Opinion | China's Real Problem Is At Home

On April 10, China's National Film Administration declared imports of American films would be "moderately reduced" in response to the US government's "abuse of tariffs". This curious retaliation is just one of the several responses that China has unleashed since Trump's April 2 tariffs. Not only did China raise tariffs on American goods, but it expanded the scope of the trade war. This article analyses China's multi-domain, escalatory measures and assesses their impact.

China's responses fall into four categories: a retaliatory tariff rate hike, restrictions on some exports to the US, coercing American companies, and rhetoric to garner external support. 

The Door Is Open

First, consider the headline response on tariffs. In response to Trump's tariffs in February and March,  China began with a calibrated response, increasing tariffs on agricultural and energy products imported from the US. Then came the tit-for-tat increases in response to the April 2 tariffs. Beginning with a 34% tariff on all US goods announced on April 4, the tariff rate had reached 125% at the time of writing this piece. 

Once the US increased tariffs on Chinese goods thrice in two months, taking the total to 54%, the Chinese leadership calculated that it had to escalate to de-escalate. But at each escalation stage, China kept its highest tariff rate lower than the US tariff rate, keeping the door open for negotiations. 

However, the key point is that American goods exported to China in 2024 are almost one-third of China's goods exported to the US. Thus, the impact of similar tariff rates will be higher on China's producers than on American producers. Moreover, the Chinese economy is production-centric and not consumption-centric. For this reason, China opted to move the conflict to other domains where it believes it holds the aces. 

Betting On Rare-Earth Metals

Its second response was to apply export controls on alloys and ores of several rare-earth metals. These restrictions aren't new; they merely expand the list of controlled metals. In December 2024, before Trump took office, China responded to Biden-era export controls on its semiconductor industry by strengthening export controls on gallium, germanium, antimony, and superhard materials.  While rare earth metal restrictions make a lot of news, they are unlikely to deter the US. Though critical for varied applications - from vacuum cleaners to fighter jets - these metals are required in minute quantities. The total value of rare-earth compounds and metals imported by the US last year was a meagre $170 million, meaning that even a fivefold increase in prices due to China's restrictions can be absorbed by American firms. The US government also maintains a stockpile of some rare earth concentrates to manage short-term risks.

In the long run, China's consistent weaponisation of its rare-earth dominance will increase prices, making extraction and processing economically feasible elsewhere. Much like the US weaponisation of the financial system will likely undermine the dollar's "exorbitant privilege", China's export restrictions will reduce its rare-earth dominance. Some cards lose their value permanently once they are played. 

American Firms Under Fire

The third response involves targeting several American firms for varied reasons. The commerce ministry banned 11 companies from foreign investment and trade in China, because they provided military technical support to Taiwan. Another 16 American companies were put on the export control list, preventing the sale of dual-use items to them, because they had engaged in 'activities that may endanger China's national security and interests'. Anti-dumping investigations on American Medical CT X-ray tubes, import suspensions from some American suppliers of poultry and sorghum, an anti-monopoly investigation on DuPont, and orders to airlines not to take further deliveries of Boeing jets comprise the wide range of actions that have been announced thus far. 

The origin of this response precedes the tariff war. Some of these actions were likely considered in response to the Biden-era restrictions on China. They were eventually approved by different state agencies once the green signal to escalate came through in response to the 'Liberation Day' tariffs. Among all the actions China has taken, this appears to be most damaging as US firms-including Tesla-heavily depend on their China plants. At the same time, these measures would belie the promise of policy consistency that pulls foreign companies towards China, accelerating the China+1 trend. 

Looking To Others

The final response is the rhetoric of China as the champion of free trade and the prime defender of the World Trade Organisation (WTO). China's narrative is that other countries should recognise how China is fighting not for itself, but for the entire world. Since April 2, it has initiated dialogue with the EU, Vietnam, and Malaysia. In these talks, it has positioned itself as the rule follower in global trade. Despite the charm offensive, few countries have joined China in raising tariffs, illustrating that countries are as circumspect of Chinese intentions as they are of Trump's mercurial nature. Most developing countries are wary of Chinese goods flooding their domestic markets, and are unlikely to budge unless China allows firms from other countries greater access to its market.

These four responses suggest that China has several options, but each has drawbacks. That's why China released a white paper on April 9, which strikes a conciliatory tone and makes the case for "equal-footed dialogue" to resolve differences between the US and China. While many memes have been made about Trump eagerly awaiting Xi's phone call, de-escalating the trade war is vital for China's economy. The ability to absorb pain due to such wars is ultimately a function of the country's GDP per capita. And because the US is five times richer than China, it can play this game longer. 

The root cause of China's problems is its anaemic domestic consumption. Until that improves, it will remain dependent on exporting its overcapacity, harming other countries' industrial capacity. However, governments are unwilling to give China's overcapacity a free pass anymore. Thus, higher tariffs against China will stay even if this round of the US-China trade war is settled. Without an economic pivot, China's troubles won't go away. 

(Pranay Kotasthane is deputy director of the Takshashila Institution and chairs the High-Tech Geopolitics programme)

Disclaimer: These are the personal opinions of the author