It's gonna be 'yuge': The impact of another Trump trade war with China, Plus Trump's tariff threats churn stomachs at Davos -- China Boss News 1.24.25

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What happened

President Trump announced on Tuesday that he plans to impose a 10 percent tariff on Chinese imports a response to China's role in the fentanyl crisis in America beginning February 1.

According to the New York Times, the announcement follows Trump's previous statement that he would impose a 25 percent tariff on imports from Canada and Mexico as punishment for allowing fentanyl and illegal immigrants to enter the US.

Trump emphasized that the tariffs on China are due to their actions regarding fentanyl distribution and claimed that China sends fentanyl to Canada and Mexico, which then enters the US.

In response, a spokeswoman for China's Foreign Ministry, Mao Ning, stated that China would protect its interests and argued that there are no winners in a trade war.

The new tariffs would add to the levies already imposed on over $300 billion of Chinese imports during Trump's first term, which remain under President Biden.

On LinkedIn, Isaac Stone Fish reminded everyone that "Trump did not say that the United States would impose 10% tariffs on China on February 1 -- he said that the U.S. may do so: "We're talking about a tariff of 10 percent on China, based on the fact that they're sending fentanyl to Mexico and Canada."

In other words, this looks like a negotiating tactic to put pressure on Beijing. Trump is well known for showy one-upmanship, and little else with him is inevitable.

Although Trump's future actions remain uncertain, apprehension over what they might bring is deepening.

But maybe we can make some projections based on what “tariff man,” as Trump once called himself, has said, as well as past experience.

Why it matters

'Yuge"

Despite years of tensions with China, companies still struggle to replace Chinese manufacturing.

It's not something that can be done in an instant.

The build-out of China's massive production ecosystem, one of the fastest feats in history, still took over three decades.

Businesses are moving production to countries like Vietnam, India, and Mexico, which are in various stages of development, to avoid US tariffs.

Yet, Trump is also considering throwing up barriers that would affect those contingency efforts.

In other words, Mr. T is going "yuge" (huge) with his tariffs, as he might say.

Even if he's bluffing, managers will batten down the hatches, and global growth that depends on new investment will stall.

"You know, businesses hate uncertainty more than anything else," said Welshe politician Carwyn Howell to NPR in 2016 after the Brexit referendum.

Howell's words and the Brexit aftermath invoke a grander sense of scale.

We're not simply talking about fewer projects of US businesses which are happily underpinned by American creditor and debtor laws.

Companies without such protections in other parts of the world will also ice new ventures.

Meanwhile, Chinese businesses - there are quite a few- have a different calculus, and the prospect of tariffs scares them less.

The Chinese government, which has shown remarkable tolerance for the current drought in consumer demand, has long approached local development with an "all hands on deck" perspective.

But when the pace of production outstrips the spending power of a billion people - Go West, comrade.

Through it all, planning for the likelihood of additional tariffs—carried forward from the first Trump Administration by Biden—has become the ordinary course of business.

According to CNN, consumers will start feeling "America first" at the gas pump, when purchasing agricultural products, and in the beverage and hospitality industries.

Tariffs on Mexico will increase the price of cars manufactured there.

But that's just from ticking off the neighbors. Almost a fifth of America's consumer goods still ship from China.

Fortune's Nicholas Gordon got the root of the matter earlier this week when he said, "Trump's specific road map for reshuffling global trade will emerge in the months and years ahead—or perhaps there will never be a map, leaving business leaders in the dark on a critical issue impacting their all-important planning."

"What is clear from his previous dance with tariffs is this: Even after nearly a decade of tensions with China, US companies still haven't been able to find a replacement for Chinese manufacturing."

Deborah Elms, head of trade policy at the Hinrich Foundation, a Singapore-based think tank that advocates for sustainable global trade, told Gordon, "Trump Two is not Trump One."

