion yuan (~$570 billion) package introduced in late 2008 following the global financial crisis—funneled most of the funds to state-owned enterprises (SOEs), triggering what became known as “the advance of the state and retreat of the private sector.” This shift undermined the vitality of private enterprise and set China on a 15-year trajectory of continuously slowing GDP growth, interrupted only by brief spikes in 2021 and 2023, both due to one-off distortions of the COVID-19 pandemic.
Given Chinese President Xi Jinping’s well-documented inclination to bolster the SOE sector at the expense of private and foreign firms, there’s little reason to expect a different outcome this time. If anything, the current fiscal push could become yet another opportunity to strengthen SOEs while further eroding the already limited space available to private and foreign enterprises—ultimately weakening, rather than fortifying, the broader Chinese economy.
One element that stirred some excitement was the editorial’s reference to “boosting domestic consumption with extraordinary efforts”—a phrase that has never appeared in major policy documents before. But this, too, should be taken with more than just a grain of salt. Despite repeated rhetorical nods to “Common Prosperity,” Xi Jinping has consistently voiced concerns about the dangers of creating a “welfare state” and “raising lazy people,” as he made clear in his essay on the topic four years ago.
Even if new consumption-boosting measures are eventually rolled out, past patterns suggest they are more likely to focus on absorbing excess industrial capacity—by incentivizing purchases of state-favored goods like electric vehicles or appliances—rather than meaningfully raising household incomes. Moreover, Beijing has been strikingly reluctant to deploy stimulus, despite growing calls for action since last November, when Trump’s election revived the threat of a renewed trade war. China seems to be reserving its fiscal firepower for a potentially larger shock, as hinted by the Liberation Day tariffs—but by the time that shock materializes, any response may prove too little, too late.
In addition to economic measures, China’s toolkit now also includes an expanding array of legal instruments—though the editorial makes no direct mention of them. These tools stem from Xi Jinping’s 2020 directive at the Central Conference on the Comprehensive Rule of Law, where he called for deploying legal means to “resolutely safeguard national sovereignty, dignity, and core interests,” a message delivered in the wake of China’s bruising experience with the Phase One Agreement, which contained 97 references to “China shall” (or 99 references if “China and the United States shall” are also included), yet only three references to “the United States shall.”
Following this, the 2021 work report of the National People’s Congress prioritized enriching the legal “toolbox” to address risks related to counter-sanctions, anti-interference, and counter-long-arm jurisdiction. Key additions to this legal arsenal include the new National Security Law (2015), the Unreliable Entity List (2019), the Blocking Statute (2021), the Anti-Foreign Sanctions Law (2021), and the Foreign Relations Law (2023). While these laws are deliberately vague—leaving broad discretion to authorities—they are increasingly being enforced. A recent case highlighted by China’s Supreme Court marked the first application of the Anti-Foreign Sanctions Law, in which a foreign shipbuilding firm was compelled to pay RMB 84 million to its Chinese counterpart after unsuccessfully citing third-country sanctions to withhold payment.
As these legal tools are invoked more often, they create a chilling effect for foreign firms operating in China—underscored by Microsoft’s recent withdrawal of various operations from China. This growing legal assertiveness signals a shift in China’s strategic posture, but it also risks further isolating the country’s economy in an already tense global environment.
As demonstrated above, China’s options are limited, and where it does have some initiative, its deteriorating economy makes it difficult to mount an effective response to the United States. Even if China does take action, the consequences are likely to backfire. So, can any other country come to China’s rescue?
The most obvious candidate is the European Union, which has made some noises to that effect. But the European Union is also caught in a bind. While it shares China’s discontent with the United States’ aggressive tariff policies, it is not about to embrace a flood of cheap Chinese imports rejected by the United States. While the European Union is indeed negotiating a deal on electric vehicles with China, this deal is less about solidarity against the United States—as some news outlets have suggested—and more about preemptively limiting Chinese imports. In exchange for suspending trade remedy measures, Chinese exporters are agreeing to a minimum price for electric vehicles in the European Union—which hardly seems likely to further boost sales.
Recognizing this, China has made efforts to rally support from neighboring countries, as seen in Xi Jinping’s recent visits to Vietnam, Malaysia, and Cambodia. However, these countries are hardly enthusiastic partners with China either. In 2024, Vietnam exported 42 percent of what it imported from China, and Cambodia’s trade deficit with China accounted for 30 percent of its GDP. All three nations enjoy trade surpluses with the United States, making it highly unlikely they would side with China over the United States. As a result, despite China’s diplomatic push, it has failed to secure major concessions from other Asian nations, including Vietnam.
Ultimately, China likely understands its true position. This is why, despite frequent accusations that U.S. actions violate international trade rules and amount to bullying, China consistently emphasizes that it is “not closing the door for negotiations” and is open to an “equal-footed dialogue” with the United States. The People’s Daily even let slip a telling remark, urging governments at all levels to “guide and help firms to try to maintain their trade with the U.S. as much as possible.”
In the end, it may turn out that the United States is the only country capable of helping China out of its fix. Which is why, despite the growing tensions and escalating rhetoric, I believe U.S.-China negotiations will likely begin within two months. Given China’s current economic troubles, it simply cannot afford to wait much longer.
