As President Trump continues to threaten U.S. allies and trading partners like Canada, the EU, Mexico, and Japan with higher tariffs, it is the growing trade war with China that most concerns global financial markets. The fear is that Trump’s tariff policies could trigger a global recession and negatively impact economic conditions in both countries. Given those fears, why is Trump willing to risk higher U.S. prices, lower corporate earnings and GDP growth, an unstable stock market, and a reduction in the retirement savings of millions of people who voted for him to launch a trade war with China?
Although Trump believes that Canada, Mexico, Japan, and European allies have been “screwing” the United States for decades, he clearly views China as the worst offender, prompting him to raise tariffs on Chinese goods by 145 percent in April. China retaliated by placing 125 percent tariffs on U.S. goods. Both countries have since lowered their tariffs after China agreed to trade talks in Geneva with the United States.
Administration officials know that China doesn’t enjoy the same level of trust and support among the American people and the political class as other trading partners. China is viewed as hostile to U.S. economic and security interests after luring manufacturing jobs from the U.S. industrial heartland to China for decades. It has taken advantage of American workers with one-sided trade deals that have had a demoralizing impact on U.S. manufacturing over the past 25 years.
However, that doesn’t fully explain why Trump’s economic team, led by Treasury Secretary Scott Bessent, suddenly concluded that China would quickly fold and allow broader market access to U.S. products and services. The primary reason that Trump decided to fight this trade war now is because administration officials believe that the Chinese economy is slowing, and therefore, China would be willing to lock in a trade deal marginally favorable to the United States to avoid further disruption to their own economy.
Is the Trump team correct that the Chinese economy is beginning a long period of economic stagnation similar to Japan’s 30-year “Lost Decades” economy following the burst of Japan’s “bubble economy” in 1990?
The official Chinese economy is doing well, according to the Chinese government. Economists believe, however, that China’s “real” GDP growth improved only modestly in 2024: between 2.4 percent and 2.8 percent, well below the official claim of 5 percent. The slower-than-expected growth in 2024 pushed the Chinese government to dramatically increase spending to stimulate domestic demand in the hopes that growth would rise to “around 5 percent” in 2025. A trade war with the United States could further expose the structural weaknesses in the Chinese economy. This is something that Chinese President Xi Jinping and his government would like to avoid, as it could discourage foreign investment, slow domestic spending, and cause political instability at home.
Few people trust the validity of the economic numbers released by Beijing, which only adds to the global narrative that the Chinese economy is dramatically slowing. Independent economists must deal with “authority bias” in China’s official economic data. Beijing defines its own economic progress by cherry-picking positive economic data such as fixed asset investment, positive trade balances, and stable employment numbers, while excluding negative data such as falling consumer spending, lower wages, the growing real estate bubble, and current fiscal spending relative to budget targets. Therefore, China’s real economic conditions depend on which government data is included in any public assessment of the Chinese economy.
Authority bias now impacts the global discussion of China’s economic growth and slowdown, with an obvious disconnect between China’s macroeconomic data and Beijing’s public policy prescriptions. Officially, China’s GDP growth slowed only modestly from pre-pandemic levels in 2022 but rebounded to 5.2 percent growth in 2023. The official numbers show only a 0.4 percent slowdown coming by the end of 2024, and into 2025. But again these GDP numbers coming from the government significantly differ from independent data on the growth of the Chinese economy.
While reporting these “positive” GDP numbers, Beijing also took steps to hyper-stimulate economic growth. The Chinese government began to aggressively cut interest rates, conducted a mid-year budget adjustment not seen since the Asian financial crisis, passed a 10 trillion-yuan ($1.4 trillion dollars) refinancing program for local government debt, created new liquidity facilities for China’s central bank to artificially boost the stock market, changed its official monetary bias to “appropriately easing” for the first time since the global financial crisis, and called for “emergency” support for the economy in a recent government meeting. No government adopts these economic policies to counter a mild economic slowdown. These are the type of economic policies a government adopts when it fears a collapse in economic growth, wages, and both consumer confidence and spending.
Unlike the EU, India, Russia, and other Chinese trading partners that still treat China as a stable and strong economic partner, the Trump administration sees China as a threat to U.S. economic and security interests. Therefore, with China’s economy slowing and showing signs of long-term economic stagnation, the administration decided it was the right time to initiate a tariff war with China. They are convinced that the Chinese economy is badly faltering, and in no position to fight a lengthy trade war with the United States.
However, even the Trump administration was caught off-guard when newly appointed Chinese trade negotiator Li Chenggang, before their meeting in Geneva on May 11, said that the two sides were not that far apart, and that a deal on tariffs could be reached quickly. This statement was buttressed in Geneva by Chinese Vice Premier He Lifeng, a top aide to President Xi.
The public desperation by the Chinese government to reduce the 145 percent tariffs imposed by President Trump on Chinese goods was evident before and during trade talks in Geneva. Five years ago, China would have never been bullied into trade talks with the United States, and even long-time China observers were shocked at how quickly Xi and senior Chinese economic officials embraced trade talks with the United States to reduce tariffs on both sides.
The popular consensus leading up to talks in Geneva was that Chinese President Xi Jinping doesn’t have to worry about sustained pressure from financial markets, the business community, opposition lawmakers, or the public. As the head of a one-party authoritarian State, he could simply wait Trump out. There was also the widespread belief that Xi, with upcoming trade talks scheduled with the EU later this year, couldn’t be bullied by Trump into talks to reduce tariffs.
With negotiations continuing it’s too early to draw substantive conclusions about the ultimate outcome of trade talks between the United States and China. However, a consensus has emerged within the Trump administration that China is facing the possibility of long-term economic stagnation and decline, putting the United States in a better position to negotiate increased access for U.S. products and services. This could also open the door for a broader trade discussion pertaining to China’s rare earth elements, which greatly impacts U.S. defense, electronics, and manufacturing industries. One thing is clear, with its economy slowing, China seems ready and willing to negotiate a comprehensive trade deal with the United States.