I'm not convinced that everyone recognizes the extent of the danger. It's going to catch a number of folks in the region really off guard," she said.

Trade war ‘preppers'

When Donald J. Trump started a trade war during his first term, Chinese officials' responses were slow, and businesses and investors reacted with fear.

However, after the Biden administration expanded technology restrictions on China, Beijing's response time quickened and its reprisals escalated.

China's retaliatory approach is usually in line with long-term objectives. (Shhh . . . it's how to tell what Xi Jinping is really thinking.)

But this is not to say that it always works or is adequate.

Instead, it indicates that Beijing understands what's at stake —I’m of the opinion that it receives close counsel from more experienced sanction-busters, like Russia, Iran, and North Korea.

We can argue about whether China prefers Trump to Biden or the other way around, but, Beijing has always known that achieving many of its objectives puts it direct confrontation with the US, no matter who is president.

Most analysts think Chinese leaders are better prepared to handle Trump and his tariffs. They predict a more targeted approach from China instead of straightforward retaliation.

The kicker is that China's economy is doing very poorly.

According to George Magnus, Research Associate, China Centre, Oxford University & at SOAS, although China's real GDP for 2024 was reported last week at 5% for 2024, the figure is wrong as credit growth was weak, and increased activity at year-end seemed due to fiscal easing and local government spending.

"Why do you need a debt swap programme of 7% of GDP and a persistent drip feed of housing and other stimulus measures if the economy is motoring at 5%?" he asked.

"Because it isn't. If it's growing at half that rate, it's generous," he said.

That doesn't mean China will go along with what Trump says. But it does mean that Xi and his party die-hards are increasingly under pressure and that retaliation ought to be limited.

I say "ought" because we don't know how much information is reaching China's strongman, and I also believe Xi’s risk tolerance is much higher than that of other post-Deng leaders. Either of those potential factors could be a game changer.

Nevertheless, Chinese policymakers have been bulking up defenses in anticipation of Donald Trump's tariffs.

According to Bloomberg, senior officials have begun employing terminology reminiscent of the global financial crisis regarding easing monetary policies and preparing fiscal measures.

Reports indicate that authorities are contemplating allowing the yuan to weaken further in 2025.

They’ve initiated an investigation into US chipmaker Nvidia over alleged violations of anti-monopoly laws, banned the export of certain critical minerals with military uses, and restricted sales of crucial components needed for drone manufacturing to the US and Europe.

Council on Foreign Relations' Zoe Liu says Chinese policymakers believe the US is pursuing a strategy to contain China and are increasingly emphasizing self-reliance in "preparing for a forced decoupling."

All China watchers should read Liu’s Foreign Policy account of the many steps and “components” in China’s plan to survive Trump and outlast America.

But none of China's actions occur in a vacuum.

For every action, there is a reaction that could do in all of China's "self-sufficiency" arrangements.

Just as the CCP's policies begat low consumer demand, which begat overcapacity now spawning new international regimes of tariffs, so the arbitrary investigation of foreign business is speeding up exits as officially-sanctioned xenophobia is killing tourism, and along with China’s hard-won soft power (is there any left?).

Nevertheless, as Liu correctly notes, "overestimating China's capacity" and "naively dismissing China's potential to challenge US global leadership and the dollar's dominance" would be mistaken.

"Washington can marginalize China's attempt to neutralize US geoeconomic power by strengthening the attractiveness of US leadership and the appeal of the existing global system," she writes.

I just can’t square how the US will achieve that with “tariff man.”

This Week's China News

The Big Story in China Business

CHINESE VICE PREMIER TELLS DAVOS 'NO WINNERS IN TRADE WAR': Chinese Vice Premier Ding Xuexiang told participants at the World Economic Forum in Davos, Switzerland, that there are "no winners" in a trade war and warned against protectionism.

His remarks came as President Donald Trump of the US planned to impose tariffs on imports from China, aiming to start a 10 percent tariff on February 1.