Testing Self-Reliance: What the Trade War Reveals About China's Vulnerabilities and Power
Commentary
Jun 10, 2025
An employee works at Ji'an Xiechuang Electronic Technology Co., Ltd. in Ji'an, Jiangxi Province, China, March 6, 2025
Photo by Deng Heping/VCG/Reuters
By Gerard DiPippo and Benjamin Lenain
The United States and China stepped away from the brink of a near embargo of bilateral trade on May 12. The countries had entered an escalatory spiral after the Trump administration announced new tariffs in April. By April 11, tariffs on both sides had reached prohibitive levels. The Geneva negotiations allowed both sides to unwind their retaliatory measures and avoid a collapse in trade.
Both sides claimed victory. In the near term, the Trump administration achieved its goal of a mutual tariff de-escalation, and Beijing committed to resuming exports of rare earths and magnets. China secured a verbal commitment that the United States doesn't seek to decouple and a mechanism for future bilateral negotiations.
Since then, continued or increased export controls have been the major point of contention. Both sides negotiated a new framework on June 10 in London to allow de-escalation. Still, the U.S.-China truce could come apart.
Despite the uncertainty about the trajectory of U.S.-China trade relations, there are some clear lessons.
- First, economic brinksmanship is more about the political willingness to endure pain than the pain itself. Beijing believes its strategy of retaliating, preparing China's population for a protracted struggle, and waiting for Washington to seek an offramp was successful. Beijing will likely use this strategy again.
- Second, a trade embargo with the United States would be painful for China, but that vulnerability is diminishing as China shifts markets for direct exports and reduces import dependencies. China's continued reliance on U.S. technologies such as software that could be subject to Washington's export controls is a more acute vulnerability. The immediate problem for Beijing is that a trade shock would occur when the domestic economy is relatively weak.
- Third, recent U.S. actions vindicate Beijing's techno-industrial and self-reliance policies in the eyes of the Chinese leadership. These policies aren't going away, regardless of the outcome of bilateral talks. China's economy may suffer from weak domestic demand, but in the most recent round of the trade war, China's manufacturing and export dominance was decisive.
The trade war is as much a test of China's economic resilience as it is of U.S. pressure. Washington's trade leverage over Beijing is considerable but diminishing, while China's leverage through its exports is growing. Escalation focused on export controls rather than tariffs could result in narrower but deeper pain on both sides, with industries such as aviation (in China) and electric vehicles (in the United States) suffering.
Beijing is unlikely to back down unilaterally in response to a new wave of U.S. pressure that it perceives as intended to undermine China's rise.
While China could endure the shock if tensions re-escalate, it would be doing so at a fragile moment, highlighting both the limits of U.S. leverage and the stakes of Beijing's self-reliance strategy. Ultimately, politics will prevail over economics, and Beijing is unlikely to back down unilaterally in response to a new wave of U.S. pressure that it perceives as intended to undermine China's rise.
Supply vs. Demand: China's Self-Reliance Initiative at (Trade) War
Beijing views U.S. tariffs and export controls primarily through a political lens rather than an economic one. Chinese leaders are broadly convinced that Washington seeks to “contain” China and stunt its economic and technological development. In response, Beijing's techno-industrial and self-reliance policies have been in overdrive since roughly 2019, especially since Washington added Huawei to its Entity List and later imposed export controls on semiconductors. To many in Beijing, the current trade war is an extension of that U.S. effort, although President Trump is focused on trade issues with many other countries. For Chinese leaders, the second U.S.-China trade war is a test of China's sovereignty, and the economic resiliency Beijing has prioritized.
Economically, the trade war is, in effect, between supply (China) and demand (the United States). China is the world's leading manufacturing and exporting country. The United States is the world's largest market and net importer. The trade war risks exacerbating preexisting problems in both economies. For China, it could further harm demand and increase deflationary prices. In the United States, it could trigger another round of shortages and price hikes just as post-pandemic inflation is getting under control.
Beijing aims to increase China's self-reliance, but the country's economy has become increasingly reliant on external demand (net exports) in recent years due to internal weaknesses. However, China's rising trade surpluses haven't been with the United States, at least not directly. As of the first quarter of this year, China's goods trade surplus with all economies except the United States was equal to 3.8 percent of GDP, while its trade surplus with the United States was 1.9 percent. In 2021, it was 1.6 percent of GDP and 2.2 percent, respectively (Figure 1).
