TOKYO — Few anticipated the self-control that Donald Trump appears to be exercising toward China this week.
While North American allies Canada and Mexico are looking at 25% tariffs, arch-rival China got away with just 10%. No one is more surprised than Beijing policymakers who feared the worst as the Trump 2.0 era hits the ground running.Rare earth piece in Ukraine peace deal puzzle
True, Ottawa and Mexico City managed to secure 30-day delays. But the tariffs are coming. Both nation’s pledges to toughen border security won’t stop Trump from achieving a multi-decade goal of sticking it to countries he thinks mooch off America.
Xi Jinping’s rather laid-back response so far, by contrast, suggests China’s leader is keeping his retaliatory options open — and his powder dry.
Beijing did announce a more limited 15% tariff on certain types of coal and liquefied natural gas, and a 10% tax on crude oil, agricultural machinery, large-displacement cars and pickup trucks. But bigger retaliatory efforts remain an option.
For now, Xi has every reason to believe he already has the upper hand versus Trump on a number of levels as the US leader wears out his global welcome in a hurry.
“The Trade War 2.0 may trigger a stagflation narrative as it involves not only US-China trade but with other major trading partners,” says Kelvin Wong, senior analyst at brokerage OANDA.
Tony Sycamore, market analyst at IG Australia, thinks the chaos has only just begun.
“The overnight pushing back of tariffs on Mexico serves as a reminder of the cycle we have entered: tariff announcements are followed by calls and negotiations, declarations of victory, and then the cycle begins anew,” Sycamore says. “Ultimately the path leads to higher tariffs, slower growth, higher inflation and less certainty for risk takers and equities.”
For one thing, the goodwill is gone. Hitting Canada and Mexico hard for questionable reasons signals that Trump’s revenge tour is in full swing.
Trump’s assault on the World Trade Organization order won’t soon be forgotten. And the speed with which he threatened to wreck Colombia’s economy over a minor diplomatic hiccup leaves little hope that Trump will act in good faith.
For another, Xi knows that China is less reliant on the US today than in 2017, the first time Trump entered the White House. As Carlos Casanova, economist at Union Bancaire Privée, points out, the impact of Trump’s tariffs is “manageable” for China so far.
“US exports account for only 3% of [China’s] GDP, compared to 15% for the rest of the world,” Casanova says. As such, he adds, “devaluation wouldn’t significantly improve trade terms while potentially risking heightening tensions with other trading partners in Europe and Asia.”
Instead, Casanova notes, “China is likely to use a combination of tax exemptions and deflationary measures to offset the impact of expected tariffs, much like what we saw during the first trade war. China’s commerce ministry indicated plans to bring a case at the World Trade Organization and vowed unspecified ‘corresponding countermeasures’ to protect its rights and interests.”
This latter instinct is driven by Beijing’s view that Trump is ceding it the moral high ground.
Back in November, after Trump’s election win, China stepped up efforts to present itself as the more stable and predictable power — the keeper of the rules-based global order that Washington had turned against.
Team Xi has busily positioned China as the protector of free trade, globalization and multilateral institutions. On November 15, for example, Xi declared that China stands ready to protect the “interdependent world” from “severe challenges” as a “new period of turbulence and change” approaches.
Then there’s the inflationary potential of what Trump is doing, warns Mohit Kumar, an economist at Jefferies. His tariffs and counter-tariffs “will be inflationary” while leading to “weaker growth prospects” and proving “negative for equities.”
All this has Asia rethinking ties to Washington.
In Seoul, where the political system is in abject chaos, officials are viewing Beijing with renewed affection. Ditto for Japan’s ruling Liberal Democratic Party. Only this week is the LDP getting some Trump facetime for Prime Minister Shigeru Ishiba after months of trying.
Xi’s inner circle is clearly worried about the 60% tariffs Trump has threatened. And odds are, taxes of that magnitude are coming, regardless of what Trump’s inner circle is signaling today.
The kind way of explaining what’s afoot in Trumpworld is that a deliberate, well-calibrated strategy is unfolding. Hitting Canada and Mexico sets the stage for another North American Free Trade Agreement (NAFTA) reboot.
That, in theory, enables Trump to consolidate power in America’s historic sphere of economic influence, reshaping supply chains closer to home and encouraging migrants to stay at home.
While this recalibration unfolds, Team Trump can prepare to aim Washington’s full financial arsenal at China. Admittedly, this affords Trump’s team the benefit of the doubt on many levels that it hasn’t earned.
If personnel really is policy, then the characters with whom Trump 2.0 is surrounding itself should worry Xi’s Communist Party.
