China won’t blink first in its fight with the US

IN AMERICA’s escalating trade war with China, it won’t be Beijing that blinks first. President Xi Jinping can withstand way more economic and political pain than US President Donald Trump.

The response from the world’s second-largest economy to what it has called “blackmail” from Washington has been robust. It has said it will “fight to the end”, and initially hiked retaliatory tariffs to 84 per cent.

That was before Trump upped the ante again by imposing an effective 125 per cent rate on Chinese goods while pausing duties on other countries for 90 days. The White House clarified Thursday (Apr 10) that with a 20 per cent levy put in place earlier this year over China’s role in fentanyl trafficking, the tariff rate is now 145 per cent.

On Friday (Apr 11), China announced that it was raising its tariffs on American goods to 125 per cent, from 84 per cent, with effect from Apr 12, retaliating for the third time in their escalating trade dispute.

Trump had earlier appeared to offer a reprieve to Beijing, saying he won’t hike rates any further and predicting that he would “get a phone call at some point” from Xi. The Chinese are unlikely to view that as an olive branch, and will see it as more grandstanding – they won’t be open to a meeting where the terms are set by Washington.

China is getting down to work. It has convened a meeting of top leaders to discuss further stimulus measures and also released a 28,000-character White Paper on trade with the US, reiterating that it’s willing to talk but warning America will “reap what it sows”.

This trade war will hurt both sides. Bloomberg Economics estimates that the average effective US tariff rate on Chinese goods will be around 113 per cent, and will put as much as 3 per cent of gross domestic product at risk, even if loosening its grip on the currency would boost exports and shield the economy.

Beijing has also promised more loans to stabilise the market. The damage to the US economy will also be significant, and there are concerns that the Federal Reserve’s battle with inflation will be undermined.

But Xi has something that Trump doesn’t: An authoritarian political system. He doesn’t have mid-term elections to face next year, the way Trump does, and he is now the most powerful leader since Chairman Mao.

Internal rivalry is still a problem, but Xi has fought that, notes Kevin Rudd, Australia’s ambassador to the US and author of On Xi Jinping: How Xi’s Marxist Nationalism is Shaping China and the World.

He’s moved the Communist Party to become the centre of all things and embraced a nationalist ideology that argues the time has come to challenge the US-led order, Rudd said in an interview with The Diplomat.

That narrative will prove particularly useful now, as Chinese citizens feel the full brunt of Trump’s trade war. It’s already at play. Memes are circulating on social media of Trump and Vice President JD Vance toiling in factories, hunched over sewing machines presumably stitching the shoes and garments that will “Make America Great Again”.

Economically, China is also prepared. Premier Li Qiang said his country has ample policy tools to “fully offset” any negative external shocks, and reiterated optimism about growth in 2025, despite worsening tariffs.

Trump is in for a shock, Ford Hart, former National Security Council China and Taiwan director told me. “Xi’s pain threshold is of a different order from Trump’s, and Xi can sustain it virtually indefinitely.” This is a political struggle, Hart noted, and he will win, even at a fearsome economic price.

Trump is right, China is guilty of unfair trade practices. It heavily subsidises industries, makes it onerous for foreign firms to do business, and has been accused of currency manipulation for decades. Beijing has also been increasingly assertive in the Indo-Pacific – it regularly harasses the Philippines’ vessels in the South China Sea and targets Taiwan with warplanes and Coast Guard ships on an almost daily basis.

But the two superpowers must find a way out of this crisis. To avoid further geopolitical and economic fallout, they need to dial down the rhetoric and the reciprocal tariffs. Reestablishing both high-level communications and back-door diplomatic channels is essential.

Now is the time to negotiate rules on some of the most egregious issues that foreign investors have with Beijing, including intellectual property protection, subsidies and technology transfers. They should also carve out a new bilateral agreement that is fit for purpose.

Both leaders are playing to their domestic audiences and want to look tough. But this is one of the ugliest splits the global economy has ever seen, and for now, the rest of us are just collateral damage. BLOOMBERG

(The column has been updated following China’s Friday (Apr 11) announcement of its latest move to raise tariffs on US goods to 125 per cent, from 84 per cent.)