How Ready is China for Trump Tariffs 2.0?

A deep dive into Chinese economy unveils Beijing’s underrated resilience against impending head-on collision

In 1784, one year after the American War of Independence concluded, a merchant schooner named “Empress of China” sailed halfway around the globe from the Thirteen Colonies’ New York to China’s Guangzhou, marking the dawn of the biggest trading relations the world has ever seen. In about a month, however, this time-honored trade link between the two greatest economies on the planet may face an imminent collapse, if Donald Trump prances into the Oval Office and follows through on one of the many free-wheeling threats he made on campaign trails: adding 60% tariffs on Chinese goods.

Although Trumpian rhetoric has a record of ending up being a mere bargaining counter, what is known as “Trump tariffs 2.0” might just be too consequential to be ignored. If Trump’s last presidency, with the already steep 25% tariff spike, ushered in a chilly winter for the China-U.S. trade, his next one is likely to obliterate it altogether. Some Western media commented that it caught Beijing at a bad time as its economy is “in a vulnerable position.” Should Trump act on what he calls “the most beautiful word in the dictionary,” is China ready to deal with the blow?

Made-in-China’s Reroute

The first problem China might encounter is where to sell its products. The denial of access to the world’s biggest consumer market could pose a challenge to the Asian power that houses 30% of the global manufacturing capacity. But weaponized tariffs are losing their teeth with China’s dependence on exports to America dwindling.

“Since Trump's first term, American consumers have spent less on clothing. So it is not simply a matter of moving our production to Southeast Asia to circumvent tariffs,” said the CEO of a clothing company based in the Yangtze River Delta, the country’s largest textile manufacturing cluster. From China’s accession to the WTO in 2001 to the start of the China-U.S. trade war in 2018, China’s textile and apparel exports accounted for a gargantuan 75% of its entire net foreign exchange earnings. This enterprise in particular has been solely reliant on the U.S. market for the past two and half decades, with annual sales exceeding $100 million at its peak.

“China’s home market is maturing, as consumers’ shopping pattern has begun to prioritize quality over foreign brand recognition,” explained the senior executive, referring to the fact that Chinese clothing firms are outgrowing the model of subcontract production. “We are scaling up our domestic operation for branding and sales.”

Despite the popular belief that Chinese home demand turns sluggish, China’s consumption growth rate has actually outpaced economies with similar GDP per capita. A report published by the Rhodium Group this July shows that China has added 65% of cumulative annual consumption of the U.S. and twice that of the EU over the past twenty years. A September analysis conducted by McKinsey also indicates that Chinese purchasing power has been misrepresented and underestimated. After cross-referencing data with those in the U.S., Britain and Japan, the report concludes that “Chinese consumers are among the most confident in the world.”

In the next decade, it is projected that about one-quarter of global consumption growth will stem from China, which already claims 13% of the world’s total demand. This prospect is further reinforced by a raft of strong policy signals to expand consumption from the third plenum to the central economic work conference.

Since 2020, Beijing has underscored the strategic pivot towards a “dual circulation” paradigm that “takes the domestic market as the mainstay.” Almost at the same time, the exponential surge in both production and domestic consumption of new energy vehicles (NEVs) bore testimony to that shift. The Chinese market is projected to consume 10.5 million NEVs in 2024, tripling that of entire Europe, the world’s second-biggest NEV market. Even though the 100% levies Washington introduced earlier this year have effectively barred imported Chinese NEVs to the U.S., China’s NEV industry largely stays unscathed.

Amid uncertainties stirred up by the incoming “Tariff Man,” China’s burgeoning market serves as a ballast not just for home businesses, but also foreign enterprises operating on China’s soil. “U.S. companies have been in China for thirty, forty years. They’ve seen a whole bunch of different presidential administrations and they’ve seen different trade policies.” Michael Hart, president of the American Chamber of Commerce in China, told Sinical China: “I don't believe people will leave for a couple of reasons. One, they have invested in supply chains and built them up with their suppliers. Number two, there are no quick, easy replacement markets.”

Alarmed by Washington’s decoupling impulse, China has also made remarkable progress in diversifying overseas markets. The proportion of U.S. imports from China has dropped from 20% to 13% over the past six years. In contrast, the percentage of China’s exports to emerging markets saw a noticeable rise from 42% to 50% within the same time span. For instance, China’s mechanical and electrical products, which have long accounted for over half of the country’s total exported goods to America, have found new destinations like Vietnam, Mexico, India and Russia. Last year, only 15% of China’s products in this category were bound for the U.S., down from 20% in 2018.

“We are currently tapping into the potential of developing markets like Mexico, Chile and Kazakhstan,” said a marketing manager at China’s XYZ Storage, which is said to represent over 10% share of China’s domestic energy storage system market. The company is the main supplier of the phase one storage project at Mexico’s Puerto Peñasco, the largest photovoltaic project in Latin America. By last year, the U.S. had fallen out of the top five destinations for China’s photovoltaic products. Meanwhile, the share of the top five markets in this category also shrank from over 50% in 2017 to 30% in 2023, as a result of overall diversification of China’s export targets. This trend reveals that the impact of tariff policies will slacken over time after repeated, abusive exercise.

China’s Age of Rediscovery

Another aim of Trump tariffs 2.0 is to expedite the relocation of supply chains away from China. Trump and Biden, who ordered an immediate supply chain review 100 days into office, are actually of one mind on this issue. They only differ in the specific approach: “friend-shoring” or “reshoring.” Judging from Trump’s latest mocking and menacing targeted at the two USMCA partners, he doesn’t want China’s loss from the 60% tariffs to be anybody else’s gain, be they allies or neighbors.

