There’s method in King Donald’s ‘madness’ on China

Don’t go by the defiant rhetoric, China is hurting and in deep trouble over Trump’s tariffs

For the purpose of writing this column, I had to do some research as I always do. What struck me was how effortlessly China is winning the battle of narratives.

It’s all a little confusing. We are apparently in the middle of a trade war, caught in the crossfire as the world’s two largest economies slap each other with tariffs in an escalatory spiral with the Donald Trump administration imposing 145% levies on most Chinese goods this month. That’s more than a little concerning for China, the trade surplus nation that has everything to lose if it is denied access to the American market. Conversely, the United States, the considerably larger and stronger economy that ran a $295.4 billion deficit with China in 2024, is in possession of a whole toolbox of options that it may deploy to increase China’s pain point. That’s economics 101. Countries that enjoy trade surplus, and most certainly China that sends more than $400 billion in goods to the US each year, are vulnerable during trade wars.And yet since the past few weeks western media is chock-full with reports, articles and analyses on China’s ‘impregnable’ economy, its unbeatable resilience, the madness of ‘King Donald’, Xi Jinping’s ‘courage’, ‘moral integrity’ and the fearsome retribution that awaits American economy owing to Trump’s ‘folly’.

We are told that China is ‘winning’, Americans are losing, and tottering Trump’s tariff tantrums have presented Xi with a ‘gift’. Portentous pundits pontificate that this is not a trade war, but American economy’s stunning act of suicide led by a dimwit dolt who occupies the Oval Office. China, not one to let go of opportunity, has mounted a meticulously calibrated narrative attack on American social media networks – that are inaccessible to the Chinese – to spread worry and panic over Trump’s decision, and going by the engagements such posts are getting, it would seem the tactic is succeeding.

This piece is essentially about setting the record straight. Make no mistake, China is hurting. Trump’s tariffs, that now stand at a staggering 145%, going up to even 245% on certain goods, present an unprecedented challenge for the exports-dependent Chinese economy that is caught in a deflationary loop, and unless the challenge is mitigated there will be punishing job cuts and very little bandwidth for debt-ridden local governments to bail out the struggling sectors.

The one thing China cannot afford to do, however, is blink. The Chinese system, led by ‘chairman of everything’ Xi Jinping, is built for stability. It is not meant for adjustments, pliability or conflict. Xi, for all his power, cannot let slip even a hint of weakness. Trump can take unlimited punches, suffer being called a clown, and still stand in the ring. Xi cannot yield even if he’s haemorrhaging.

In this piece, I shall strive to explain my position, and elucidate that China’s fire and brimstone rhetoric conceals its deep anxiety and fear underneath.

I posit that Trump’s “reciprocal” tariffs, that have now been paused against every other nation except China, is in essence an attempt at a systemic reset.

It is, of course, done in a very Trumpian fashion with all the trappings of a reality TV show. That is why despite all available evidence to the contrary of the inherent strength of the American economy, most pundits suffering from ‘Trump Derangement Syndrome’ are writing off America’s chances in this trade war, and media’s unbalanced coverage is hinging on an axiomatic position that China can do no wrong. Trump, albeit crudely, is trying to decouple American economy from China’s. He understands perhaps intuitively that China has perfected the art of gaming the system of open trade authored by America to such an extent that while China’s export-driven economy achieved uber-efficiency in a matter of decades – trading with 145 countries in 2023, a rise of almost 50% since 2008 – its economy by and large remained inaccessible to the world.

Successive American administrations have identified the problem but have been unable to deal with it. China manipulates the WTO-led open trade order, knows how to exploit the loopholes, and has grown immeasurably prosperous by building a sprawling manufacturing base in a relatively short time at the cost of its peer competitors. Trump considers the trajectory deeply unfair and is ready to take drastic steps.

