The first shots in the latest US-China trade clash have made it clear that Chinese President Xi Jinping is taking a more calculated, cautious approach than during the volatile trade war with former President Donald Trump. After Trump imposed 10% tariffs on China late on Tuesday, Beijing wasted no time in responding, announcing tariffs on about $14 billion worth of US goods, but this time, China’s retaliation wasn’t limited to just matching tariffs. In a multifaceted response, Beijing also launched an antitrust investigation into Google, tightened controls on critical minerals, and added two American companies to its blacklist of “unreliable entities.”
This restrained yet strategic retaliation signals that China has learned lessons from the previous trade war, when Beijing’s retaliatory tariffs were often mirrored dollar-for-dollar to what the US imposed. Unlike that approach, which often resulted in direct tit-for-tat escalation, this time Xi’s government has taken a more diversified strategy, using a mix of tariffs, regulatory measures, and economic pressure points to keep the trade conflict from spiraling further. The relatively small scale of the tariffs—on only a sliver of US goods—suggests that China is seeking to avoid a full-scale trade war, particularly as it faces growing economic challenges.
The shifting approach is a reflection of China’s evolving position on the global stage. Xi’s strategy of diversifying its imports and reducing reliance on US goods since the first trade war has given China more leverage. However, the country is also grappling with a deflationary crisis and a struggling property sector, meaning it is treading carefully. According to Larry Hu, head of China economics at Macquarie Group, China has more to lose in a trade war, especially given its massive trade surplus with the US. Instead of escalating tariffs, China is likely to focus on domestic economic stimulus to weather the storm.
Xi’s cautious response, which avoided triggering a market panic, also highlights the global uncertainties surrounding the trade war. Financial markets, which have been volatile due to the back-and-forth tariff announcements, rebounded slightly following Beijing’s measured retaliation. The Hang Seng China Enterprises Index gained 3.5%, while the offshore yuan held steady after initial losses. Xi’s move was deliberate: a calculated response designed to avoid undermining China’s fragile economic recovery while making clear that Beijing is prepared to hit back if necessary.
The real question now is whether Trump and Xi can quickly find common ground, or if the trade talks will drag on for months. Trump, who has oscillated between belligerent rhetoric and diplomatic overtures on China, said he would seek a deal with Xi, although after the tariffs took effect, he suggested there was no urgency for talks. His administration’s mixed messaging on the matter, combined with his desire for a more balanced trade relationship and renewed scrutiny of the Phase One deal signed in 2020, signals that the negotiations could become protracted.
Trump’s push for China to take a more active role in ending Russia’s war in Ukraine and his insistence on breaking up TikTok, demanding a partnership between the Chinese-owned app and a US company, adds further complexity to the negotiations. The looming 75-day deadline for a TikTok deal highlights the intertwining of trade issues with national security concerns in both countries. Chinese officials are likely to face difficult decisions as they balance their economic priorities with the demands of a US president who has a personal stake in TikTok’s fate.
But here lies the crux of the issue: China enters these talks with far less bargaining power than it did in the last trade war. The US has long maintained a massive trade deficit with China, and the numbers are stark: China exports more than three times the goods to the US than it imports. This gives the US more leverage when it comes to imposing tariffs or other economic sanctions. Beijing may have fewer goods to target in response, which could limit its ability to escalate the conflict.
