Why China Might Have An Upper Hand In Trade War With US

The United States and China– two of the world’s largest economies– are locked in a dangerous trade stand-off that may have no winners. As the US tries to arm-twist China — with mounting tariffs– into seeking a deal from his administration, it is becoming increasingly clear that Beijing may have more leverage than President Donald Trump and his aides think. 

The United States remains an almost irreplaceable market for China for its manufactured goods. However, experts caution Washington not to underestimate Beijing’s capacity to resist the Trump administration’s coercive tactics. The combination of Beijing’s centralised political control, diversified export markets and stronghold over some strategically vital materials, including rare earth metals and magnets, gives China plenty of room to negotiate with the US. 

The complexity of the United States’ dependence on China was evident over the weekend when the Trump administration exempted smartphones, laptops and TVs from its new tariffs — goods that the US primarily imports from China. 

Trade Power

In FY24, Beijing had a trade surplus of almost $300bn with Washington, with about 15 per cent of its total exports heading into the US. The popular consensus is that the country with large trade deficits, like the US, wields more power in a trade conflict than the surplus nations (like India and China) whose exports fuel that imbalance.

But what if the country with a deficit needs what the surplus nation is selling, and stopping the purchases ultimately hurts it more? That’s the case with China, on which the US is dependent for many things like electronics, machinery and some processed minerals, a Bloomberg report said.

Some of America’s biggest conglomerates, including Apple and Tesla, are dependent on production in China. These companies faced an existential crisis in Trump’s 145 per cent levies on goods from China.

China’s imports from the US, on the other hand, are heavily focused on agriculture – such as soyabeans, cotton, beef and poultry – and so are low value-added.

Talking to Financial Times, Marta Bengoa, professor of international economics at City University of New York,  explained how the ultimate balance of risk was on the US side in the US and China’s heavily interdependent trade.

“US dependence on China is higher, because China can source agricultural products from elsewhere more easily than the US can replace electronics and machinery,” she said. 

“Beijing is already buying up soyabeans from Brazil, for example, so in the end China has a bit more leverage.”

Inflation Fears

Moreover, the US is a consumer-driven economy, and large taxes on things that consumers like can have consequences. Last week was a great demonstration of American consumers’ power when Trump was forced to blink first as her paused most of his reciprocal taxes for 90 days following a market bloodbath triggered by his taxes. 

He also exempted tech products like smartphones, laptops and TVs from its new tariffs. Although Trump and his economic team insisted later that all the exemptions would eventually be subject to other impending tariffs, Americans planning to buy a TV or smartphone got a short-term reprieve. 

New Friends

Since Trump started a trade war with China during his first term by imposing sectoral tariffs on steel, aluminium, and solar panels, Beijing has tried to reduce its reliance on American markets. The US government’s data show that China has slashed its trade exposure in the US market from 21 per cent in 2016 to 13.4 per cent last year.

At the same time, China has rerouted its trade through Southeast Asian countries such as Vietnam and Cambodia, where Chinese manufacturers took advantage of cheaper labour and reduced exposure to US tariffs, according to the FT report. 

Chinese exports to Vietnam have reportedly soared 17 per cent in March.

As Trump tries to strongarm China, President Xi Jinping embarked on his first overseas trip of the year to showcase China’s clout in the region. Xi first landed in Vietnam on Monday, where he asked the government to oppose “unilateral bullying” to uphold a global system of free trade – though he stopped short of naming the US.

The Chinese leader is scheduled to visit Malaysia and Cambodia next. Beijing is also attempting to redirect excess capacity to alternative markets, including the EU, India and countries across the global south.

Autocratic Leverage

In autocratic China, the ruling Communist Party is less reactive to pressure than the White House, which has already been forced to respond to turmoil in the bond and stock markets.  

According to Alfredo Montufar-Helu, head of the China Center at the Conference Board think-tank in New York, Beijing was entering the trade stand-off with a greater capacity to stimulate its economy in the event of a slowdown. 

Beijing also has more levers to manipulate its domestic market, which is closely watched by authorities as an indicator of social stability and economic sentiment. As per the FT report, Beijing has intervened heavily in the market in recent weeks, with the “national team” of state institutions driving coordinated action to support share prices.

Rare Monopoly

China controls over two-thirds of global rare earth production and more than 90 per cent of processing capacity, and the US is reliant on these minerals essential for modern manufacturing. This gives Beijing a critical point of leverage.

China has already halted the export of some rare earth elements last week, including dysprosium and terbium, which are essential ingredients in products such as jet engines and EVs.