To quote researcher Zineb Riboua of Hudson Institute from her blog, “Trump’s trade war is a reconfiguration. His repeated attacks on the World Trade Organization, threats to withdraw, and efforts to bypass multilateral forums all signal a deeper strategy: to reset the rules of global trade in ways that constrain China’s model. For decades, China used the WTO system to scale its export economy while shielding its domestic market. That asymmetric advantage is now being challenged at the foundation.” Look beyond the sweeping tariffs, and you’ll find a conscious attempt to isolate China by striking deals with America’s trading partners. Whether or not the policy will be successful is moot, what we are watching now is the application of the strategy. Some of the trade negotiations the Trump administrations are involved in right now with a bevy of trading partners are aimed at clamping down on transshipment of Chinese goods that are rerouted through third countries to conceal origins, synchronized taxes, or going after Chinese raw materials meant for the American market.

The brain behind this step, according to the Wall Street Journal, is US Treasury Secretary Scott Bessent who apparently pitched the idea to Trump. It involves systematically removing China from the American economy despite the heavy integration and even potentially delisting Chinese stocks from US exchanges to tackle the “the biggest offender in the global trading system”.

Wall Street Journal reports that US officials “plan to use negotiations with more than 70 nations to ask them to disallow China to ship goods through their countries, prevent Chinese firms from locating in their territories to avoid US tariffs, and not absorb China’s cheap industrial goods into their economies.” The Trump White House reckons that if executed, the moves will considerably weaken China’s hand, dent further its already plagued economy and force Beijing to sit across the table with little leverage.

It won’t be easy, of course. UK, for example, has dismissed the idea of cutting trade ties with China despite heavy American pressure. However, if the US succeeds in extracting concessions from even some of them – such as Mexico where Chinese firms have invested billions in hundreds of Mexican factories to make millions of products for the American market tariff-free by taking advantage of the US-Mexico-Canada Agreement – then the noose will tighten around China.

Largely due to China’s machinations – its firms exploiting the Mexican loophole – US trade deficit with Mexico shot up to nearly $172 billion in 2024 from about $78 billion in 2018. (Read the WSJ report here).

Or take Vietnam, another favourite destination for Chinese firms to relocate their production. Just like Mexico, that has reportedly offered to match American levies on China to strike a deal with Trump, Vietnam, faced with the prospect of 46% US tariffs, sent a team to Washington and promised to crack down on “trade fraud”, a reference to millions of Chinese goods routed to the US through its territory to avoid American taxes. Chinese tactics range from establishing factories in Vietnam, using Vietnamese workers to process goods for the ‘made in Vietnam’ label, or as Reuters reports, making ships carrying Chinese-made goods dwell in Vietnamese ports “just long enough to obtain documents certifying that the products were made in Vietnam before leaving.” Little wonder that Vietnam now has the fourth-highest trade surplus with the US, next only to China, Mexico and the EU.

If these routes are blocked, China would obviously be in deeper trouble. China manufactures far more products than its consumers can absorb, making exports imperative for the wheels of its economy to run. The deflation loop that it suffers from owing to its crisis-ridden real estate sector, where most of the middle-class wealth is parked, is exacerbated by the fact that its export volume far outstrips prices, adding to deflationary pressure.

This is exactly where Trump is stress-testing the Chinese economy by levying eye-watering taxes on exports, attempting to shift the entire global trade architecture from ‘open’ to one based on bilateral ‘deals’ and collective coercive mechanisms. China finds Trump difficult to tackle owing to his unpredictability and refusal to play by the established rules, rules that China has spent decades in manipulating.

China also finds it discomfiting that for the leader of a democracy, Trump has a higher threshold of pain and is driven by a sense of manifest destiny. This allows Trump, who has suffered two assassination attempts, to take steps that are seemingly impossible or at least difficult for a leader who functions within the parameters of an electoral democracy. Trump’s uncertainty, unpredictability, greater latitude, and the ability to absorb criticisms pose a particularly tricky challenge for Xi. If the Chinese president retaliates and matches Trump in countermeasures, he risks exposing China’s rickety economy to more external shocks. If Xi appears to back down, that could send a message of ‘weakness’, a fatal quality in a CCP general secretary.

