As Beijing rebuffs Trump, China and US hurtle towards economic catastrophe

(Originally published April 25 “What in the World“) Trump may yet succeed in destroying the world’s biggest economy. The question is whether he’ll succeed in pulling the world’s second-largest economy down with it.

Beijing, despite its demonstrated capacity for cognitive dissonance when it comes to Taiwan, doesn’t appear capable of nuance when it comes to Trump. Instead, it’s playing petulant. Trump seemed to give in somewhat on tariffs Tuesday after his Treasury Secretary Scott Bessent told an investor conference they were unsustainable. “145% is very high and it won’t be that high,” Trump told reporters, repeating suggestions that behind-the-scenes negotiations are underway. “It won’t be anywhere near that high. It’ll come down substantially. But it won’t be zero.”

Bessent and Trump’s comments buoyed financial markets. But China wouldn’t accept Trump’s opening. Instead, it denied claims by the White House that any talks were taking place. “China and the United States have not conducted consultations or negotiations on tariffs, let alone reached an agreement,” Chinese Foreign Ministry spokesperson Guo Jiakun said.

Trump doubled down, calling Beijing a liar. “They had a meeting this morning,” Trump said Thursday, apparently alluding to Chinese officials in Washington for semi-annual meetings of the International Monetary Fund and the World Bank. “It doesn’t matter who ‘they’ is. We may reveal it later, but they had meetings this morning, and we’ve been meeting with China.”

With the global economy hanging in the balance, neither Washington nor Beijing seems to be reading the other very well. China, for its part, seems to have rejected a strategy other nations have adopted, which is to recognize that stroking Trump’s vanity and giving him empty deals he can portray as great victories is more important than concessions of real substance.

But China may also recognize that even Trump’s retreats are only temporary feints on the road to de-coupling. For his part, Trump appears determined to return the United States to some kind of rose-tinted 19th-century vision of America’s Gilded Age, when robber barons freely roamed the country’s unregulated prairies, sheltered behind high tariffs and isolationist foreign policy, the poor toiled in dangerous sweatshops, and immigration was controlled with sensible legislation like the Chinese Exclusion Act. For Trump, Upton Sinclair’s “The Jungle” is a warm and comforting, bedtime story.

China, on the other hand, would prefer not to revisit this period of history. The latter half of the 1800s wasn’t very fun for China. Not after the United Kingdom decided the best way to redress its own persistent trade deficit with it was to force Beijing to allow imports of opium and hand over to imperial powers treaty ports up and down China’s coast from Haikou and Hong Kong to Tianjin and Dalian. China has had a rocky journey since kicking the imperialists out in 1949, but to some extent it has all been about reversing this “century of humiliation” and re-gaining the preeminence it enjoyed before gunboats and unequal treaties.

Beijing’s leaders understand that Washington’s goal is to place China under a kind of financial suzerainty. And Washington’s continued failure to treat it as an equal, instead denigrating its people as “peasants,” only reinforces Beijing’s conclusion that the U.S.—and the West in general—is determined to prevent China from regaining its place in the world and even return China to subjugation.

So, China has insisted that Washington climb down first. “If the U.S. truly wants to solve the problem, Chinese Commerce Ministry spokesperson He Yadong said Thursday. “it should… completely cancel all unilateral tariff measures against China and find a way to resolve differences through equal dialogue.”

But tariffs are only part of Trump’s plan to punish China for its trade practices. Along with new restrictions on high-tech semiconductor exports, he’s also revoking the de minimis rule on tariffs, which exempted very small shipments from tariffs. And he’s imposing levies on Chinese-built ships arriving in U.S. ports.

Washington is also working to keep China from using other countries as maquiladoras to skirt U.S. tariffs. In its latest move, the U.S. has imposed tariffs as high as 3,521% on solar panels imported from Cambodia, Malaysia, Thailand, and Vietnam after the U.S. Commerce Dept. found that some Chinese solar panel companies have been shipping products through these nations. The same thing has been happening with Chinese steel.

Under normal circumstances, Beijing could just wait out Trump’s term. And China’s defiant stance suggests it’s battening down for a long fight. China has already retaliated with tariffs of its own on U.S. goods, and banned exports of minerals and magnets vital to the global manufacture of cars, planes, semiconductors, and weapons. It’s also preparing to cut imports of U.S. food and LNG. Last week, China’s President Xi Jinping embarked on an unlikely diplomatic offensive in Southeast Asia to head off Trump’s efforts to isolate China by dangling tariff concessions to neighbors that restrict trade and investment with China. On Monday, Beijing threatened retaliatory measures on any country that cuts such a deal.

The question is whether time is still on China’s side. China is already battling slowing growth, crippling local-government debt, a slumping property market, and growing deflationary pressure. Exporting cheap, manufactured goods has played a key role in propping up weak domestic investment and spending.

That’s forcing Beijing to take a leaf from Washington’s book: borrow and spend. Beijing’s latest budget raises the consolidated government deficit to a record 8.8% of China’s GDP, according to research by Christine Wong at the National University of Singapore’s East Asian Institute.

To finance that deficit and help local governments refinance existing debt, China is issuing a record 14 trillion renminbi in new debt, equivalent to almost 10% of GDP. Almost half of that will come from bonds issued by the central government.