What cards does China hold?
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BBC Sounds. Music, radio, podcasts. In the last week, while the Trump tariff hokey-cokey continued in the White House, Xi Jinping, President of China, was on the road in Southeast Asia. A tour that President Trump described as a series of meetings plotting, quote, how do we screw America? To which the Chinese responded by accusing him of whining.

If this was fiction, it might be funny, but it isn't and it isn't. As of now, two of the world's three economic superpowers, the other one being the European Union, are engaged in a trade war, with China responding in kind to America's huge new tariffs. If this is a game, it's one in which the Chinese leadership will be looking hard at what cards they hold. So when they look at their hand, what do they see? And what's likely to be their strategy as a result?

Step into the briefing room and together we'll find out. First, how healthy and resilient is China's economy? Damien Ma is an economist at the Kellogg School of Management in Chicago specialising in the Chinese economy.

Damien Ma, was China surprised by what Donald Trump announced on Liberation Day? I think the answer to that would be yes and no. I think the Chinese government came into the new Trump administration thinking that it could be disruptive and that they were going to get, quote unquote, punched on trade. But then nothing happened for a while. So I think that threw them for a loop.

And I think they were ultimately a little surprised by how fast and furious the tariffs came because they spent the first bit of the administration trying to reach out. They thought there was room to talk.

But none of that actually happened. So I think they grew frustrated. And then Trump just launched his liberation day. But they did expect and they were preparing for trade disruptions. And they had an arsenal of toolbox ready to respond. Can you give us a kind of sitrep on the state of China's economy before the tariffs were announced? Sure.

The economy was doing mixed. They were stimulating a little bit toward the end of 2024. That stimulus did show up in the first quarter numbers that just came out. So growth was 5.4% in the first quarter, higher than many people expected. Could you explain briefly what you mean by stimulus? You mean the Chinese government stimulating its own domestic market? Yes.

That's right. They were concerned about meeting their growth target at the end of 2024, and they were facing a deflationary cycle which persists. So they wanted to boost the economy a little bit by pumping money into the economy, credit, fiscal spending. They did a little bit of that. Some people say not enough, but it was apparently enough to carry the first quarter to slightly better than expectations.

I think that takes us back to a program that we did not so long ago when we looked at China's economy and found that actually there were some weaknesses becoming evident. Can you remind us what those big weaknesses are? I call them the two Ds. Right now there's deflation, which is price is not going up and they're hovering in negative territory. And the other D is deleveraging, which is dealing with China's debt. China has an enormous local debt problem that needs to be solved.

But if not managed well, it's obviously a huge risk because debt could explode. What's really important is China is dealing with a domestic local government debt problem in particular. And that has a lot to do with the property collapse that's been happening for the last two or three years. And that's really her local government revenue. When we did that program, we also looked at, and you've referred to it, the property market crash. Could

Could you tell us why that happened? So the property market started to really collapse around 2021 and 2022. It's still sort of going. This was really a deliberate policy effort from the top leadership. They wanted to pop the property bubble that was growing red hot for many, many years.

They felt the market was unsustainable and they felt there was a lot of speculative activity. They felt it symbolized the old growth model of fixed asset investment driven, and it led to a lot of corruption and waste as well. So they really wanted to tamp down the bubble. That was their way of really signaling that China was moving to a different growth model that's not as dependent on investment. And that really hurt Chinese household wealth.

And what's the situation with regard to how the Chinese consumer and ordinary citizen faces the economy? I mean, with something like, say, unemployment?

The unemployment is a little tough. They publish official numbers. Urban unemployment is usually around 4% to 5%. But I would take the headline figure with a grain of salt. There's also pretty severe youth unemployment, up to 20% just a few years ago. But that figure was so sensitive that the Chinese government stopped publishing it. So we're not exactly sure what the real figures are, but it is a pretty significant problem. Let's now look at Chinese exporting. Can you remind us?

how much China exports to the U.S. and the rest of the world? In the U.S., 2024 data is not out yet, but as of 2023, they exported about half a trillion dollars. Now, that's a little bit lower than the previous two years because Trey has diverted a little bit away from the U.S.

because of the first trade war. In the aggregates of the rest of the world, China in 2023, export value was over $3 trillion. Is it difficult for China to substitute its market in the US with markets elsewhere? I think they are really hoping that the Europeans would step up. They exported a little bit more to Europe, $700 billion roughly in 2023.