That doesn’t mean Xi is sitting idle. It has been fascinating to watch the Chinese retaliation, calibrated, targeted and relentless.

Cognizant of America’s endeavour to isolate China, Xi has gone on a diplomatic charm offensive. The ‘wolf warrior’ has transformed into an ‘affable’ Xi, trying to win friends and influence people. The Chinese president is wooing the Europeans, trying to wean the bloc away from America’s influence. Xi recently hosted the Spanish president, Pedro Sanchez, and urged the EU to join forces with China to ‘defend globalization’ and resist “unilateral acts of bullying”, a thin reference to Trump’s tariffs.

Europeans, anxious with the antics of a mercurial American president whom they do not trust, are in turn gravitating closer to their “systemic rival”, easing regulations on Chinese-made electric vehicles and planning a trip to Beijing in July for a summit meeting with Xi. Self-interest is thicker than ‘values’ and ‘principles’.

As Xi’s commerce minister was working the phone lines to parley with European and ASEAN officials, the Chinese president went recently on a Southeast Asia tour, seeking to draw Cambodia, Malaysia and Vietnam closer to form a broader coalition against Trump’s tariffs. Xi’s aim was to portray China as the defender of the global trading system that these nations have benefitted from, and paint China as an image of stability and reliability amid global uncertainty. His task was also to ensure that these Southeast Asian nations do not give in to Trump’s demands of cutting China off from their economies or impose taxes of their own on Chinese goods.

China has also sought to present a friendlier face to India. If you tell me that Beijing’s moves to placate New Delhi over a $100 billion trade surplus and promise of buying more “premium products” from Indian manufacturers (that it is yet to act on) has nothing to Trump’s belligerence, then I have a bridge to sell you.

Alongside, China has raised duties on American products to 125%, carefully targeting the Red States – blocking natural gas, Boeing jets, beef, poultry and bone meals along with export restrictions on rare earths. These moves are designed to hit specific industries rooted in the MAGA base and exploit America’s dependence on critical minerals needed for modern appliances, medical and defence technology.

These elaborate and intricate retaliatory mechanisms adopted by China suggest that Xi is in a precarious spot, waiting for his opponent to blink in a costly game of poker. Not only does he face an economic crisis that cannot be wished away, he is also struggling with another eventuality – the inevitable fallout of adopting deception as the fulcrum of state policy is that the Chinese Communist Party has made China friendless, and though it runs trade surplus with many nations, it runs trust deficit with everyone.

Australia, Japan and South Korea have already rejected his calls of forming a broad coalition against Trump administration, the Southeast Asian nations and the European Union are hedging their bets.

On the economic front, despite CCP’s tight control over information, it is difficult to hide the markers of trouble. At the recent Canton trade fair, China’s biggest expo held twice a year in the city of Guangzhou where Chinese manufacturers, all 30,000 of them showcase their products to clients around the globe – a healthy chunk from America – the signs of distress were overwhelming.

Financial Times spotted a notice by the organisers of the fair, started by Mao Zedong in 1957, describing the current trade scenario as “grim and complex” and warning exhibitors that they would carry out inspections at the end of each of the fair’s three stages to ensure that “none packed up early”. The newspaper quoted many exporters at the fair, saying that that the new levies made selling to the US market unfeasible, with some commenting that “all of our US customers have paused all of their orders… the tariff is too high.”

Reuters also spoke to a bunch of exhibitors. Most were too depressed over the proceedings, confirming that American orders “have either been delayed or stopped coming”, a matter of concern for the Chinese economy that’s more exposed to the vulnerabilities of an unstable global commerce than any other nation.

Some are looking to close their factories set up in Southeast Asian nations to bypass duties as Trump ratchets up tariffs across the board, while some are laying off employees, reducing management costs and cutting down on sundry expenses.

