While the leaders of Canada and Mexico responded swiftly after President Donald Trump launched a new trade war, Chinese President Xi Jinping took a breather before announcing specific retaliatory measures for his country.
On Saturday, President Trump imposed a flat 10US-China Trade RelationsChina Economic Growth 2025% tariff on China and a 25% tariff on Canada and Mexico, as he had warned after his election victory, for allegedly failing to curb illegal immigration and the flow of drugs into the United States. . Within hours, Canadian Prime Minister Justin Trudeau announced a 25% retaliatory tariff on $107 billion worth of U.S. products, and Mexican Prime Minister Claudia Scheinbaum also announced retaliatory tariffs.
China’s response, coming in the middle of the week-long New Year’s holiday, was fairly muted, as it had been during Trump’s first term. The Commerce Department expressed strong “dissatisfaction” in a statement and announced “appropriate countermeasures,” but did not provide details. She promised to file a complaint with the World Trade Organization and called on the U.S. to “resolve differences on the basis of equality, mutual benefit, and mutual respect.”
Trump’s tariffs are set to take effect shortly after midnight on Tuesday, but President Xi Jinping has several tools he can use to fight back beyond reciprocal tariffs. Options include restricting exports of critical minerals and limiting market access for some U.S. companies, according to Gary Ng, senior economist at Natixis SA. A series of laws passed since Trump’s first term have given China more influence over domestic business transactions in the name of national security.
However, the situation with China has become more complicated compared to the first trade war, both domestically and internationally.
Unlike before, when China was the main target, Trump has imposed higher tariffs on allies this time and is likely to impose even higher tariffs, including on the European Union. This could give China an opportunity to strengthen trade ties with other countries and help exporters maintain a competitive advantage.
China’s domestic economy is also in more shaky waters. Bloomberg Economics estimates that Trump’s initial tariffs could wipe out 40% of Chinese exports to the U.S., putting 0.9% of China’s gross domestic product at risk. Goldman Sachs Group Inc. said the 10% tariffs would shave 50 basis points off real GDP growth this year, but noted that Trump’s measures “are less severe than market participants and Chinese policymakers had feared.”
“If Chinese policymakers are truly preparing for a worsening situation, they are likely to respond cautiously for now and adjust course later if necessary,” Goldman economists said in a Monday note. Exports have been a big driver of growth as Xi’s administration promotes manufacturing to offset a slump in the real estate sector. Even before the tariffs, economists had expected more government spending to offset deflationary pressures and boost consumer spending, but now it will be even more important for Beijing to make concessions.
China’s response to the tariffs will be primarily domestic, according to Larry Hu, head of China economics at Macquarie Group. He sees growth targets for this year and 2024 at “around 5 percent” as authorities take steps to offset the U.S. tariff hikes.
“We see the main issue for 2025 as a tug-of-war between tariffs and stimulus,” Hu said in an email. “If the economy continues to weaken in the coming months, we could see a new domestic stimulus package in the second quarter.”
Because China typically takes countermeasures against foreign trade measures only after tariffs take effect, there is only a short window of opportunity for behind-closed-doors negotiations. The two presidents have pledged to continue talks after their phone call last month, and Trump has made comments suggesting he is open to a broader agreement with China, including asking Xi to help Russia stop the end of the Ukraine war.
One sign of China’s policy response could be the strength of the yuan peg next time, Brad Setzer, a senior fellow at the Council on Foreign Relations and a former senior U.S. Treasury official under President Barack Obama, wrote on X. Chinese markets were closed for the New Year holiday. Work in the countryside will resume from Wednesday.
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