Figure 1: China's Increased Trade Surplus in Recent Years Isn't with the United States
Share of China's GDP (Rolling Four-Quarter Sums)
| Total Exports | Total Imports | Exports to United States | Imports from United States | |
|---|---|---|---|---|
| 3/2000 | 19% | 16% | 4% | 2% |
| 6/2000 | 20% | 17% | 4% | 2% |
| 9/2000 | 20% | 18% | 4% | 2% |
| 12/2000 | 20% | 18% | 4% | 2% |
| 3/2001 | 20% | 19% | 4% | 2% |
| 6/2001 | 20% | 19% | 4% | 2% |
| 9/2001 | 20% | 18% | 4% | 2% |
| 12/2001 | 20% | 18% | 4% | 2% |
| 3/2002 | 20% | 18% | 4% | 2% |
| 6/2002 | 20% | 18% | 4% | 2% |
| 9/2002 | 21% | 19% | 4% | 2% |
| 12/2002 | 22% | 20% | 5% | 2% |
| 3/2003 | 23% | 21% | 5% | 2% |
| 6/2003 | 24% | 22% | 5% | 2% |
| 9/2003 | 25% | 23% | 5% | 2% |
| 12/2003 | 26% | 25% | 5% | 2% |
| 3/2004 | 27% | 26% | 6% | 2% |
| 6/2004 | 28% | 27% | 6% | 2% |
| 9/2004 | 29% | 28% | 6% | 2% |
| 12/2004 | 30% | 28% | 6% | 2% |
| 3/2005 | 31% | 28% | 7% | 2% |
| 6/2005 | 32% | 28% | 7% | 2% |
| 9/2005 | 33% | 28% | 7% | 2% |
| 12/2005 | 33% | 28% | 7% | 2% |
| 3/2006 | 33% | 29% | 7% | 2% |
| 6/2006 | 33% | 29% | 7% | 2% |
| 9/2006 | 34% | 29% | 7% | 2% |
| 12/2006 | 35% | 28% | 7% | 2% |
| 3/2007 | 35% | 28% | 7% | 2% |
| 6/2007 | 35% | 27% | 7% | 2% |
| 9/2007 | 34% | 27% | 7% | 2% |
| 12/2007 | 34% | 26% | 6% | 2% |
| 3/2008 | 33% | 26% | 6% | 2% |
| 6/2008 | 32% | 26% | 6% | 2% |
| 9/2008 | 32% | 26% | 6% | 2% |
| 12/2008 | 31% | 24% | 5% | 2% |
| 3/2009 | 29% | 22% | 5% | 2% |
| 6/2009 | 26% | 20% | 5% | 2% |
| 9/2009 | 24% | 19% | 4% | 1% |
| 12/2009 | 23% | 19% | 4% | 1% |
| 3/2010 | 24% | 21% | 4% | 2% |
| 6/2010 | 25% | 22% | 4% | 2% |
| 9/2010 | 25% | 22% | 5% | 2% |
| 12/2010 | 25% | 22% | 5% | 2% |
| 3/2011 | 26% | 23% | 5% | 2% |
| 6/2011 | 25% | 23% | 4% | 2% |
| 9/2011 | 25% | 23% | 4% | 2% |
| 12/2011 | 25% | 23% | 4% | 2% |
| 3/2012 | 24% | 22% | 4% | 2% |
| 6/2012 | 24% | 22% | 4% | 2% |
| 9/2012 | 24% | 21% | 4% | 2% |
| 12/2012 | 24% | 21% | 4% | 2% |
| 3/2013 | 24% | 21% | 4% | 2% |
| 6/2013 | 23% | 20% | 4% | 2% |
| 9/2013 | 23% | 20% | 4% | 2% |
| 12/2013 | 23% | 20% | 4% | 2% |
| 3/2014 | 22% | 19% | 4% | 2% |
| 6/2014 | 22% | 19% | 4% | 2% |
| 9/2014 | 22% | 19% | 4% | 2% |
| 12/2014 | 22% | 18% | 4% | 1% |
| 3/2015 | 22% | 17% | 4% | 1% |
| 6/2015 | 21% | 17% | 4% | 1% |
| 9/2015 | 21% | 16% | 4% | 1% |
| 12/2015 | 20% | 15% | 4% | 1% |
| 3/2016 | 20% | 14% | 4% | 1% |
| 6/2016 | 20% | 14% | 3% | 1% |
| 9/2016 | 19% | 14% | 3% | 1% |
| 12/2016 | 19% | 14% | 3% | 1% |
| 3/2017 | 19% | 14% | 3% | 1% |
| 6/2017 | 19% | 15% | 3% | 1% |
| 9/2017 | 18% | 15% | 3% | 1% |
| 12/2017 | 18% | 15% | 3% | 1% |
| 3/2018 | 18% | 15% | 3% | 1% |
| 6/2018 | 18% | 15% | 3% | 1% |
| 9/2018 | 18% | 15% | 3% | 1% |
| 12/2018 | 18% | 15% | 3% | 1% |
| 3/2019 | 18% | 15% | 3% | 1% |
| 6/2019 | 18% | 15% | 3% | 1% |
| 9/2019 | 17% | 14% | 3% | 1% |