Trump’s tariffs, according to another Reuters report, may “slash Chinese exports to the US by 30%, cut overall exports by more than 4.5%, and drag economic growth by 1.3 percentage points.” It will be difficult for Chinese manufacturers, plagued with overcapacity, to cater to new markets of increased competition with the possibility looming large that many nations may raise their own barriers to stop dumping of redirected Chinese goods.

One option that Xi in doubling on to escape the punch and clinch on Chinese economy, is spur domestic spending to absorb some of the overcapacity, given that exports to the US may tumble by around 80% over the next two years.

The trouble with this plan is that Chinese consumers are unable to spend – as a fall in consumer price index would indicate that declined for a second straight month according to latest data, and producer deflation that recorded a fall for the 29th straight month.

Part of the reason Chinese domestic market cannot soak up excess capacity is that its middle-class wealth, tied up in the troubled real estate sector and stock markets is taking a severe beating in a society where “70% of family assets are tied up in property. Every 5% decline in home prices will wipe out 19 trillion yuan ($2.7 trillion) in housing wealth, according to Bloomberg Economics.”

While housing sector’s value may dramatically shrink in China’s GDP, the $2.9 trillion ‘shadow bank’ industry is suffering a collapse, deepening the wealth wipeout.

Global banks are slashing China’s growth forecasts with UBS downgrading China’s 2025 growth forecast to 3.4% despite a 5.4% growth in first quarter, while the tariffs have squeezed low-end manufacturers’ wafer-thin margin even tighter. Local governments, lacking in revenue streams, are too impoverished to provide support.

FDI flow is at its lowest in three decades, while “confidence in the system among many in China’s elite has been shattered,” reported Bloomberg, quoting an investor who lost 16 million yuan ($2.2 million) from trust products. The report says he’s considering selling his family home in Beijing for a smaller apartment to raise cash.

The CCP’s legitimacy is ultimately tied to China’s growth prospects, so the more economic challenges grow, unemployment prospects loom large, the hotter it may get for Xi under the collar with chances growing of internal dissent. Now, put in context the old clip that has resurfaced on American social media networks amplified by China’s foreign ministry, of Mao Zedong declaring that “We are Chinese. We are not afraid of provocations. We don’t back down.”

We are Chinese. We are not afraid of provocations. We don’t back down. 🇨🇳 pic.twitter.com/vPgifasYmI — Mao Ning 毛宁 (@SpoxCHN_MaoNing) April 10, 2025

The writer is Deputy Executive Editor, Firstpost. He tweets as @sreemoytalukdar.

There is also a larger strategic component to the tariffs. Trump is delivering to China now some of the economic distress that would be a consequence of a war with the US. In effect, as China deliberates when and how to make her move against the US, Trump has delivered an economic blow that may deter China.

It’s worth pointing out that China’s over-reliance on foreign consumption for its industrial output goes deeper than just economics. It’s part of a deliberate policy choice that’s fundamental to their strategy for remaining in power. And as such, it puts limits on their ability to respond to a loss of export markets.

The Chinese policy of keeping its wealth under the control of the state rather than allowing it to be controlled or shared by the private sector is the basis for the CCP’s tight grip on power. Their control of the government is dependent on an economically dependent populace. Their model for maintaining power is to provide their people with just enough prosperity to keep them compliant, but not enough for them to be in a position to challenge the CCP’s authority.

China is already sucking wind. And it hasn’t even been a month. Another month and China will be in very bad shape. Three months and I believe the economic collapse would start.

Or it may cause Xi to accelerate his plans for Taiwan. Common practice of dictators to start a war to cover domestic problems.

Either way, seems like a bad idea for a country dependent on exports for its existence.

Doubt many Chinese buy fake Christmas trees…..

China might accelerate their attack plans, but authoritarian regimes tend to be compromised by corruption and to have unwieldy command structures and rigid decision cycles. As economic pressure tightens on China, they seem more likely to decide that it is better to defer open conflict with the US than accelerate it.

I don’t know any other country who buys more from China than the U.S. they need our business their economy is in shaky territory and they fear of losing their power grip on countries.

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