In fact, China’s supply chains are relocating overseas, but not to America as Trump fantasizes, or because of the “friend-shoring” tactic as Biden envisioned. “Some Chinese companies are transferring their manufacturing sectors overseas, not as a response to the U.S. policies, but in the process of globalizing the Chinese industrial model,” said Chris Pereira, CEO of the Shenzhen-based consultancy iMpact, which has provided service for over 300 Chinese companies harboring overseas ambitions in the past four years. “China’s industrial upgrading is driving out some of the low-end production capacity. Even so, emerging manufacturing centers like Mexico and Vietnam are in no position even to replace China’s city of Dongguan, not for the next decade or two.”

The age of rediscovery for China’s supply chains started long before the trade war. It was gradually set in motion after the Chinese population’s dependency ratio started to rise in 2010, resulting in increased labor costs and subsequent industrial realignments. Labor-intensive industries like textiles, not only began to found bases in Southeast Asia, but also went in droves further inland domestically from the country’s southeast littorals. However, the core components of the textile industry, such as fabric production and dyeing, remain anchored in China due to the requirements of supply chain complexity. This mode also applies to other labor-intensive industries like toy or furniture manufacturing. As a recent study by China Galaxy Securities discovers, China still maintains a competitive edge in these so-called “low-end” manufacturing, even compared to South or Southeast Asian counterparts that are affluent in cheap labor.

Therefore, there is a world of difference between the ongoing globalization of China’s supply chains and the “hollowing out” of U.S. industries since the 1970s, since many integral if not crucial segments of “low-end” production remain unattached from China. Even if Trump ups the ante on China tariffs, and the inflow of finished goods starts to come from other emerging economies, the very fabric of the industrial chains will remain deeply rooted in China.

In terms of advanced manufacturing, Trump’s proposed tariffs will prove even less effective in its redisposition. Despite an array of Washington’s punitive restrictions on Chinese drones, an industry insider suggested that they have not felt a drastic change in the global market environment because there is simply no readily available alternative. Although Chinese drone companies are establishing assembly lines outside China, key components of flight control can only be produced at home.

The same thing happens to China’s NEV industry. Because of the tariff barrier, the exports of finished Chinese NEVs to America have now become virtually non-existence. But the U.S. continues to rank first among China’s export destinations for NEV-related products like batteries, electric motors and electric control systems. It is a preview of Trump tariffs 2.0, which adds to American consumers’ burdens, but fails to cut exposure to Chinese supply chains.

More importantly, contrary to Trump’s expectations, even if some of the manufacturing capacity exits China due to incoming tariffs, it is by no means “re-shoring” to America. “There is a big question mark whether industrial chains will ever go back to the U.S. on a substantial scale,” said Xie Tao, professor and dean of the School of International Relations at Beijing Foreign Studies University. “It is doubtful whether the U.S. has enough advanced, skilled workforce, and whether its products are competitive in costs and prices.”

As early as 2012, General Motors made a bold move by investing $244 million to shift its electric vehicle production line from Mexico back to Baltimore. But this “re-shoring” project created a meager 200-odd jobs. During the first Trump term, a high-profile TSMC investment in Wisconsin backfired in a similar fashion. State intervention and government subsidies are impotent to revitalize the infertile manufacturing landscape, and so are tariffs. If Trump slaps tariffs on Mexico to push out Chinese investments, they will simply find someplace else to build factories, anywhere but America.

Endgame of Thucydides Trap

During the last Trump administration, China’s nominal GDP for the first time approached nearly 70% of America’s. It is argued that the China-U.S. trade war, marked by Washington’s tariff offensive, is doomed to occur on this occasion, with or without Trump’s presidency. This modern tragedy of great powers seems to have been foretold by Thucydides’ famous judgment on the cause of the Peloponnesian War: “The growth of the power of Athens, and the alarm it inspired in Sparta, made the war inevitable.”

But most people miss the latter part of that analogy. Sparta emerged victorious in the nearly three-decade war, but its hegemony in the Hellenistic world ended for good. Those who are dead set on an escalated trade war with China may have an epiphany after learning this episode of history.

The China-U.S. economic ties have been mutually beneficial, and, in a way, inevitable. The breakdown of the Bretton Woods system in the 1970s, which unpegged dollars from gold, prompted incessant torrents of capital inflow into America. While it boosted consumer spending to over 60% of GDP for four consecutive decades, the consequential high interest rates sapped the competitiveness of the U.S. as a manufacturing power. It is almost irreversible that Americans need other nations to supply wholesale products. Therefore, as the comparative advantages shifted, the manufacturing center first moved to Japan, then to the “Four Asian Tigers,” and eventually to China.

The meteoric rise of “made-in-China” provides American consumers with an unprecedented array of affordable options, laying the ground for U.S. prosperity and growth. As the U.S. criticized China's rapid climb in the value-chain ladder following its accession to the WTO, it was in effect the chief beneficiary of this economic interdependence. Any attempt to contain China through trade suppression will only be at its own peril.

A study by the Peterson Institute for International Economics suggests that if Trump tries to reduce the trade deficit with China through tariffs, the U.S. total trade deficits with the rest of the countries will actually expand. Talking about the possibility of Trump raising baseline tariffs with all the other countries, Zhao Hai, a researcher with the Chinese Academy of Social Sciences, said that American history is not without examples of such aggressive tariff moves that ultimately end in failure. “If it happens, the American economy is likely to slip into recession.”

“If the U.S. persists in protectionism as a long-term policy, it might end up lagging behind the rest of the world, like what happened to China in the late Qing period,” said Chris Pereira. “In that case, today’s China is well-placed to lead the next wave of globalization, and the world is looking forward to that.”

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Xu Zeyu, founder of Sinical China, is a senior journalist with Xinhua News Agency. Email: xuzeyuphilip@gmail.com

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