President Trump’s decision on Saturday to impose new tariffs on imports from China poses a dilemma for Beijing’s leaders: Is it better to ignore the new tariffs or retaliate?
Doing little runs the risk of looking weak in the eyes of the Chinese people. China’s extensive domestic propaganda apparatus has described China as a rising power, while the United States is portrayed as suffering inexorable decline.
But vigorous retaliation risks starting a global trade war that could damage China more than the United States. China’s trade surplus — the amount by which its exports exceeded imports — reached almost $1 trillion last year. Exports, and the construction of new factories to make further exports, are practically the only area of strength these days in the Chinese economy.
China’s initial reaction on Sunday was cautious: the Ministry of Commerce said it would challenge the tariffs at the World Trade Organization. That body’s investigative panels can try to embarrass a country that violates international free trade rules, by criticizing a specific trade action.
But the W.T.O. has lost much of its power since 2019. The first Trump administration and then the Biden administration blocked the appointment of judges needed to authorize countries to take countermeasures.
Some in China had been relieved that Mr. Trump initially focused his criticisms on other countries. But few expected that to last.
“I don’t think we feel optimistic about the future of this relationship,” Wu Xinbo, dean of the Institute of International Studies at Fudan University in Shanghai, said on Thursday. “Given his team of hawks on China, the battle is yet to come.”
On Saturday, President Trump put additional 10 percent tariffs on goods imported from China, as well as 25 percent tariffs aimed at Mexico and Canada. He said he might escalate the tariffs if the countries retaliate.
In its response, China commerce ministry said it would take “countermeasures to firmly safeguard its rights and interests.” But the ministry also urged the United States to “strengthen cooperation.”
China has shown in the weeks since President Trump was re-elected that it may be willing not only to retaliate to tariffs, but also to up the ante.
China has put export controls on a gradually lengthening list of materials and technologies. In early December, China halted the export to the United States of critical minerals like antimony and gallium, which are used in the manufacture of some semiconductors.
The export ban was in retaliation for a decision by President Joseph R. Biden Jr. a day earlier to expand American curbs on the transfer of technology to China.
Beijing’s response went beyond any previous export restrictions: For the first time, Beijing officially banned other countries that buy these minerals from re-exporting them to the United States. China had previously been a critic of such transshipment bans, describing them as an unfair form of “long-arm” jurisdiction that interfered with international commerce.
Yet Beijing is aware, Chinese experts said, that a strong reaction from China poses two big risks.
Further restricting exports could prompt multinationals to stop investing in China and put their new factories in other countries. Another risk is that such curbs on exports by China could trigger a further response from President Trump.
An upward spiral in trade restrictions is what happened during the first Trump administration. China responded to that first round of tariffs in 2018 with its own penalties on American exports. But as Mr. Trump imposed further rounds of tariffs, Beijing quickly ran out of American exports to target. China sells nearly four times more goods to the United States than it buys.
China and the Trump administration agreed to stop the escalation in January 2020, but left in place most of the tariffs that had been imposed.
Some Chinese experts contend that tariffs will hurt American consumers, by pushing up prices, more than they will hurt China.
“This style of bluff will backfire,” said Zhang Weiwei, dean of the China Institute at Fudan University in Shanghai. “From our calculation, over 90 percent of the increased tariffs were in fact paid by American companies or consumers.”
However, some Western economists argue that the question of who pays tariffs is not clear-cut. To avoid big losses of market share in the United States after the previous imposition of tariffs, some Chinese companies lowered prices. That would have helped them to offset the tariffs and to dissuade American importers from turning to suppliers in other countries.
China’s exports to the entire world rose more than 12 percent last year by volume, but the increase in dollar terms was only half as much, as companies slashed prices.
China’s currency has also weakened in recent months, and prices are falling in China for many goods. That has made Chinese goods more competitive in foreign markets, including the United States, and may offset part of the cost of the tariffs imposed on Saturday.
Professor Zhang pointed out that exports to the United States represent a declining share of China’s overall exports, as exports to developing countries have surged.
Still, China has become indirectly more dependent on the American market. China’s exports have surged to countries like Mexico and Vietnam that assemble Chinese components into finished goods for re-export to the United States.
The big question now for China is how many other countries President Trump will hit with tariffs.
“China has learned from Trump’s first term how to manage even large bilateral tariffs on direct U.S.-China trade — some companies will just pay up to import a critical part, and Chinese companies will find a way to do final assembly outside of China while still using a ton of Chinese parts,” said Brad Setser, an international economist at the Council on Foreign Relations in New York. As long as final assembly is done outside of China, goods have typically been able to bypass American tariffs on China.
But American tariffs on many countries would be harder for China to bypass. “China does face a problem if President Trump is determined to close all of the United States bilateral trade deficits no matter the collateral damage to the U.S. economy,” Mr. Setser said.
Many countries in Asia, Europe and Africa run large trade deficits with China that they can afford only by running large trade surpluses with the United States. The European Union had a $247 billion trade deficit with China last year — and an almost equally large trade surplus with the United States.
If President Trump curtails the ability of many countries to run large trade surpluses with the United States, countries might resort to imposing tariffs on trade with China.
China is more dependent on trade surpluses than it was during the first Trump administration. During President Trump’s first term in office, prices were soaring in China’s housing market amid a manic pace of apartment tower construction.
But the hot real estate market began to cool in 2021, and prices have been falling since. Millions of construction workers have lost their jobs, and middle-class families have lost their savings.
As renewed tensions with the United States coincide with economic weakness at home, officials and experts in China are still hoping for the best.
“We will do our best to try to stabilize this relationship,” Professor Wu said on Thursday, “but we also prepare for the worst-case scenario down the road.”
