When a Trade War Transforms into a Geopolitical Advantage for China

          When a Trade War Transforms into a Geopolitical Advantage for China

                                                            Trump & xi xinping

Former U.S. President Donald Trump implemented the highest tariffs in over a century, doing so without strong economic or political justification. These tariffs applied almost indiscriminately to nearly every country. While Trump had previously indicated that the tariffs would be long-lasting, he suddenly suspended the “reciprocal” tariffs for most nations—except one: China.

The U.S. imposed a 10% tariff on most countries, but China faced a far more severe penalty. After two rounds of 10% tariffs in February and March, Trump added another 34% under the guise of a “liberation day” and later raised it to 84%. Altogether, the minimum effective tariff on Chinese goods entering the U.S. stood at 145%—though there were temporary exemptions for consumer goods.

China initially responded to the first two rounds with equivalent tariffs and hoped for a diplomatic resolution. But when Trump raised tariffs further, China retaliated proportionately. Now, imports from the U.S. into China face a combined tariff rate of 125%.

The Trump administration believed that China’s economy, heavily reliant on exports (roughly 20% of its GDP), would not withstand the pressure. About 14.7% of China’s exports were directed to the U.S. in 2024, making America its second-largest export destination. A 145% tariff, especially during a period of economic stagnation in China, was expected to seriously impact Chinese businesses, workers, and households.

Ironically, Trump's erratic and overly aggressive approach gave the Chinese government a major political advantage. Economic hardship usually leads citizens to criticize domestic policy. But Trump’s seemingly irrational and punitive tariffs—even targeting small and poor nations like Lesotho or remote islands—allowed ordinary Chinese citizens to shift the blame to U.S. "economic terrorism."

The Chinese government has highlighted that trade is mutually beneficial and that no party genuinely "wins" in a trade war. They have called for national solidarity, and as Trump's unpredictability increased, so did the public support for the Chinese government.

China is no longer in isolation. Although President Biden has sought to unite allies against China, Trump's actions have inadvertently strengthened China's relationships with traditional U.S. partners. For example, after Trump imposed a 20% tariff on European Union (EU) goods, the EU retaliated with its own tariffs. Following a market downturn and an increase in U.S. Treasury bond yields, Trump was ultimately compelled to suspend some of these tariffs.

Some interpret Trump's aggressive stance on China as an effort to consolidate Europe and other nations against Beijing. This approach had some success—Mexico, for instance, agreed to synchronize its tariffs on Chinese imports with those of the U.S. However, this strategy has also undermined America's reputation as a reliable economic partner.

Europe is unlikely to suddenly align with China out of dissatisfaction with the U.S., particularly due to its apprehensions regarding inexpensive Chinese electric vehicles and Beijing's backing of Russia during the Ukraine conflict. Nevertheless, Trump's erratic trade policies have made business dealings with the U.S. more expensive and uncertain, prompting Europe to contemplate strengthening its connections with China.

Additionally, Trump withdrew the U.S. from the Paris Climate Agreement, while both Europe and China continue to emphasize the critical need to tackle climate change. China is at the forefront of electric vehicle and solar panel manufacturing and is rapidly advancing in green energy and nuclear power—areas that are increasingly attracting the attention of European policymakers.

Although the ongoing conflict in Ukraine and challenges related to Chinese exports continue to affect European manufacturers, the shared interest in economic stability may motivate China and Europe to seek common ground. A potential partnership could entail China increasing its imports of European products, reducing its exports to Europe, appreciating its currency, or collaborating on technology in critical areas such as artificial intelligence, electric vehicle batteries, and electric grids. While Europe perceives many of China's subsidies as inequitable, access to more affordable goods and advanced technologies could prove advantageous for both European consumers and producers.

Additionally, Europe might encourage China to take a more proactive role in global governance, a goal that Chinese leaders have long pursued.

It is improbable that China will completely sever its relationship with Russia; however, it may take pragmatic measures to enhance its appeal to Europe. For instance, China could boost its imports of Ukrainian agricultural products, assist in the reconstruction of war-affected Ukrainian infrastructure, and ensure that Chinese mercenaries do not participate in Russia's military operations.

Recent events indicate a thawing of relations. Spanish Prime Minister Pedro Sánchez recently traveled to Beijing, and Chinese President Xi Jinping is scheduled to meet with EU leaders in July. These developments suggest that the world's second and third-largest economies recognize the potential advantages of collaboration.

Ultimately, what may appear as an economic crisis for China could evolve into a strategic geopolitical opportunity. If China and Europe manage to establish a new partnership, the trade conflict may not be as detrimental for Beijing as it initially seems. 

—Nancy Qian, Professor of Economics at Northwestern University and Founding Director of the China Econ Lab