An American government doesn’t entrust economic policy decisions to Peter Navarro and Robert Lighthizer acolyte Jamieson Greer if a “grand bargain” trade deal with China is a top priority.
The same goes for the anti-China foreign policy team Trump assembled. A White House doesn’t hire Marco Rubio, Mike Waltz, John Ratcliffe or Pete Hegseth if forging a more productive China relationship is the grand plan.
Case in point: Ratcliffe’s first act as CIA director was to amplify the theory that Covid-19 most likely started in a Chinese lab, not randomly in a wet market. It offers a glimpse into the mindset of Trump’s inner circle.
At the same time, even the cabinet hires deemed to be less MAGA-ish than most are learning their Trumpian talking points. Look no further than Scott Bessent, Trump’s Treasury secretary, accusing Beijing of flooding the globe with cheap goods to finance its military ambitions.
The hedge fund billionaire claims that China has “the most imbalanced economy in the history of the world” and that it might be suffering a “severe recession/depression.” If so, wouldn’t he be advising Trump not to kick a US$18 trillion economy when he supposedly thinks it’s on the verge of collapse?
Not that it would help. Trump’s most consistent geopolitical view over the decades is that Asia is siphoning American jobs and wealth and must be stopped. Back then, Japan was cast in the role of boogeymen, a nemesis that the “Tariff Man” superhero of Trump’s imagination sought to avenge.
The mid-1980s zeitgeist had Hollywood churning out films like Gung Ho. Starring Michael Keaton, the movie explored how Japan Inc was exploiting Detroit auto workers. It was a period that Michael Crichton immortalized in his best-selling novel “Rising Sun.”
That was at the height of Japan’s “bubble economy” era, a time when academics like Harvard University’s Ezra Vogel, author of “Japan As Number One — Lessons for America”, characterized Tokyo as an unstoppable economic force.
So great was the perceived threat that Washington pulled off the “Plaza Accord” currency deal to weaken the dollar at a New York hotel that Trump owned for a time.
At the time, New York property mogul Trump was a regular on daytime talk shows complaining Japan had “systematically sucked the blood out of America – sucked the blood out! They have gotten away with murder. They have ended up winning the war.”
Today, China inhabits this role. It’s more complicated, though, given Trump’s oft-articulated affection for Xi. On January 23, for example, Trump said “I like President Xi very much. I’ve always liked him.” Trump added that he’s “always had a great relationship” with China’s strongest leader since Mao Zedong.
Yet Trump and Xi seem on a collision course, nonetheless. After a dozen years at the helm, Xi has shown little inclination to bow to Trump.
There are reports that China is indeed working up an opening offer for trade talks. As The Wall Street Journal and others report, though, most of the items involve reviving the “Phase 1” deal Trump signed with Xi in 2020. That won’t satisfy Trump, who’s expecting big market-access wins.
At the same time, China has greater scope to retaliate than it did in 2017, when Trump entered the White House the first time. Greater scope, too, than Japan had back in the 1980s.
Of course, China worries greatly about Trump’s 60% tariff threat. Economists at UBS reckon taxes of that magnitude will cut China’s annual growth by more than half — shaving 2.5 percentage points off gross domestic product.
Yet Xi could take a page from Canada and target countermeasures at Trump-supporting red states. For example, China could exact great pain by altering agricultural purchases. And by taxing mainland goods sourced by Amazon, Costco, Target and Walmart.
China could impose surcharges on household-name American companies from Boeing to General Motors to John Deere to Starbucks. Or China could meddle with Apple, Microsoft, Nike and other household name companies.
Could Musk find himself in harm’s way? Along with making electric vehicles for China— which now accounts for more than a third of Tesla sales — Musk’s Shanghai “gigafactory” is a major producer of EVs going to third countries.
For now, though, no one really knows what to expect from Trump.
“These announcements have come as a shock to many investors who expected tariffs would only be imposed if trade negotiations failed,” says Goldman Sachs strategist David Kostin. “Our economists describe the outlook as unclear but believe there is a substantial probability that the tariffs on Canada and Mexico will be temporary.”
Nomura Holdings strategists write in a note that “macro-wise, we think the immediate channel where Asian equities might be impacted is via a potentially higher US dollar. We also believe investors are likely to assess which sectors or areas in China might be more exposed to these tariffs.”
Yet only Trump and the China skeptics in his orbit can say for sure. This is leaving global markets in suspense in ways that might play into China’s hands.
Follow William Pesek on X at @WilliamPesek