Xi Jinping opined this week that no nation emerges victorious from a tariff battle, and if he’s referring to China, he couldn’t be more accurate. The Chinese population will bear the brunt of this conflict. However, the United States is poised to see a significantly different aftermath. Once the residual effects of President Donald Trump’s tariffs dissipate, an estimated 340.1 million individuals are expected to reap the benefits.
China has been perpetuating abusive and illicit trade tactics for over forty years. The U.S., along with other countries, had overlooked this behavior for a variety of factors, until Trump’s administration made a solid move by enforcing a 25% tariff as a cautionary action in his first term in 2018. Regrettably, the Chinese authorities disregarded this warning. Consequently, Trump felt compelled to increase the standard tariff rate on goods imported from China to an astonishing 145% this month.
The timing for Xi couldn’t be worse, given that Trump’s stringent trade measures have coincided with a downturn in the Chinese economy. While their economy is officially reported to be growing at 5.4% in the first quarter of the year, indicators such as negative Consumer Price Indexes for two consecutive months and negative Producer Price Indexes for thirty consecutive months suggest a deflationary spiral is in play. This pattern indicates that the Chinese economy is contracting and will likely continue in this direction.
And the economic storm is far from over. Despite his advisors’ reassurances, Xi is hesitant to make consumption the primary driver of China’s economy. Alarmingly, consumption’s contribution to the gross domestic product, which was at a staggering low 38% last year, is on a downward slope. With this bleak economic canvas, Xi’s only lifeline to salvage the situation is to amplify exports. However, Trump’s accelerated tariffs are obstructing most Chinese goods from entering the huge U.S. consumer market, which accounts for a significant third of global consumer spending.
Further compounding Xi’s challenges, Trump’s tariffs hasten the end of rapid globalization, a characteristic that has defined the post-Cold War period. Trade expert, Alan Tonelson, affirms that ‘globalization has been decelerating due to numerous factors. Presently, these tariffs are accelerating this trend, imposing even greater threats to China’s well-being and other economies reliant on exports.’ As Tonelson infers, global integration is on the decline.
Echoing this, the invasive expansion of Russia into Ukraine has effectively put a halt to the three-decade-long globalization momentum. The largest global asset management firm noted that the conflict in Ukraine coupled with the existing weaknesses of globalization, exacerbated by the decreased interconnectivity instigated by the COVID pandemic, effectively quashed globalization.
In this environment of reduced globalization, other countries are unlikely to allow an influx of Chinese goods originally intended for the American market. These alternate markets can neither accommodate the sheer volume of these goods nor are willing to allow the local industries to collapse under the onslaught of Chinese goods. This means tough times ahead for China, where increasingly, export factories are shutting down due to lack of orders, triggering workers to retreat back to their hometowns and resort to farming to subsist.
Simultaneously, China’s domestic economy is reeling from an event parallel to the 2008 financial crisis. In response to the 2008 crash, Xi’s predecessor, Hu Jintao, launched an unprecedented massive stimulus plan, causing China to incur a colossal amount of debt. At present, China’s aggregate debt-to-GDP ratio could potentially have skyrocketed to an unsustainable 375%. Manifestations of this debt-burden have been visible over the past four years when prominent debt defaults occurred, particularly in the real estate sector.
Property prices in China have plummeted, creating serious social instability since a major part of the households, approximately 70%, have invested their wealth in property. The situation is further complicated because amidst this economic turmoil, Trump’s tariffs are now threatening the most vital sector of China’s economy: exports.
Any logical course of action would suggest that Xi should initiate a dialogue with the White House. However, he has firmly indicated that he has no plans to adopt this strategy. According to Trump, last Wednesday, ‘China is eager to strike a deal. They’re simply unsure of how to proceed.’
However, it’s apparent that Xi is reluctant, mostly due to the political ecosystem he has fostered in China. Only the most aggressive responses are deemed acceptable, leaving him with no room for negotiating or making concessions. Doing so could potentially undermine his authority, as demonstrated by the emerging discontent among top military officials.
Xi remains defiant: ‘China will not back down in the face of any unfair suppression,’ he declared during a meeting with Spain’s Prime Minister Pedro Sanchez on April 11. In essence, Xi has trapped himself in a corner where every potential move could be detrimental. If he refuses to compromise, China’s economy will crumble. If he chooses to compromise, his leadership will be undermined.
Ultimately, it’s evident that Xi will not be the one to initiate talks with Trump. As a result, China, under Xi’s stubborn leadership, will bear the brunt of the consequences.