But obviously, everyone's quite concerned about Chinese oversupply in a number of products like solar panels. So it's going to be tough to negotiate with the Europeans to take all the products that would otherwise go to the United States. How damaging are these tariffs for China economically?

I've seen anywhere between half a percentage point to a full percentage point of GDP, depending on how long this lasts and how much Trump digs in, which is significant because China has a target of roughly 5% growth this year. And the trade war could seriously undermine that target.

So, Damian, what do you think the Chinese government will do? I think the Chinese government needs to launch a bazooka stimulus that's similar in proportion as what they did after the global financial crisis in 2008 on the order of 10 trillion RMB is what some have proposed.

And that would come in the form of central government fiscal spending, the central bank launching more credit. It would basically go toward all sorts of investment. And it may also help address some local government debt problems that we talked about that could help local government spend more. So it's a whole big package of spending that's probably going to go for one or two years on the order of 10 trillion RMB.

You mentioned before the earlier trade war, which was the first set of tariffs that Trump imposed on China back in 2017-18 and that were kept on by Joe Biden. To what extent has China managed to adjust to those?

China has adjusted quite well. And some of that is showing up that there is just simply slight decline in exports to the United States. But what's happening is that a lot of that diversion is going through Southeast Asia, Vietnam, Malaysia, which I think is one of the reasons why the current administration has slapped universal tariffs on all those other countries. And so, you know, a lot of solar panels that were coming out of mainland China are now coming out of Vietnam, but they're still Chinese companies.

So that's an adjustment they made, which may not necessarily be available this time round. Well, I think everyone knows their game now and everyone's caught on. So it would be tougher. And I think given that Trump is in favor of universal tariffs of at least 10 percent, that gets slapped on everybody, including Vietnam and Malaysia.

Damien Maher. And before we carry on, just a quick reminder that you can subscribe to the Briefing Room podcast by visiting BBC Sounds and you'll get access to the entire back catalogue, which includes the one which asks how we fix the NHS and the very recent one which looks at the history and ideology behind Donald Trump's love affair with tariffs.

Now back to the Chinese response to those tariffs. I'm joined by Isabel Hilton, visiting professor at the Liao Institute, King's College, London, and Rana Mitter, who's the ST Lee Chair in US-Asia relations at the Harvard Kennedy School. Isabel Hilton, were you surprised that China retaliated to Trump's tariffs?

No, I wasn't surprised. Look, they know Trump. They've had eight years to prepare for this moment and they pretty much had their very calibrated response ready. They couldn't not retaliate. You know, there's a matter of national pride, of dignity. But also their retaliation was pretty well thought out. It targets vulnerable sectors in the US economy like Midwestern farmers. And there's just a threat of worse to come.

in restrictions on the export of strategic minerals, which are essential for military magnets, for example, and various bits of high technology. Rana, can you put their response into some kind of historical context?

Absolutely, David. One of the things that will have been fueling the decisions of people in Beijing, Xi Jinping and the leadership team around him is that they've been here before. In a sense, they regard the last hundred years, really, and possibly even more than that, as being a series of ways in which the wider world, controlled by the West...

is essentially trying to put China on the back foot when it comes to trade and economics. So, you know, 150 years ago, it might have been the opium wars where the British warships essentially came and forced open the doors of China to sell opium, bring Christianity and essentially forced China back in the days of the old empire.

to do things it didn't want to do. Now, obviously, the Opium War is a very, very long time ago, you know, more than a century and a half. But there's still a sort of strong sense that when you come to different aspects of global trade, let's say the way in which the 20th century, China's tariffs were not controlled by the Chinese government directly, but by an institution called the Imperial Maritime Customs Service, which for a long time was actually run by an Ulsterman called Robert Hart from Portadown.

