Trump’s China trade war plan keeps markets guessing
Donald Trump hasn’t applied maximum tariff pressure on China, yet, leaving room for markets to speculate and swoon
Your move, President Xi. This may be the key message from Donald Trump’s surprising reversal on massive “day one” tariffs on China.
The reprieve Trump appears to have granted Asia’s biggest economy is one Xi Jinping’s Communist Party surely didn’t see coming. For weeks now, Trump and the gang of anti-China advisers he’s named to his new administration promised immediate 60% tariffs as the centerpiece of a “shock-and-awe” trade war.
Not so fast, it turns out. Taxes on Chinese goods are notably absent from the tsunami of first-week executive orders. When pressed, Trump even lowered his sights. Whereas Canada and Mexico face 25% levies by February 1, China might suffer a mere 10%.
Odds are, this is Trump’s way of cajoling Xi to the negotiating table for a giant Group of Two trade deal. To be sure, slow-walking China tariffs are aimed partly at the stock market.
Though Trump couldn’t care less about legalities, norms or diplomatic etiquette, he cares a great deal about Wall Street. Headlines about equities tumbling this week are the last thing the new US president wants.
Yet Trump is still spoiling for an epic clash with China, particularly once he realizes that Xi isn’t Shinzo Abe.
Beginning in December 2012, Japanese Prime Minister Abe pledged to revitalize an economy fast being eclipsed by China. In the years that followed, Abe empowered the Bank of Japan to push its ultraloose policies into uncharted territory and took steps to strengthen corporate governance.
Then came the Trump 1.0 era, threatening trade wars the likes of which Asia had never seen. Immediately, Abe snapped to attention to attempt to shield Asia’s No. 2 economy from Trump’s tariffs.
Following Trump’s shock election win in November 2016, Abe made a beeline for New York. He was the first world leader to visit Trump Tower to congratulate the man.
Abe did more than that, vouching for the “America First” president in gushing terms. “I am convinced Mr. Trump is a leader in whom I can have great confidence” and “a relationship of trust,” Abe told reporters that day.
In the months and years that followed, Abe made a global splash wining and dining with Trump’s first White House team — including at Trump’s Florida golf club. On top of heaping praise, Abe gifted him pricy golf gear, including a US$3,755 driver, among other fancy gifts.
Abe was feted as a geopolitical Trump whisperer, credited for protecting Japan from the worst of the trade war. One way Abe tamed Trump was acquiescing to a bilateral trade deal in 2019. Abe’s real success was in running out the clock on Trump 1.0. By slow-walking on negotiations, Tokyo managed to achieve a “draw” between the two nations.
At the end of the process, Japan effectively agreed to the same market-opening steps it had under the Barack Obama-led Trans-Pacific Partnership (TPP) pact that Trump scrapped.
Team Abe distracted Trump with greater market access for US beef, pork, and wheat exporters. But the deal pointedly didn’t include automotive goods. Tokyo rejoiced.
“With typical hyperbole, President Trump declared the deal phenomenal,” notes Matthew Goodman, who at the time led economic policy for the Center for Strategic and International Studies. “But once again, President Trump … settled for a minimalist deal.”
Can Xi pull off a similar rearranging-of-the-deckchairs US trade deal? The question is whether Xi’s party will even bother.
After all, few world leaders had a worse 2024 than Xi. China’s property crisis, weak household demand, near-record youth unemployment and aging population have produced deflationary pressures for seven consecutive quarters now.
The second-biggest economy also saw an alarming increase in in-person protests. And China Inc. is still dealing with the fallout from Xi’s tech-sector crackdown.
Xi, in other words, has some things for which to answer. It is doubtful his party would be happy to see the most powerful Chinese leader since Mao Zedong appearing to cede ground to Trump — or appearing to bow to Washington on the world stage.
But Xi also surely knows that after a period of calm, Trump will almost certainly order up the tariffs he’s threatened — and perhaps even bigger ones than he’s telegraphed. Trump’s top benefactor, Tesla billionaire Elon Musk, last year talked about the need for tariffs on Chinese electric vehicles.
“The Chinese car companies are the most competitive car companies in the world,” Musk told investors. “So, I think they will have significant success outside of China depending on what kind of tariffs or trade barriers are established.” Musk has since walked back these comments, but China has every reason to worry Trump might go after China’s auto industry.
For now, Trump claims to have commissioned a sweeping review of Washington’s trade relationships with China and other key trading partners. The White House, Team Trump says, will “investigate and remedy persistent trade deficits that harm our economy and security.”
Such reviews take time, of course. Years, in some cases. But Trump’s US Trade Representative office hardly needs probes to know that his 2018 deal with Xi was a dud. To Chad Bown at the Peterson Institute for International Economics, the way in which the first Trump-Xi trade deal “fell short” is the “anatomy of a flop.”
As Bown sees it, “attempting to manage trade — to meet Trump’s objective of reducing the bilateral trade deficit — was self-defeating from the start. It did not help that neither China nor the United States was willing to de-escalate their debilitating tariff war.”