| 12/2019 | 17% | 14% | 3% | 1% |
| 3/2020 | 17% | 14% | 3% | 1% |
| 6/2020 | 17% | 14% | 3% | 1% |
| 9/2020 | 17% | 14% | 3% | 1% |
| 12/2020 | 17% | 14% | 3% | 1% |
| 3/2021 | 18% | 14% | 3% | 1% |
| 6/2021 | 18% | 14% | 3% | 1% |
| 9/2021 | 18% | 14% | 3% | 1% |
| 12/2021 | 18% | 15% | 3% | 1% |
| 3/2022 | 19% | 15% | 3% | 1% |
| 6/2022 | 19% | 15% | 3% | 1% |
| 9/2022 | 20% | 15% | 3% | 1% |
| 12/2022 | 20% | 15% | 3% | 1% |
| 3/2023 | 20% | 15% | 3% | 1% |
| 6/2023 | 20% | 14% | 3% | 1% |
| 9/2023 | 19% | 14% | 3% | 1% |
| 12/2023 | 19% | 14% | 3% | 1% |
| 3/2024 | 19% | 14% | 3% | 1% |
| 6/2024 | 19% | 14% | 3% | 1% |
| 9/2024 | 19% | 14% | 3% | 1% |
| 12/2024 | 19% | 14% | 3% | 1% |
| 3/2025 | 19% | 13% | 3% | 1% |
Source: General Administration of Customs and National Bureau of Statistics via CEIC.
Note: Includes only merchandise trade.
China's trade relationship with the United States is asymmetric, giving it market power. Generally, in a trade war, one country imposes costs on the other primarily by restricting its imports from that target country. But China has weaponized its exports to greater effect than its imports. Beijing imposed export controls on rare earths and magnets, goods needed by the defense, electric vehicle, wind energy, and consumer electronics industries. The effective U.S. embargo on Chinese goods until the Geneva deal meant that U.S. shelves might become empty for some consumer goods, and supply chains would take a hit.
From a supply perspective, China holds significant trade leverage over the United States. Last year, China exported $525 billion worth of goods to the United States while importing $164 billion from America, according to Chinese data. Using methodology from the Reserve Bank of Australia, we found that roughly 40 percent of China's exports to the United States fall into categories where China supplies more than half of America's total imports, but the United States represents less than half of China's export market for those goods (Figure 2). This includes critical products like smartphones, laptops, and lithium-ion batteries—items so important that the White House exempted smartphones and laptops from high tariffs on April 11. In contrast, the United States has less direct export leverage over China. America holds similar market power for only 12 percent of its exports to China, with liquified propane gas being the largest category where the United States has significant influence (Figure 3).
Beijing's exemptions to its retaliatory tariffs in late April reveal where it thinks it critically depends on U.S. imports. While Beijing has not published an official exemption list, a draft list circulated among firms suggests that the exemptions cover nearly 30 percent of China's U.S. imports, including semiconductors and related equipment, as well as aircraft, parts, and jet engines.