So all of these collective memories about how China's trade position has for a very long time not been controlled by China in much of the historical perspective, and that in recent years, China has regained that capacity to choose its own tariffs, to decide who it's going to trade with and where, and actually to become a bit

a swaggering imposer of its own rules on global trade, all of that means that there is no way I think the Chinese would not have responded to these tariffs. Can I just ask you both to occupy for a moment the shoes of President Xi and his advisers? Isabel Hilton, do you think that at the moment they are actually slightly intimidated perhaps or worried about what's going to happen?

You don't really get scared unless you think the contest is unevenly balanced. And it is definitely my impression that the feeling in Beijing is that the contest is pretty evenly balanced at present.

They know that, for example, the US imports Chinese smartphones made by an American company, Apple, so that if you hurt the smartphone industry from China, you're actually hurting one of the US's most important companies. The same with laptops. You know, there is a kind of feeling in Beijing, I think, that to use the old Chinese expression, United States has lifted up a stone and dropped it on its own foot.

So, you know, China has had a policy of building self-reliance. They dominate a number of absolutely critical supply chains. So actually, I think they think that they will emerge from this probably stronger and that this will do a lot of damage to the United States.

How different should we think of Trump's and Xi's worldview as being? And one of my reasons for asking it is that we have a president on the one hand who says he'd like to take over Greenland and thinks Canada should be the 51st state. And we have a president on the other hand who seems to be threatening Taiwan and have his own very big ideas about what should be happening in the South China Sea.

Yes, I think that it wouldn't go down terribly well in Beijing to make that Greenland and Taiwan analogy, you know, China.

It is highly contestable, but nevertheless, China argues that Taiwan is an integral part of China. It's just a renegade province for historical reasons. As I say, we can certainly argue about that, but I don't think anyone would pretend that Greenland was an integral part of the United States or indeed that Canada was. So certainly China would say these are really quite different cases and that China's ambitions territorial stop there. Expansion of trade, expansion of power,

You can see China building alliances all across the Pacific, which would make it quite difficult if it came to a fight, a live firefight over Taiwan would make it difficult for the United States. So China wants to build in a kind of regional security and a global order in which China plays an important part.

Rana, what do you think about that? I think that the worldviews of President Donald Trump and President Xi Jinping are

in some ways do have some real similarities. Both of them regard essentially big powers, China, the United States, Russia, as the key players of the new global order. Both of them have explicitly in different sorts of ways talked about the idea that we're in a new global order. In those terms, great power plays are absolutely at the center of

of both of their worldviews. Linked to that, I think, is something that is not explicitly stated by either, but actually has something of a Confucian turn to it, you might say, thinking of the great Chinese philosopher Confucius. That's the idea of hierarchy as a necessary way of ordering the world. Now, this can be a benevolent thing or it can be a coercive thing, but for many philosophers,

the UN system has essentially argued that all nations are equal, at least in territorial terms. Now I think we're returning to a world which both Donald Trump and Xi Jinping are more comfortable with, in which big countries and small countries have a more hierarchical relationship. Getting back to the specifics now of China,

the coming trade war. Isabel Hilton, China certainly seems to be playing it tough. Now, I suppose the question we have to ask now is, do they mean it? In other words, will they persist with it? I think they will persist with it. The terms in which Donald Trump speaks about...

other leaders queuing up to beg him for a deal absolutely guarantee that China has to play tough. It's politically unthinkable for it not to play tough. So my question at that point is, what cards do they think they have to play in playing it tough? What's on their side?

Well, they can hurt important sectors of the U.S. economy. They know that Donald Trump is subject to kind of the ills of democracy, if you like, that you get too much discontent and your position weakens. China doesn't really have that to worry about. And in terms of the cards that are still to play, I go back to the strategic minerals and the rare earths.

We have a new licensing process for the export of those things. The United States needs them. And China back in 2010 did dramatically reduce the exports of these rare earths. And there was a massive spike in prices around the world and the whole global economy, you know, felt the shock. So China can do that again. And that would really hurt the United States. Ronald, what cars do you think they think they have?

I think that Beijing's trying to develop a new pack of cards, so to speak, by which I mean they're trying to find out if there would be partners who might work with them in terms of pushing back against the United States on the global trade front. In mid-April, as we're speaking, in fact, China has just changed its chief trade negotiator. And a lot of people are interpreting this as meaning that they want to get a lot tougher.

