Annals of the Trade War

Trump launched then escalated an all-out trade war with China. Where is this headed, and is there a way out of this mess?

Portraits of US President Donald Trump and Chinese President Xi Jinping. Photo by Dilara Irem Sancar/Anadolu via Getty Images.

Last week, Trump put a 90-day hold on his announced “Liberation Day“ tariffs, with one very big exception: China. For that country, one of our largest trading partners, Trump actually ratcheted up tariffs by some eye-popping amounts. China then retaliated with high tariffs of its own.

By all accounts, Trump has begun a trade war with the other global superpower. And that is likely to have major repercussions for both the global and U.S. economies.

I wanted to take a deeper dive into how this trade war is shaping up, so I turned to the person I trust most to give me the skinny on Sino-U.S. affairs, especially from the Chinese side. That happens to be my brother Kaiser Kuo, who runs Sinica—one of the most popular podcasts out there on U.S.-China relations.

Kaiser just came back from Beijing and is giving a talk at Columbia University this week, so I caught up to him between his gigs.

Q: Based on everything we’ve seen so far, with tariffs first raised to 20 percent, then 84 percent, with China retaliating, then up again to 145 percent, with China again retaliating, are we in a full-fledged trade war now? Or is this all just posturing, given Trump’s quick exemptions on key items from semiconductors to mobile phones?

Trump appears to have caved on some important categories of goods, skewed conspicuously to favor the technology companies to whom he’s so beholden, but has kept prohibitively high tariffs in place on other goods. It’s easy to dismiss these as just textiles and toys, but key components like batteries, automotive parts, furniture and much more will raise costs or cripple production for the very manufacturers Trump purports to want to help, and will raise prices for American consumers. Even with tech products like smartphones, laptops and certain semiconductors, Trump has now said they’re still subject to the 20 percent tariff he imposed earlier (allegedly to punish China for failing to curb fentanyl) , and has hinted that they’ll be tariffed under a separate schedule following a Section 232 investigation to determine whether there is a risk to national security. The upshot is that yes, we’re in a full-fledged trade war — though by the time I finish this sentence, it’s entirely possible he’ll have changed his mind. Call it Schrödinger’s Trade War: It is one, and it isn’t.

Q: Trump keeps telegraphing that he wants and expects Xi Jinping to call him to make a deal, but so far the Chinese have been ignoring him. What are people saying about the likelihood Xi will try to make a deal with Trump?

Based on my conversations and my reading of China’s responses to date, Xi Jinping isn’t about to pick up the phone. He’s not likely to make any significant concessions, and certainly no unilateral ones, even if they do talk — as they eventually must. But this isn’t out of some fear of crossing online nationalists, out of fear that either he or the Party will lose legitimacy and their grip on power unless they face down the Americans. It’s bizarre to me how often I see people making this claim, and I can pretty much promise you that should China end up making some concessions and compromises to restore some stability to trade, those same people will claim that Xi had no choice — that refusal to meet Trump halfway would threaten his hold on power. I don’t think Xi is ready at this point to compromise simply because he thinks China has the advantage, and that Trump’s feckless “Liberation Day” tariffs will ultimately hasten what he sees as an American decline already underway.

That said, I expect Xi will be ready to talk once Trump cries uncle or taps out, and China can secure what it assesses as lasting advantages. Ahead of anticipated talks, China is corralling allies and pressuring trade partners not to make a separate peace with Trump. The Ministry of Commerce put out a statement after the Friday night exemptions were quietly announced by Customs and Border Patrol, calling the move “a small step by the U.S. toward correcting its mistaken unilateral practice of ‘reciprocal tariffs,’” which may not land well on the American ear but signals that Beijing doesn’t want things to go off a cliff. The U.S. is still one of China’s largest export markets and accounts for between 14 and 15 percent of Chinese exports, so it’s not nothing.

Q: The pundits are arguing over which side can “tolerate more pain” should this become a protracted fight. The hawks in the U.S. claim that this will disrupt the Chinese economy sufficiently that Xi will be forced to the table. The skeptics are saying that it’s the U.S. that will not be able to tolerate the economic impact. Who has the better argument, in your view? Or is there one?

My money would be on China’s pain threshold being much higher. Americans are still smarting from inflation that was bad enough to have decided an election, some might argue, and it’s hard to see them sitting still for considerable price increases. Beijing’s responses to the tariffs have been planned carefully for a long time; it’s become cliché in my world to say that they’ve learned many lessons from the first Trump trade war, but it’s certainly the case. They know where to apply pressure. They understand American electoral politics well, and are keenly aware of which export goods come from what congressional districts, and which GOP legislators are vulnerable. There are no analogous political pressure points for China, and even if there were, American knowledge of China’s commercial geography is wanting.

Americans dramatically overestimate China’s dependence on the U.S. as an export market. Not only does China have other export markets it can (and has already begun to) refocus on, but more importantly, it has huge untapped domestic consumer demand that it has only recently begun to address seriously. For years, the strategy was very much supply-side: improved quality of goods, encouraging trade-ins and upgrades of cars, electronics, white goods and home furnishings. That’s worked but only to a limited extent. Since March, as consumption was still flaccid, there’s been more of a demand-side focus from Party leadership.

Beijing has some emergency levers it could pull if it wanted to create virtually costless boosts to domestic consumption. Just the other day I was talking to Yukon Huang, a former World Bank country head for China, who sold me on the idea that China’s hukou system, which designates all citizens as having either rural or urban residency, is the real reason for China’s exceptionally high savings rate: It prevents the millions upon millions of migrant workers with rural residency designations who live and work in first-tier cities from buying property and educating their children. Huang argued that were it to be removed, it would unleash huge consumer demand and China would see overall savings rates plummet.