Figure 2: China Has High Market Power for 40 Percent of Its Exports to the United States
The scatter chart is broken up into four quadrants, with the top left labelled "High U.S. market power," the top right "Mutually dependent," the bottom left "Easy to divert," and the bottom right "High China market power." The vast majority of the bubbles are in the bottom two quadrants. The Y-axis is labelled "U.S. Share of CHN Exports," and the X-axis is labelled "CHN Share of U.S. Imports." See the text for more analysis.
Source: Trade Data Monitor.
Note: Data are at the HS6 product level for 2024. Dot size indicates the value of China's exports; only export categories over $5 million are plotted in the chart.
Figure 3: The United States Has Less Market Power with Its Exports to China
The scatter chart is broken up into four quadrants, with the top left labelled "High China market power", the top right "Mutually dependent", the bottom left "Easy to divert", and the bottom right "High U.S. market power." The majority of the bubbles are in the bottom left quadrant with a large number in the bottom right and several in the top left. There are a few bubbles in the top right. The Y-axis is labelled "CHN Share of U.S. Exports," and the X-axis is labelled "U.S. Share of CHN Imports." See the text for more analysis.
Source: Trade Data Monitor.
Note: Data are at the HS6 product level for 2024. Dot size indicates the value of China's imports; only export categories over $5 million are plotted in the chart.
China exports more manufactured goods than any other country, but it produces even more manufactured goods for its internal market. Last year, U.S. export revenues accounted for roughly 2 percent of Chinese manufacturers' total revenues. Among larger industries, China's electronics and electrical equipment industries were the most reliant on exports, but U.S. export revenues were only 4.5 percent of revenues for those industries (Figure 4). Some industries rely more on U.S. exports, such as toys and sporting goods (8 percent of revenues) and furniture (5.5 percent), but they're smaller.
Figure 4: China's Electronics Industries Depend the Most on Exports
Figures for 2024
| Domestic Revenues | U.S. Export Revenues | Other Export Revenues | |
|---|---|---|---|
| Consumer Electronics | 1,383 | 136 | 755 |
| Electrical Equipment | 1,315 | 37 | 198 |
| Toys & Sporting Goods | 143 | 15 | 31 |
| Automobiles | 1,360 | 13 | 122 |
| General Machinery | 589 | 13 | 90 |
| Specialized Machinery | 456 | 12 | 73 |
| Metal Products | 585 | 11 | 61 |
| Clothing | 138 | 10 | 31 |
| Rubber & Plastics | 361 | 10 | 55 |
| Chemicals | 1,214 | 7 | 72 |
| Pharmaceuticals | 325 | 7 | 24 |
| Furniture | 74 | 5 | 16 |
| Leather & Footwear | 92 | 5 | 23 |
| Agricultural Products | 711 | 5 | 27 |
| Instruments & Meters | 129 | 4 | 19 |
| Other Transport | 163 | 3 | 51 |
| Cement & Glass | 693 | 3 | 21 |
| Printing & Media | 86 | 3 | 5 |
| Nonferrous Metals | 1,177 | 3 | 28 |
| Food Products | 288 | 2 | 17 |
| Misc Manufacturing | 21 | 2 | 7 |
| Paper Products | 193 | 1 | 10 |
| Textiles | 301 | 1 | 35 |
| Wood Products | 122 | 1 | 4 |
| Fuels | 790 | 1 | 23 |
| Tobacco | 191 | 0 | 1 |
| Iron & Steel | 1,113 | 0 | 29 |
| Beverages | 220 | 0 | 3 |
| Synthetic Fibers | 154 | 0 | 10 |
Source: National Bureau of Statistics via CEIC and International Trade Centre.
Note: Ranked by U.S. export revenues. Export revenues by sector are based on NBS industrial survey data. U.S. shares are estimated from China Customs trade data (FOB basis) and applied proportionally. China Customs values are often higher because they include FOB prices and re-exports, while NBS data reflects enterprise-level revenue, excluding many trading firms and potentially underreporting contract manufacturing.
