The Sino-U.S. trade conflict is shaping up to be a prolonged affair rather than a brief bout of turbulence.
The Chinese Communist Party has been struggling with problem after problem in recent years, including an anemic economy, demographic crisis, rising geopolitical pressures, and persistent corruption. Many of these problems have been exacerbated by developments such as the beginning of the Sino-U.S. trade war during President Donald Trump’s first term, the bursting of the property bubble after Beijing imposed restrictions on real estate, and the imposition of draconian health measures during the three years of “zero-COVID.”
Trump’s latest tariff actions in April threaten to greatly worsen many of the CCP’s problems and plunge the regime into an existential crisis. Beijing’s insistence on finding solutions within the confines of the communist system leaves it with very limited ability to find an off-ramp from U.S. tariffs and escape its economic quagmire. The longer the Sino-U.S. trade conflict persists, the worse Communist China’s prospects will become.
Dueling tariffs
On April 2, President Trump announced sweeping “reciprocal tariffs” of 10 percent on all U.S. imports effective April 5. The Trump administration imposed higher tariffs on 57 countries including China effective April 9, but subsequently suspended them for 90 days while maintaining the baseline tariff of 10 percent after over 75 countries reached out to the U.S. for negotiations.
The only country subjected to more U.S. tariffs by the end of the week of April 7 was the People’s Republic of China. Unlike other nations, the PRC opted to impose retaliatory tariffs and other countermeasures in response to Trump’s actions. After a brief back-and-forth, the PRC would impose a 125 percent tariff on U.S. imports plus non-tariff measures like export restrictions on certain critical rare earths and restrictions on U.S. services like Hollywood films and travel advisories. Beijing added that it would “simply ignore” further tariff escalations with the United States, but would “resolutely institute countermeasures and see them through to the end” if the U.S. continues to “substantially harm” PRC interests.
Meanwhile, Trump raised U.S. tariffs on Chinese imports to 145 percent and signed an executive order closing the “de minimis” trade loophole that has allowed low-value packages from China and Hong Kong to enter the U.S. duty free. After the PRC hiked tariffs to 125 percent, Trump wrote on Truth Social, “We are doing really well on our tariff policy. Very exciting for America, and the World!!! It is moving along quickly.”
Economic impact
Trump’s tariffs on Chinese imports already have and are projected to significantly impact China economically. Financial markets on the mainland and Hong Kong saw sharp declines on April 7, and the market volatility saw three major central state-owned enterprises announcing measures to ensure the stable operation of the capital market. The Washington Post reported that the nearly $700 billion U.S-China trade could shrink to “almost nothing.” Meanwhile, Goldman Sachs revised down its economic growth forecasts for China, projecting 4 percent growth and 3.5 percent growth respectively for 2025 and 2026. This is compared to Goldman’s earlier estimates of 4.5 percent and 4 percent.
Goldman economists also estimated that 10 million to 20 million workers in China could be affected by the tariffs, and the slowdown in trade with the U.S. and the world would place substantial pressure on China’s labor market. A review of Chinese social media shows the first sign of labor and business trouble, with factories announcing “holidays” and requiring employees to take unpaid leave. Some export-oriented firms noted on social media that 80 percent of their U.S. orders have been canceled and their production lines have been halted, while Chinese manufacturers said they have not received the usual orders for Christmas decorations that typically come in mid-April.
As long as they stay in place, the massive U.S. tariffs will accelerate the shifting of supply chains away from mainland China. China’s manufacturing base is at risk of being hollowed out as companies relocate production to countries subject to lower U.S. tariffs like Southeast Asia, India, and Mexico.
China’s coastal provinces like Guangdong and Zhejiang will be hit hardest by supply chain moves, business closures, and labor problems. Over time, rising unemployment and the economic slowdown could fuel public discontent. Social problems could quickly transform into political problems as people start to question the CCP’s policies and legitimacy. Mounting socioeconomic troubles could also create opportunities for “anti-Xi” elements in the CCP elite to move against the Xi leadership and undermine Xi Jinping.
Geopolitical impact
Sustained and steep U.S. tariffs on Chinese imports will accelerate decoupling between China and the United States. Meanwhile, future U.S. tariff hikes on countries neighboring China and renegotiated trade deals could effectively close off pathways for Chinese manufacturers to reroute exports to the United States and mitigate costs.
Beijing will likely attempt to deepen ties with the European Union, ASEAN, and BRICS nations to find new markets and offset the losses of being closed off from the U.S. market. The CCP authorities could also rely more heavily on its Belt and Road Initiatives to secure alternative trade routes. Beijing’s success in those projects, however, will be determined by the willingness of countries to strengthen relations with China amid growing international concern over a potential PRC invasion of Taiwan and greater awareness about the CCP threat globally.
Ideological roadblocks
The Sino-U.S. trade conflict is shaping up to be a prolonged affair rather than a brief bout of turbulence. On the U.S. side, there is a strong bipartisan consensus about the
“China problem,” particularly the need to rectify long-term trade imbalances between the two countries, address the CCP’s threat to U.S. national security, and deter aggression against Taiwan. The Biden administration did not remove Trump’s tariffs on China from his first term, and Trump’s second term tariffs are likely to be upheld by future administrations.
Beijing has several reasons why it cannot back down. Foremost is the CCP’s need to save “face” and maintain its “great, glorious, and correct” image. The Xi leadership, which is already suffering from a “quan wei” (authority and prestige) deficit due to recent governance failures, cannot be seen as being cowed by Trump’s tariffs lest it loses more legitimacy and suffers serious political consequences.
The CCP also views trade conflict with the U.S. as a challenge to its political system. Given the stakes of this challenge, Beijing has no choice but to return Trump’s trade blows and “go the distance” with the U.S. as best it can in the trade war. Even so, the Xi leadership has signaled a wish to de-escalate by declaring that it would ignore further tariff escalations and by dismissing additional U.S. tariffs as having no economic significance and as a “joke” in the history of world economics.
Finally, the Xi leadership could believe that it has sufficient tools and measures to withstand heavy U.S. tariffs for an extended period. However, back-of-the-envelope calculations show that China does not have the fiscal capacity to drive growth through infrastructure investment. Excessive monetary easing will also exacerbate China’s financial risks. Sustained government efforts to prop up the tariff-hit economy would put a severe strain on Beijing’s coffers and make the regime more vulnerable to various shocks.