Nor does that seem the trajectory today as Trump surrounds himself with China hardliners. They include advisor Peter Navarro, who co-wrote a book titled “Death By China.” And trade czar Robert Lighthizer, who’s signaled that Trump 2.0 is considering a currency devaluation gambit.
Even US Treasury Secretary-nominee Scott Bessent, who’s considered less MAGA-ish than most Trump cabinet picks, has taken to discussing China in dark terms. During his recent confirmation hearing, Bessent said China had “the most imbalanced economy in the history of the world” and that it might be suffering a “severe recession/depression.”
Bessent also segued to MAGA talking points about Beijing’s supposedly flooding the globe with cheap goods to finance its military ambitions. Commenting on Trump’s earlier deal, Bessent argued that “China has not made good on their [agriculture] purchases” and that the US will push Beijing to resume those purchases and perhaps add a “make-up provision.”
Yet all this speaks to the high odds that Trump’s trade war will reemerge sooner rather than later. “If there’s any lesson for US-China relations from Trump 1.0, it is that he is a volatility machine and predicting what he will do is a sucker’s game,” says longtime China watcher Bill Bishop, who writes the Sinocism newsletter.
Bishop notes that investors “had found some comfort in the fact that President Trump did not impose more tariffs on [China] on his first day in office, but they forget his earlier promise to impose 10% tariffs, in addition to any other tariffs that may come on, because of fentanyl. He reiterated the 10% tariff threat Tuesday.”
The delay does afford Xi a big opportunity. While Trump is distracted with domestic exploits – from avenging his critics to overseeing a mass deportation program for undocumented residents to devising tax cuts – Xi’s team could accelerate efforts to reduce its trade surplus the organic way by increasing domestic demand as a means of boosting import activity.
On the one hand, China’s nearly US$1 trillion trade surplus proves that efforts by Trump 1.0 and the West in general to alter the mechanics of world trade came up short. China’s global manufacturing dominance has only grown since 2017, a fact Trump 2.0 can verify with a mere Google search. Yet Xi has the power to alter these global dynamics.
A vital first step would be to end the property crisis once and for all. The drip, drip, drip of bad news about housing demand and prices is deflating consumer prices and confidence simultaneously. Beijing’s slow response continues to inspire “Japanification” chatter and have some on Wall Street debating if China is “uninvestable.”
On Monday, Fitch Ratings downgraded homebuilder China Vanke Co., a reminder that default risks continue to hover over the sector. The move “reflects a deterioration in China Vanke’s sales and cash generation, which is eroding its liquidity buffer against large capital market debt maturities in 2025,” says Fitch analyst Rebecca Tang.
Trouble is, Vanke’s challenges are hardly unique. The extreme downward pressure on the yuan, meantime, could increase default risks as offshore debt payments become harder to make. This tug of war is limiting the People’s Bank of China’s latitude to cut interest rates.
Xi could take steps to accelerate China’s pivot toward increased domestic demand-led growth, reducing Trump 2.0’s argument that Beijing isn’t sharing its 5% rate of annual output globally.
At the moment, “China’s economy is showing signs of revival, led by industrial output and exports,” says Frederic Neumann, chief Asia economist at HSBC.
Yet a trade war would put these drivers in harm’s way. What’s needed are large and robust social safety nets to encourage households to spend more and save less. Xi and Premier Li Qiang talk often about doing so, but little has been achieved to transform China’s consumption dynamics.
The drop in “spending on property by roughly half since the peak in 2021 represents a huge drop in domestic demand, which cannot be easily replaced by more spending on consumer goods or government investment,” says economist Duncan Wrigley at Pantheon Macroeconomics.
Only top-down policy shifts in Beijing could jumpstart household demand and halt the deflationary pressures making headlines. At the same time, international funds are still waiting on moves to strengthen capital markets, improve corporate transparency, reduce the dominance of state-owned enterprises and make more space for startups to disrupt the economy.
This will require considerable political will in Beijing – and patience on the part of investors. Though markets crave major retooling, they don’t often afford Team Xi the space and time needed to execute them.
Moves to repair, change or tweak China’s engines are certain to depress growth somewhat. Markets, though, tend to react badly when upgrades soften growth.
This paradox has carried over into 2025. The slow pace of reform in recent years is catching up with Xi’s government, and markets are reacting badly. Mainland stocks began 2025 with their weakest start since 2016. That has Beijing rolling out measures to stabilize equities.
Among them is boosting how much pensions can invest in listed Chinese companies as investors brace for the second Trump administration. It’s part of a Beijing directive is to “steady the stock market, and clear bottlenecks for the introduction of mid-to-long-term capital,” according to the China Securities Regulatory Commission.
Yet nothing might steady Chinese markets faster than knowing how or when Trump might tax Beijing – and by how much. Until traders get an answer, 2025 is sure to make market volatility great again.
Follow William Pesek on X at @WilliamPesek