But I think that they have already indicated that if they can get other major emerging or existing high-level economies on side for their position, that will help them. So again, in the week that we're speaking, Xi Jinping is making a tour of certain Asian countries. And the idea is that by going and showing the global South countries, particularly ones that are in the neighborhood in Southeast Asia, that China is a cooperative partner when it comes to trade,

They can essentially argue that China is now really the face of free trade, of agreements that enable mutual cooperation, that the win-win scenario, which Chinese negotiators are always so happy to talk about. And this message could also be seen as potentially powerful in Europe. Germany's automobile industry is currently going through a very painful transition as the world moves towards electric cars in many cases.

And it's Chinese technology that's very, very important, along with Chinese batteries, for keeping the newly invented 2.0 version of the European auto manufacturing business going. So there's lots of cards in that sense that China can play. However, it's got one really big disadvantage that it's going to struggle to overcome.

That is that, broadly speaking, other economic partners, Europe, Southeast Asia, welcome Chinese markets and a certain amount of Chinese investment, but they're really worried about the implications for security of getting too close to China. In Southeast Asia, one of the most important sets of disputes of the last few decades has been over the South China Sea. And the feeling is it's hard completely to buy China's argument that,

it's safe and effective to become a trade partner of China against the United States when the US is still, for all the changes that have happened, providing the major security presence in Asia that pushes back against China. So, Isabel, if China believes that the US has engaged in a major act of self-harming, does it automatically follow that the beneficiary from this would be China?

I don't think anything is automatic in this situation, but I can see a number of potential benefits for China in this situation. And the first one is that it improves the position of Xi Jinping and the party at home. You know, there are a lot of unhappy people in China because of the state of

the economy because people have lost a lot of money on the collapsing property market. There's an ageing population. There are lots of things to worry about. But now all the troubles that China has, some of which are a result of mistakes made by its own leadership, can be blamed on Trump. And that's a tremendous plus for the leadership. And then again, internationally, you have a once reliable superpower, the United States.

imposing tariffs on its closest allies. And if the United States does demand from its trade partners in the course of trade negotiations, as was hinted at recently, that it will demand that its trade partners join it in a kind of trade war against China, that is going to put those mid-sized economies, particularly in the region, in a very, very awkward position. Isn't it also the case that

that some of the countries of the West in particular are going to be also reluctant purely because of China's human rights record.

Yes, although I think the whole question of human rights is going to be slightly on the back burner. The relations with the European Union deteriorated sharply over Xinjiang and then again with the UK over Hong Kong. And Xinjiang was the fate of the Uyghurs. The fate of the Uyghurs in Western China, yes. And the incarceration in camps and then the distribution to virtual, you know, bonded labour in China.

through prisons and factories across China. So it is a highly, highly problematic issue. Rana, time to put your profits hat on. What do you think is going to happen? I think that actually...

The chances of a deal between the United States and China on this issue are higher than they might seem, you know, in the kind of April moment when rhetoric is extremely fierce. The rates of mutual tariffs seem to be going up at one point almost daily. But over the next few months, I would say the chances of both sides, the United States and China, coming to some sort of agreement on the tariff question is quite high. The reasons for that are,

are essentially that first of all, both economies, while they're the first and second biggest economies in the world respectively, and they are sustained by significant domestic consumption and production, nonetheless do have vulnerabilities and don't want to be stuck, I think, for a very long time in a situation where actually American consumers and small producers are having to pay very high costs for sourcing things from China that they can't actually get elsewhere.

And Chinese workers are finding that a significant, if not existential market for them in the United States is no longer available. Isabel? I think that in order to get the kind of photo opportunity that Donald Trump wants, he's going to have to go to Beijing. I think Xi will take a lot of persuading to go to Washington where he might be mistaken for a supplicant.

So what I envisage is quite a painful standoff over quite some time. And then I agree with Rana, they will talk. Both sides will declare victory. My sense is that the United States will emerge from this weaker and China will emerge from this stronger. And then the question is, will they manage the relationship in a steadier state in the future than they have done to date?

Isabel Hilton and Rana Mitter. Finally, what about the impact of this China-US trade war on the rest of us? I'm joined by David Hennig, who's director of the UK Trade Policy Project. David Hennig, can we just talk first about what you think the global impact on trade is if this current trade war between China and the US goes ahead at roughly the levels which we've now got?