China's total economic exposure to U.S. final demand is larger, however. Direct gross revenue reliance on the United States is small, but a larger portion of domestic revenues depends on domestic products or services that are indirectly incorporated into U.S.-bound exports. On a value-added basis, U.S. final demand accounted for about 3 percent of China's economy in 2020, the latest data available (Figure 5). U.S. exposure was much higher for manufactured goods (China's main exports) than for services.
In recent years, as its export reliance increased, China's manufacturing sector has exported roughly 30 percent of its value-added, of which at least 20 percent goes to the U.S. market. Tariffs only apply directly to bilateral goods, not services, and therefore, the trade war doesn't risk all of China's exported value-added to the United States. However, if Washington imposes large tariffs on Southeast Asia—the main destination for Chinese firms' offshored production for exports to the United States—it could have a bigger impact. Private-sector analysts estimated that a sustained embargo-level trade war (in both directions) would reduce China's GDP by roughly 2.5 percent.
Figure 5: China's Industry-Level Exposure to U.S. Final Demand in 2020
| Industry | Industry Share of China's Economy | U.S. Share of Final Demand for China Industry | U.S. Final Demand Share of China's Economy |
|---|---|---|---|
| Agriculture, Forestry and Fishing | 3.97% | 0.37% | 0.01% |
| Mining and Quarrying | 0.07% | 12.25% | 0.01% |
| Manufacturing | 27.33% | 6.81% | 1.86% |
| Food Products | 5.62% | 1.54% | 0.09% |
| Textiles and Garments | 3.06% | 12.11% | 0.37% |
| Wood Products | 0.05% | 15.16% | 0.01% |
| Paper and Media | 0.39% | 3.24% | 0.01% |
| Coke and Refined Petroleum Products | 0.30% | 2.99% | 0.01% |
| Chemical Products | 0.37% | 9.58% | 0.04% |
| Pharmaceutical Products | 0.89% | 5.10% | 0.05% |
| Rubber and Plastics | 0.21% | 17.49% | 0.04% |
| Other Non-Metallic Mineral Products | 0.11% | 7.37% | 0.01% |
| Basic Metals | 0.04% | 6.92% | 0.00% |
| Metal Products | 1.12% | 2.67% | 0.03% |
| Computer, Electronic and Optical Products | 3.53% | 13.01% | 0.46% |
| Electrical Equipment | 1.67% | 7.60% | 0.13% |
| Motor Vehicles | 3.57% | 6.15% | 0.22% |
| Other Transport Equipment | 0.94% | 2.37% | 0.02% |
| Furniture, Jewellery, and Toys | 1.35% | 18.75% | 0.25% |
| Utilities | 2.54% | 0.30% | 0.01% |
| Services (including Construction) | 66.09% | 1.62% | 1.07% |
| Total | 100.00% | N/A | 2.97% |
Source: OECD Trade in Value Added (TiVA) 2023 edition.
Lost access to the U.S. market would also mean lost jobs in China at a time when overall unemployment is high. Private-sector analysts estimated in April that the trade embargo could result in up to 16 million lost jobs in China. Those losses would be concentrated in China's manufacturing industries—especially consumer electronics and electrical equipment—and its wholesale and retail industry, which are the most exposed to U.S. final demand (Figure 6). That would mean losing about 2 percent of China's 734 million jobs, which would disproportionately affect export-oriented, coastal provinces.
Figure 6: Chinese Workers in Manufacturing and Wholesale and Retail Trade Have the Most to Lose from U.S. Tariffs
| U.S. Share of Final Demand for Industry (Left) | Employment in Millions (Right) | |
|---|---|---|
| Mining | 12.3% | 4.77 |
| Manufacturing | 6.8% | 123.18 |
| Wholesale & Retail | 5.6% | 135.50 |
| Transport & Storage | 2.7% | 28.55 |
| IT Services | 2.4% | 16.72 |
| Hospitality | 1.5% | 34.35 |
| Other Services | 1.5% | 183.71 |
| Construction | 0.9% | 60.79 |
| Finance | 0.9% | 12.48 |
| Agriculture & Fishing | 0.4% | 3.41 |
| Utilities | 0.3% | 5.08 |
Source: National Economic Census (2024) and OECD Trade in Value Added (TiVA).
