While Chinese officials don’t want to overreact to Trump’s new tariff threats, they are also wary of looking weak, according to Scott Kennedy, a senior adviser at the Washington-based Center for Strategic and International Studies, who frequently travels to China. Potential options for Xi’s government, he said, include targeting American companies with sizable interests in China, selling US treasuries, devaluing the yuan and doing more outreach in Europe and Latin America.
“They’re sick of being treated like a piñata and want to fight back,” Kennedy said of China. “They’re prepared to deal with Trump and fight fire with fire if needed.”
One wild card for China is the emergence of Elon Musk as a major supporter of Trump’s campaign for president. The billionaire chief executive officer of Tesla Inc. has extensive business interests in China, raising the possibility that he could advocate a softer approach. Trump praised Musk while declaring victory in the early morning hours of Wednesday in the US.
But if a trade war does erupt, China will be ready to hit back — and US exports of agricultural goods may again be the first target. Since Trump’s first term, Brazil has strengthened its position as the largest soybean supplier to China, and is now also the biggest source of corn imports, replacing the big spike of US exports to China as part of the 2020 trade deal. In 2016, the US supplied more than 40% of Chinese soybean imports, but that had fallen to less than 18% in the first nine months of this year.
When Donald Trump first started a trade war with China in 2018, Beijing found itself on the back foot and unsure of how to respond. This time President Xi Jinping is better prepared for a fight, even as he has more to lose.
Trump, who won a second term as president in an election on Tuesday, has threatened to put tariffs of as much as 60% on Chinese goods, a level that Bloomberg Economics says will decimate trade between the world’s biggest economies. That’s on top of a range of export controls on advanced technology that the Biden administration has only tightened since Trump left office.
In that time, China has taken strategic steps to ensure it’s more resilient and well positioned to strike back. Key to that has been expanding its toolkit, which now includes export controls on critical raw materials, in addition to tariffs on agricultural goods and an entity list that can target key American companies.
“China, psychologically speaking, is much more prepared in dealing with him again,” said Zhou Bo, a retired senior colonel in the People’s Liberation Army and senior fellow at Tsinghua University’s Centre for International Security and Strategy. China’s Foreign Ministry on Wednesday congratulated Trump on his election victory, saying it respects the choice of Americans.
Still, Xi would much prefer to avoid a tariff battle that risks proving much more devastating than the first round. China has relied on exports of goods like electric vehicles and batteries to buoy an economy beset by deflationary pressure and property woes, and Chinese lawmakers are meeting this week to formulate measures to bolster growth.
If Trump follows through on his tariff threats, Chinese authorities will need to do much more to help the economy. Goldman Sachs Group Inc. said last week that steeper trade restrictions on China may force Xi’s hand to bolster domestic consumption, something the Communist Party has traditionally sought to avoid.
The yuan on Wednesday weakened the most in two years and Chinese stocks fell, giving investors a taste of the volatility that lies ahead as Trump clinches the US presidency. The offshore yuan fell as much as 1.3% against the dollar, the largest one-day drop since October 2022. Chinese shares listed in Hong Kong bore the brunt of the selling, with a Hang Seng gauge closing 2.6% lower.
“China can hardly retaliate on 60% tariffs,” said Alicia Garcia Herrero, Asia Pacific chief economist at Natixis SA. “What China will do is to announce a bigger stimulus to counteract so that the market doesn’t penalize China.”
During Trump’s first term, roughly two years of threats, tariffs and talks ended with a deal signed in January 2020 that included a promise by China to buy US$200 billion worth of American goods to try and close its trade imbalance with the US. However, the outbreak of Covid around the same time quickly soured relations between the countries, and China never came close to achieving the targets as Chinese exports soared during the pandemic.
A renewed trade war threatens to do greater damage to global trade. Last year, Chinese companies exported US$500 billion in goods to the US, or about 15% of the value of all its exports. If the US were to put high tariffs on all or much of those products, it could wipe out those sales and further hurt firms facing a weak domestic economy and falling prices.
