How should China respond to Trump’s tariffs?

BEIJING – US President Donald Trump’s “Liberation Day” announcement of sweeping new tariffs on imports from more than 180 countries will be remembered as a man-made economic tsunami. Many are already comparing it to President Herbert Hoover’s 1930 Smoot-Hawley Tariff Act, which slashed global trade by 66 per cent in five years and deepened the Great Depression. Trump’s tariffs, most of which have been abruptly paused for 90 days, have rattled financial markets, prompting analysts to warn that the United States could enter a recession in 2025.

The global implications can hardly be underestimated. As the world’s largest economy, the US has an outsize impact on other countries’ exports and growth. Adding to the uncertainty is Trump’s erratic approach to policymaking, which is nurturing doubts about the US dollar’s viability as a global reserve currency.

Even more alarmingly, as the US withdraws from its international commitments, the world risks falling into the “Kindleberger trap,” a scenario reminiscent of the 1930s, when no major power was able or willing to provide the global public goods necessary to sustain the world economy. If current trends persist, the international economic architecture the US helped build 80 years ago could unravel.

How should other economies respond to Trump’s tariffs? China, Canada, and the European Union have already announced retaliatory measures, while others have signaled a willingness to negotiate. For many, the US is not just a major export market but also a critical security partner and geopolitical ally.

Given its status as the world’s second-largest economy and the largest trading country, China’s response is especially consequential. While Trump has imposed new tariffs on nearly every country, China is clearly his primary target. During his first term, he launched an investigation into China’s trade practices and imposed sweeping tariffs on a broad range of Chinese goods, many of which were later retained by Joe Biden’s administration.

The same tit-for-tat dynamic that characterized Trump’s first trade war is playing out again. Within 48 hours of the US announcing a 34 per cent tariff on Chinese imports, on top of a previous 20 per cent increase, China’s government responded by matching Trump’s tariffs and introducing a set of more targeted measures. In turn, Trump raised tariffs on Chinese goods to 104 per cent, prompting China to hike its own tariffs on US imports to 84 per cent. Trump then escalated further, raising the rate on Chinese goods to 125 per cent even as he put Liberation Day on hold.

While Chinese experts hold differing views about how to respond to Trump’s tariffs, many believe that offering concessions would only invite further US aggression, and the decision to raise its tariff on imports from the US to 125 per cent reflects this view. Nonetheless, one hopes the two sides will be able to find ways to de-escalate through dialogue.

Beyond tariffs, Chinese policymakers should focus on more strategic responses in three key policy areas. First, they must do more to boost economic growth. After two years of relatively weak performance, the government finally adopted more aggressive macroeconomic stimulus policies in September, leading to a significant acceleration in growth during the final quarter of 2024.

But the newly announced US tariffs could make it difficult for China to achieve its targets of 5 per cent GDP growth and 2 per cent inflation, as a decline in exports may reduce aggregate demand, exacerbate industrial overcapacity, and intensify deflationary pressures. Given the potential impact of the new US tariffs, Chinese policymakers will need to implement bold and well-targeted macroeconomic policies. The People’s Bank of China should consider further monetary easing, including cutting its policy interest rate and the banks’ reserve ratio.

To be sure, concerns about financial stability limit the scope for currency depreciation. There is broad consensus among Chinese analysts that fiscal policy, especially increased deficit spending by the central government, should play a greater role in supporting growth.

Second, the new US tariffs underscore the need to rebalance China’s economy by strengthening domestic consumption. Currently, consumption accounts for only about, nearly 20 percentage points below the global average, exacerbating China’s overcapacity problem.

Historically, China addressed this imbalance by relying heavily on export demand. But that strategy has become increasingly unsustainable since the 2008 financial crisis, as global demand has weakened. Consequently, Chinese policymakers have introduced the “dual circulation” strategy to boost domestic demand and reduce dependence on foreign markets.

In March, the government unveiled a new series of “special initiatives” aimed at boosting consumption. But this is inherently more difficult than stimulating investment, as household spending is largely driven by income and confidence, both of which take time to rise.

Lastly, America’s regrettable protectionist turn threatens to create a global leadership vacuum. Over the past few decades, many countries, particularly in Western Europe and East Asia, have benefited enormously from open markets. China must work together with these countries, both bilaterally and multilaterally, to preserve this system and bolster free trade and investment.

Over the past year, the Chinese government has taken unilateral steps to facilitate international exchange, including visa-free travel for citizens of countries like Denmark, Norway, and South Korea. Similar measures could be extended to trade and investment.

Encouragingly, Chinese policymakers have already made progress in each of these three areas. As the world enters a new phase of development, it is in China’s best interest to get its own house in order first, and then take a proactive role in safeguarding the global economy.

Huang Yiping, Dean of the National School of Development and Distinguished Professor at Peking University, is a member of the Monetary Policy Committee of the People’s Bank of China. Copyright: Project Syndicate, 2025. www.project-syndicate.org