Note: Employment figures are from 2023 and include only formally registered workers. U.S. share of final demand based on Trade in Value Added data from 2020, the latest available.
China has faced even bigger economic headwinds than the trade war in recent years. However significant the shock from U.S. tariffs, it almost certainly wouldn't be as dramatic as China's property-sector collapse. Before the COVID-19 pandemic, the property sector—including construction and related inputs—was the most important broad industry in China's economy. Sales of newly constructed properties relative to GDP declined by five percentage points of GDP in 2022 and have fallen from 16 percent in mid-2021 to 5 percent as of this year. China's direct goods exports to the United States are a comparatively small 3 percent of GDP (Figure 7).
Figure 7: Losing U.S. Export Market Wouldn't Hurt China's Economy as Much as Property Collapse Has
Share of China's GDP (Rolling Four-Quarter Sums)
| Goods Exports to United States | New Property Sales | |
|---|---|---|
| 03/2013 | 4% | 10% |
| 06/2013 | 4% | 10% |
| 09/2013 | 4% | 11% |
| 12/2013 | 4% | 11% |
| 03/2014 | 4% | 10% |
| 06/2014 | 4% | 10% |
| 09/2014 | 4% | 9% |
| 12/2014 | 4% | 9% |
| 03/2015 | 4% | 9% |
| 06/2015 | 4% | 9% |
| 09/2015 | 4% | 10% |
| 12/2015 | 4% | 10% |
| 03/2016 | 4% | 10% |
| 06/2016 | 3% | 11% |
| 09/2016 | 3% | 12% |
| 12/2016 | 3% | 12% |
| 03/2017 | 3% | 12% |
| 06/2017 | 3% | 13% |
| 09/2017 | 3% | 12% |
| 12/2017 | 3% | 13% |
| 03/2018 | 3% | 13% |
| 06/2018 | 3% | 13% |
| 09/2018 | 3% | 13% |
| 12/2018 | 3% | 14% |
| 03/2019 | 3% | 14% |
| 06/2019 | 3% | 14% |
| 09/2019 | 3% | 14% |
| 12/2019 | 3% | 14% |
| 03/2020 | 3% | 14% |
| 06/2020 | 3% | 14% |
| 09/2020 | 3% | 14% |
| 12/2020 | 3% | 15% |
| 03/2021 | 3% | 15.7% |
| 06/2021 | 3% | 15.9% |
| 09/2021 | 3% | 15% |
| 12/2021 | 3% | 14% |
| 03/2022 | 3% | 13% |
| 06/2022 | 3% | 11% |
| 09/2022 | 3% | 10% |
| 12/2022 | 3% | 9% |
| 03/2023 | 3% | 9% |
| 06/2023 | 3% | 9% |
| 09/2023 | 3% | 8% |
| 12/2023 | 3% | 7% |
| 03/2024 | 3% | 7% |
| 06/2024 | 3% | 6% |
| 09/2024 | 3% | 5% |
| 12/2024 | 3% | 5% |
| 03/2025 | 3% | 5% |
Sources: General Administration of Customs and National Bureau of Statistics via CEIC.
However, the collapse of the property sector and its effects on consumer confidence are reasons Beijing should fear an intense trade war. China's economy is becoming more secure from a supply perspective, but it's suffering from an internal demand shock that Beijing is struggling to offset, even with this year's expanded stimulus spending. It's not that China's economy can't weather the loss of the U.S. export market in general. It's that it would be happening at a bad time for China's economy and Beijing's ability to engineer and fund more stimulus.
It's not that China's economy can't weather the loss of the U.S. export market in general. It's that it would be happening at a bad time for China's economy and Beijing's ability to engineer and fund more stimulus.
The trade war has reshaped the U.S.-China economic relationship, with America's relative position weakening over time. While Washington retains meaningful leverage over Beijing, especially via technology controls, that influence is diminishing as China reduces its vulnerabilities. Meanwhile, China's control over critical supply chains—from smartphones to batteries to critical minerals—continues to deepen. Beijing has spent the past five years preparing for prolonged economic competition with America, viewing trade tensions as confirmation of its strategy to reduce dependence on U.S. markets and technology. Irrespective of future trade negotiations, this trajectory is unlikely to shift.