WHY CHINA HAS THE UPPER HAND IN ITS TRADE WAR WITH AMERICA / THE ECONOMIST

Battle-ready

Why China has the upper hand in its trade war with America

A truce is still possible, but no one wants to be first to pick up the phone

“HAVE YOU heard of the eye of the storm?” asks a video posted on April 29th by China’s Ministry of Foreign Affairs. 

The centre of a tornado or cyclone can be deceptively calm. 

But it is actually a “deadly trap”. 

The world is caught in a similar spot, the ministry argues, thanks to the “tariff storm” America has conjured up.

It is not a bad analogy. 

The world economy has indeed entered a lull. 

Danger seems to lie both behind and ahead. 

When Donald Trump said on April 9th that he would delay his “reciprocal” tariff plan, financial markets stopped howling quite so loudly. 

Many of Mr Trump’s aides also felt happier. 

Whereas the president’s original plan had imposed baffling levies on close allies and distant islands, what remained during the 90-day pause was easier to understand: a high tariff on America’s principal rival, China, and a low tariff for almost everyone else.

The calm, however, cannot last. 

As container ships chug across the Pacific from China, America’s leaders are waking up to the trap they have set for themselves. 

The status quo, including a tariff of 145% on many Chinese goods, is not “sustainable”, said Scott Bessent, America’s treasury secretary, on April 22nd. 

That percentage “will come down substantially”, Mr Trump himself said shortly afterwards. 

America has already exempted many electronic goods, including smartphones, from the highest levies. 

When Punchbowl, a news outlet, reported that Amazon would display the cost of tariffs alongside the price of some goods, America’s trade warriors seemed appalled by their own handiwork. 

The White House’s press secretary accused Amazon, which downplayed the proposal, of a “hostile and political act”.

Their disquiet reflects the fact that these unsustainable tariffs were also largely unplanned. 

When Mr Trump proposed a levy of 34% on China on April 2nd, he did not know that China would match it. 

And when China retaliated, its leaders did not know for sure that America would be quite so reckless in response.

Could things de-escalate just as quickly? 

The tariffs doing the most harm to America’s economy are the ones America itself has imposed. 

The jump in price of many Chinese imports will hurt American consumers, whether Amazon highlights the cost or not. 

It could also cripple many firms that rely on Chinese components. 

Mr Trump could contain this damage by lowering his own tariffs unilaterally to a more bearable level. 

All it would take is an executive order, of which he has already signed over 140 since January. 

But he wants to avoid looking weak. 

He has therefore insisted he will wait until China calls first. 

“The onus will be on them to take off these tariffs,” said Mr Bessent on April 29th.

That stubbornness has given China unaccustomed power over America’s immediate economic fate. 

If it reaches out to Mr Trump, the worst could be averted. 

If it does not, the storm will soon return. 

All signs suggest China’s leaders are not ready to relieve the suspense just yet. 

They may even be quite enjoying it.

The new foreign-ministry video, for example, argues that bullies like America are “paper tigers”. 

“Compromise won’t earn you mercy”, it says, “kneeling only invites more bullying”. 

An article published on April 28th by Beijing Daily, a state-run newspaper, was equally defiant. 

It was keen to rebut the “mistaken view” that China should respond to the apparent softening of America’s resolve by quitting while it was ahead. 

Instead it advised readers to consult “On Protracted War”, a work by Mao Zedong, which argued that “quick victory” is often a “mere illusion”.

This bravado may not last. 

China is already in a protracted war against deflation and a property slump. 

Now exporters are beginning to worry. 

A monthly survey of Chinese manufacturers released on April 30th showed that new export orders were at their weakest since the end of 2022. 

To weather the trade war, China needs its cautious consumers to start spending. 

On that topic, Mao offers little inspiration.

But for now China seems reluctant to back down. 

Although the economic standoff between the two superpowers will hurt both of them—it is what economists call a “negative sum” game—the geopolitical tussle is inevitably “zero sum”. 

Anything that hurts America helps China. 

America’s loss of credibility is China’s gain.

China is even hoping to capture some of the goodwill America has casually destroyed. 

In contrast with Mr Trump’s fickleness, it has portrayed itself as a force for stability. 

In its video, the foreign ministry called on other nations to join it in standing up to America, which accounts for much less than a fifth of global trade. 

China, on the other hand, is the biggest trading partner for over a hundred countries. 

It is also tightly stitched into Asia’s supply chains. 

In 2022 it provided more than 19% of Japan’s imports of intermediate goods. 

For South Korea it supplied over a third, and for Vietnam more than 38%.

China’s centrality in these trading networks gives it serious clout. 

Its Asian trading partners cannot afford to unpick China from their supply chains as America might wish. 

But China’s open defiance of America also finds little echo in these countries. 

Japan and South Korea are too dependent on America’s security guarantees. 

And many countries in South-East Asia are determined not to alienate either superpower, so they can continue to hedge one against the other.

Since Mr Trump announced his tariff plans, many Asian countries have looked for creative ways to appease him. 

They have offered to buy more American energy, crops or arms, as well as removing some of the trade impediments that catch his attention. 

Vietnam is promising to crack down on customs fraud, whereby Chinese goods are mislabelled as “made in Vietnam” so as to attract lower duties. 

These trade-dependent Asian nations are trying to give Mr Trump lots of face-saving reasons not to reinstate tariffs when the 90-day pause comes to an end on July 9th. 

If China is making it hard for Mr Trump to de-escalate, its neighbours are making it easy for him not to re-escalate.

Some of China’s neighbours are also hoping to profit at its expense. 

Thailand’s economic strategists, for example, hope their exporters can make gains in the American market for dog and cat food, prepared mackerel and frozen squid.

Many of these countries also fear that America’s high tariffs will divert more Chinese goods to their markets, undermining their manufacturing industry. 

“If they can’t sell on Amazon,” says an executive from a South Korean conglomerate, “they’ll sell on Coupang,” South Korea’s leading e-commerce site. 

They were already on their guard. 

Prabowo Subianto, Indonesia’s president, has threatened to sink ships smuggling cheap textiles into the country. 

In February South Korea introduced anti-dumping duties on certain kinds of steel from China. 

A month later Japan imposed similar levies on China’s graphite electrodes, which are used in arc furnaces.

America’s hopes to cow China and remove it from Asian supply chains will not be realised. 

Nor will China’s dreams of rallying its neighbours in defiant opposition to the hegemon. 

China, the foreign ministry’s video insists, “won’t kneel down”. 

But its Asian neighbours are doing everything they can to help Mr Trump climb down.