Can China come out on top in a US trade war?

Less than one month into US President Donald Trump's second term, and the first salvos in a potential new trade war between the United States and China are already being fired, with tit-for-tat tariffs and the threat of lasting economic consequences on both sides.

After the US imposed a sweeping 10% tariff on all Chinese imports earlier in February, China announced 10%-15% levies on imports of US crude oil, liquefied natural gas, agricultural machinery, and other products.

Beijing's retaliatory tariffs came into effect on Monday, the same day as separate 25% US tariffs on steel and aluminum imports took effect.

Along with the retaliatory tariffs, China has announced new export controls on minerals critical to making high-tech products like semiconductors.

Beijing also launched an antitrust probe into Google, and placed US companies PVH Group — the owner of brands Calvin Klein and Tommy Hilfiger — ­and biotech company Illumina, on its "unreliable entities" list. China has also issued a complaint at the World Trade Organization (WTO) over the 10% tariffs.

"The storyline from six years ago started to repeat," Wang Guochen, a scholar at Taiwan's Chung-Hua Institution for Economic Research, told DW. Trump launched the first round of tariffs on Chinese goods in 2018, with Beijing responding in kind, leading to a cycle of ratcheting tariffs.

Average US tariffs on Chinese imports have remained above 19% since June 2020, when the "phase one" agreement between Washington and Beijing paused further cycles of escalation, according to data from the Peterson Institute for International Economics (PIIE).

"Trade and tariff wars have no winners and undermine the interests of both Chinese and American people," a Chinese Foreign Ministry spokesperson told a press briefing on Monday.

"We urge the US to correct its wrongdoing and stop politicizing and weaponizing trade and economic issues," he added.

Could US tariffs on China backfire?

It is unclear what criteria the White House has stipulated for eventually reducing the latest round of blanket tariffs on Chinese goods, which were ostensibly announced in response to Beijing failing to curb the export of fentanyl into the US.

The 10% tariffs were, however, a far cry from the 60% targeting Chinese goods floated by Trump during his election campaign.

According to data from Goldman Sachs cited by The Washington Post, China's tariffs currently apply to $14 billion worth of US imports. The US tariffs on Chinese imports cover $525 billion worth of goods.

Nick Marro, the principal economist for Asia and lead for global trade at the Economist Intelligence Unit (EIU), told DW that in many ways, the US looks poised to lose more in the first phase of tariff escalation.

"Tariffs are inherently a tax paid by US consumers," Marro said, especially when these measures have been "implemented very chaotically without a lot of warning."

When US retailers pay increased wholesale prices for imported goods, the rising cost is usually passed on to consumers.

During Trump's first trade war with China, Beijing's tariffs targeted farm products from the US, especially soybeans, which came down hard on US farmers.

In 2023, the US imported $427 billion worth of goods from China, according to the most recent data from the US Census Bureau. Topping the list were smartphones, computers and consumer electronics.

And Trump's threat of 25% tariffs on goods from neighboring Canada and Mexico, although postponed, has raised major concerns about his scattershot approach to trade policy.

"It's raising questions about credibility and transparency, and that's causing a lot of consternation not just among US trade partners but US allies," Marro said.

"There's a risk that this could accelerate the migration away from the US-based global order towards an alternative order, maybe one promoted by China," he added.

China's economic vulnerability

The renewed trade tensions come as China is dealing with sluggish GDP growth and declining domestic consumer demand, brought on by a collapse in the real estate market.

And compared to the first trade war during Trump's first term, countries around the world have been diversifying supply chains and trade options away from dependence on China. 

While developed countries may be more cautious and skeptical about doing business with the US under Trump, "it doesn't mean they'll embrace China," said researcher Wang. 

He added China is more likely to shift its trading strategy to developing countries. However, the ongoing overcapacity of Chinese goods may hinder that plan. 

Although China is low on the list of steel and aluminum exporters to the US, owing to pre-existing trade restrictions, the new 25% US import tariffs come as China attempts to export more steel onto global markets as it deals with a massive surplus due to flagging domestic consumption.

In recent years, developing countries such as Mexico, Indonesia, and Thailand have also grown wary of large inflows of Chinese imports and have implemented anti-dumping policies, Wang said. 

"Since a big part of China's economy and businesses rely on exports, this will impact domestic investment, employment, and consumption even more." Wang added.

Another option for the world's second biggest economy would be relying on its own market, however, consumer spending in China continues to lag.

In autumn 2024, the Chinese government passed a series of economic measures to spark consumer spending, including cutting interest rates, while relieving cash-strapped local governments by approving a $1.4 trillion debt-relief plan.

But with more goods under export controls being put on domestic markets, this will add even more pressure on consumer demand.

Chinese consumers may initially welcome lower prices, but a risk of deflation could follow.  

"Since the US-China trade war in 2018 and the pandemic, China has introduced policies to encourage export-oriented companies to shift to the domestic market. This has led to continuously falling prices or deflation within China," Wang said.

Moreover, lower prices also mean reduced profits for companies.

"This, in turn, could lead to higher unemployment," he added, which would potentially create a vicious cycle that makes boosting domestic consumption even more difficult. 

DW's East Asia correspondent James Chater contributed to this report 

Edited by: Wesley Rahn