US-China Watch

Trade wars are political wars. Politicians want you to think otherwise, attempting to rationalize trade aggression through economic arguments. On the surface, these arguments are seductive, promising spoils to the winners of trade conflicts through a zero-sum resolution of deeply ingrained economic grievances. But in the end, trade wars are a race to the bottom, with no winners. That is the lesson of the 1930s, and a worrisome parallel with what may now be happening.

The escalating Sino-American conflict is an obvious and critical case in point. For all practical purposes the US-China trade war now boils down to MAGA versus the Chinese Dream, or Donald Trump versus Xi Jinping. Two seemingly intransigent political leaders are locked into battle, fueled by ideological commitments to their respective political bases.

Trump, the so-called dealmaker, attempts to convey a transactional impression that belies any ideological conviction. Yet even if he cuts a deal with China, it will have to be sold to his MAGA base on their terms, as an antidote to the so-called China shock and all of its presumed corrosive ramifications—trade deficits, the hollowing of Smokestack America, the plight of the US working class, America’s fentanyl drug crisis, and on and on. For MAGA extremists, there is no middle ground—any compromise would be viewed as nothing short of capitulation.

The politics are different for Xi Jinping, but no less compelling. Xi’s political contract was sealed with a solemn pledge that he made in November 2012, shortly after having been appointed as General Secretary of the Chinese Communist Party. On the steps of the National Museum of China, prominently situated on Tiananmen Square in the heart of Beijing, Xi emerged from a massive exhibit, “The Road to Rejuvenation,” and, in the presence of the newly appointed Standing Committee of the Politburo of the CCP, he first espoused what has since become known as the Chinese Dream:

“The Chinese dream, after all, is the dream of the people.
We must realize it by closely depending on the people.
We must incessantly bring benefits to the people.
Realizing the great renewal of the Chinese nation is the
Greatest dream for the Chinese nation in modern history.”

Framed around the twin commitments to prosperity and rejuvenation, the Chinese Dream is no less a political anchor to modern China than MAGA is to Trump. It was no accident that this messaging was orchestrated to reinforce the key theme of a museum exhibition on China’s “century of humiliation.” From the opium wars and foreign occupation of the mid-19^th century to revolution in the 1940s, to the founding of the People’s Republic of China in 1949, Xi’s statement at the National Museum of China in November 2012 (illustrated below) spoke of a renewal from which there can be no turning back. Modern China’s political calculus flows from this promise.

Even if we in the West, disagree with the principles and tactics of Chinese renewal, we need to take this promise seriously. If anything, Xi Jinping’s commitment to this political contract has deepened over the years, spurring a surge of nationalistic fervor with important implications for China’s role in the world at large. In a speech delivered on July 1, 2021, on the occasion of the 100^th anniversary of the founding of the Chinese Communist Party,  Xi Jinping essentially operationalized this political contract, warning that, “We will never allow any foreign force to bully, oppress, or subjugate us,” he said, before stressing that, “… having the courage to fight and the fortitude to win is what has made our Party invincible.”

It is in this context that we need to interpret China’s latest promise “to fight to the end” in response to Trump’s tariff actions of early 2025: Two rounds of 10% tariff hikes due to fentanyl, a “reciprocal” adjustment of 34%, and a 50% penalty because China had the audacity to retaliate. And all of that has been piled on the legacy tariffs of around 20% that are a holdover from Trump’s initial tariff hikes of 2018-19. It makes for a grand total of a 124% US tariff hike on China relative to pre-Trump 1.0 norms.

On his Truth Social platform, the US President made it clear that absolutely no retaliation to America’s reciprocal tariffs would be tolerated. After all, Trump implied, reciprocity, no matter how dubious his attempts to measure it, is well justified by decades of America’s economic abuse at the hands of the Chinese. China dared to act, in his view, “ …despite my warning that any country that retaliates against the U.S., … will be immediately met with new and substantially higher tariffs.”

Predictably, US Treasury Secretary Scott Bessent, parroted the President, claiming, “It was a big mistake, this Chinese escalation”— in effect, pinning the blame for escalation on China rather than admitting the US struck first. For China, Trump’s reciprocal tariffs fall well within the “bully, oppress, and subjugation” construct that Xi warned of in his CCP centennial speech in 2021. Ultimately, It’s not a question of who is right or wrong. Conflict arises out of the collision between two very different political mindsets.

When I was in China a couple of weeks ago, I met with a broad cross-section of Chinese officials, academics, and businesspeople. Their views spanned the gamut, from Party hardliners to market-oriented modern thinkers.  Discussions were frank and vigorous, all under Chatham House rules that prevent me from naming names. But irrespective of where they sit on China’s political spectrum, there was little doubt of their collective conviction. As one of my most liberal thinking Chinese friends said, “China will most definitely retaliate to another tariff attack from Trump.” And that’s exactly what happened when China matched Trump’s 34% reciprocal action, as well as the 50% penalty tax, with comparable tit-for-tats of its own.

At the risk of being labeled a panda hugger (again), I will take this argument one step further. The United States has a president who acts out of anger and commands center stage to bask in the personal attention his actions get. China has a president who operates less out of emotion and more with strategic discipline. Unlike Trump, Xi doesn’t need to personalize his pronouncements—the latest move was buried on the website of the government’s Customs Tariff Commission.

This conflict pits emotional policy tantrums of a volatile US president against the more dispassionate actions of a calculating Chinese leader.  As Donald Trump continues to put pressure on China, unsurprisingly, China has been quick to retaliate in kind.  They often say that a bully only responds to a punch in the face.  As America’s third largest export market and second largest foreign holder of Treasury securities, if pressed, China has many more punches to throw. Like I said, it is a race to the bottom that no one can win. Unless, of course, someone flinches.