Q: Everyone has been watching the bond market, worried that the once safe haven for risk-averse investors is looking more dicey these days. That’s driving interest rates up, and the reporting, as confirmed by Trump himself, has pointed to instability in the bond market as the thing that made Trump hit pause on most of the other tariffs on other countries. First, why focus on China as the bad guy? Is it really just because they retaliated? And did Xi in your view have any choice but to do so? Second, given that China holds so many U.S. bonds, is there a real risk China could inflict pain on the U.S. by selling those bonds, creating more upward pressure on yields and pushing interest rates higher for U.S. consumers? What’s the likelihood China would actually play this card?

The focus on China was almost inevitable. Not only does China run the largest trade surplus with the U.S., but it’s been the whipping boy of choice through successive administrations from Trump 1.0 through Biden, blamed for all manner of American pathologies by politicians of both parties. Mind you, China wasn’t the only country or geography to retaliate. The EU did too, but they were let off the hook. As bond prices rose and the Trump team panicked, Lutnick, Bessent and most of all Trump needed to be able to claim that this was the plan all along — to isolate China, the “bad actor.” This was, of course, nonsense. But they have little choice but to double down now.

The grim reality is they’ll almost certainly pull out all the stops and declare open season on China, as the Trump administration did in the spring and summer of 2020, and this will certainly fan the flame of Sinophobia within the American body politic. It’s almost inevitable that this will gin up more anti-AAPI hate, especially as the tariffs begin to bite through inflation and layoffs. Xi Jinping could notionally have held off on retaliation, and if I could have bent his ear on “Liberation Day” I would have urged him to wait a couple of days. But it wouldn’t surprise me if someone who did have his ear told him, as a senior American China analyst speculated to me privately, that this moment was coming sooner or later — it just happened to be sooner — and that the nation is ready: confident, resilient, willing to “eat bitter” and outlast this last spasm of American hegemonic arrogance.

I don’t think China will choose the “nuclear option” of dumping U.S. Treasuries. It has an interest in maintaining their value, don’t forget. It would cut deeply both ways. And China does need somewhere to park its enormous hard currency reserves. Some have suggested that the sell-offs that we saw, which sparked the Trump White House’s climb-down, were instigated by Beijing, which holds many T-bills indirectly in Europe. But I don’t have direct evidence for this. China has many other options to inflict pain more unidirectionally than a big sell-off of Treasury notes.

Q: Do you see any off-ramp possible? Trump already “blinked” by exempting a host of items, but it seems he did this more to protect powerful tech companies like Apple than to offer an olive branch to China. How are you reading the signs, and what might an off-ramp look like?

China has left itself some possible off-ramps, yes, and I’m already hearing a lot of chatter, including from some of the best-informed China analysts, about back-channeling. Trump’s “blink” was not an olive branch to China — you’re absolutely right. This wasn’t about China, but about Apple and other tech companies, and ultimately about American consumers.

The most likely off-ramp is the simplest one: A call is arranged, its instigation deliberately obscured so that neither side appears to have capitulated; or Beijing initiates it, casting itself as the adult in the relationship, messaging domestically that Trump needed to be flattered and coddled and that it was willing to do that for the sake of global weal. Beijing’s price is going to be high: It doesn’t just want an end to the high tariffs, but is more concerned ultimately about the knee on its neck — the tech export controls. It’s hard to overstate Beijing’s irritation at this. Nothing has done more to convince the Chinese leadership of America’s intention of stymying its rise than this effort to starve it of key tech inputs. Sure, the policy has stimulated a lot of innovation in China — and by my lights it was utter folly, basically forcing the frog to leap past the U.S. in sectors like AI (witness DeepSeek!) — but it’s been costly. There is some indication that the Trump administration is willing to negotiate on this, and again, it’s American technology companies that are compelling this flexibility. Jensen Huang of NVIDIA met with Trump at Mar-a-Lago, and voilá, the NVIDIA H20 chip, which was used extensively in the training of DeepSeek, is greenlighted for continued export to China.

Q: The New York Times reported on Sunday that China has suspended exports of a range of rare earth minerals and magnets, which are used by auto manufacturing, aerospace, semiconductors and defense. This is in retaliation for Trump’s tariffs that began April 2. Most readers here, and most Americans generally, don’t have a strong sense of how this could affect our industries and national security. Is this an Achilles heel that the Chinese have known of for some time, and is this escalation as serious as it sounds?

I mentioned that China still had a range of retaliatory responses available, and this is one of them. China has an outsize share when it comes to rare earth processing (the “rare” in rare earths is actually misleading: they’re ubiquitous, just very polluting, and China has ended up as a major player in the mining and a near-monopolist in processing). Rare earths are used in a huge number of industries, from aerospace to consumer electronics, renewable energy, automotive manufacturing, defense systems, telecommunications and even medical imaging. So yes, it’s an Achilles heel, but not something that would permanently cripple the U.S. My sense so far is that Beijing has rattled this saber, but hasn’t drawn it from its scabbard just yet. It would be a serious escalation — but no more serious than what the U.S. has tried to do with the tech export restrictions.

If Beijing decides to implement export restrictions on rare earths and other strategic minerals in a serious way, then it’s really on, and we should all buckle up for a nastier, more protracted fight.

Kaiser Kuo is the host and co-founder of the Sinica Podcast, the leading English-language podcast on current affairs in China. Kaiser is also professor at large at New York University Shanghai, and is guitarist of the Beijing-based rock band Spring & Autumn. He formerly served as director of international communications for Baidu, China's leading search engine, and was the co-founder and guitarist of China's seminal heavy metal band, Tang Dynasty. He divides his time between Chapel Hill, North Carolina, and Beijing, China.