Well, there's been a projection by the World Trade Organization published which suggests that global trade in goods is going to decline by 0.2% in 2025 as compared to if there had not been such US tariffs that it would have increased by 2.5%. But the more worrying part of this is that

If there is further escalation, retaliatory actions, more reciprocal tariffs reintroduced, that could add up to a hit of 1.5% on global goods trade volumes. That's a huge number, and that is the number that starts to push a lot of countries into recession. Let's look specifically about the possible impact upon the UK. Let's say we restricted the tariff, or broadly speaking, to China versus the US on the current levels. Would that have any significant effect on us?

The impact on the UK is that it's not huge from the US-China trade conflict, but it might be large enough to remove Rachel Rue's fiscal headroom, which, as we know, is very slight. So even if it just takes...

0.2% off GDP, which seems a not unreasonable number, that has a knock-on effect onto the public finances. So every small hit really is a problem for the UK, even though, by and large, this affects, well, frankly, North America, and the US in particular, more than any other country. If that's the case, how does it compare to other shocks we've had, like the shock of Brexit? Yeah.

Brexit, the Office of Budget Responsibility suggests, took 4% off UK GDP. Economists can vary around that number, but let's take it as a central point. So for the UK, that's potentially 20 times more significant than the impact of US and China tariffs.

because Brexit was hitting directly on the UK, just as US tariffs are going to raise costs for US consumers and is hitting first and foremost on the US market and then onto people who export a lot of goods to the US.

The UK exports a fair amount, but nothing like the amount that China does, that Canada does, that Mexico does. These are the countries that stand to lose directly from the tariffs that President Trump is putting in place. One of the things that people have talked about is the idea that because the market for their goods has diminished in America, the Chinese might dump goods.

their goods in the UK and other European countries. Firstly, could you just explain very briefly what dumping actually means? And second, can you tell us whether you think that's likely? There are two concepts that are important to explain here. Dumping is to basically sell a product at less than the cost of manufacture because you've got surplus. And that obviously affects

It's a domestic industry which struggles to compete. And is dumping illegal, David? Dumping of products at below the cost of production is illegal under WTO rules and countries can take measures to prevent that happening. There is also trade diversion in which you still sell things at the same cost, but because you have lost one market, you try to increase the amount you sell at the same cost. That's not illegal. That's just a natural marketing instinct.

We could see effects of that on the UK. There's not a huge number of products that the UK produces that China also produced, where huge amounts of extra are likely to put UK production under pressure. That's a bigger problem in other countries. And actually, what may be one of the biggest impacts here is that

If we import more from China, say, of clothing, then we'll import less from other markets, particularly less developed countries like Bangladesh, let's say. And there is a big concern at the moment that the victims, really, of US tariffs and of US-China trade war may end up being the less developed countries who are then squeezed out of other markets because currently they have an advantage. Their goods can be sold in the UK tariff-free. Do you think one of the consequences of this...

would also be that China simply becomes more trusted in the UK than the US. I'm not sure that China will become more trusted generally by the UK. I just think that the level of trust in the US will decline. I think we're already seeing that.

And that for the UK, for Europe as a whole, there's now this idea, well, we can't really follow what the US is doing. We can't really get much closer to China. We're just going to have to carry on finding our way and see what other allies we can find. But it won't necessarily be China or the US. So who might it be? There's a lot of talk about other mid-sized powers, the likes of South Korea, Japan, Mexico, Canada, etc.

There is one other possibility as well, closer to home, which is that with Germany saying that they are going to start spending again, perhaps the German economic engine in Europe will start up again. European growth will pick up more than the US and that that will take a certain amount of extra UK production. So ironically, it may be Europe that becomes the saviour all these years after Brexit.

And that's all we have time for. My thanks to David Hennig and all my guests. And my conclusion, cross your fingers and hope that common sense prevails. We'll be back at the same time next week. Goodbye. You've been listening to The Briefing Room with me, David Aronovich. The producers were Lucy Paul, Kirsteen Knight and Caroline Bailey. The sound engineer was James Beard. The editor is Max Deverson.

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