Those expecting a credible George Kennan-type or Henry Kissinger-like grand Trump strategy toward China have not paid attention to the career of the 47th president. Donald Trump has general objectives to rebalance global burdens on trade and spending on defense of the global order but achieving these will incorporate his self-assessed superior negotiating skills on a tactical basis. In 2025, the task is much more difficult than in 2017. Above all else it will involve a more powerful adversary and changing alliance structures with Europe and Russia. Xi Jinping has improved his tactical skills and understanding of Trump. But both have objectives of dominance that include bilateral and global dimensions. At the global level their similar objectives imply continuing and intractable clashes.
To grasp some of the likely trajectories and outcomes we should expect, a review of relative economic strengths and related vulnerabilities is necessary.
Economic strengths and related vulnerabilities
The most important development since 2017 is the growing weakness of the Chinese economic model. Before Covid and the appearance of a serious real estate bubble China was expected to surpass the US in GDP by 2020. By 2025 its GDP had only reached 64% of the US level and the expected year of exceeding the US had drifted toward mid-century, if not longer. Per capita GDP in China is around 15% that in the US. A growth model based on capital investment, real estate and exports has now become more dependent on investment and exports, which reinforce each other. This internal dynamic results in massive industrial overcapacity and the need for very large (and possibly increasing) export flows.
Despite Xi’s rhetoric about a “dual circulation” economy, exports to the consumer-driven countries of East Asia, the US, the EU and, increasingly, South Asia still dominate. The US is by far China’s largest export destination, with more than three times the level of the second leading market, Japan. But US exports to China are dwarfed by what it buys from China by a factor above three. Xi resolutely refuses to shift to policies such as improving the social safety net and moving from industrial subsidies toward tax and direct incentives to consumers to drive growth. Youth unemployment remains in double digits and lack of adequate social welfare benefits pushes up precautionary savings. Xi is fundamentally opposed to what he calls “welfarism,” an ideological impediment to a more balanced economy. His economic and social welfare policies have caused substantial popular disillusionment in Chinese Communist Party leadership and externally in broadening pushback against Chinese mercantilism. Even in friendly middle-income countries such as Mexico, Brazil and Vietnam there has been both political and popular pushback against Chinese practices.
Chinese firms are already reeling from the new 20% Trump tariffs, a somewhat restrained measure of pressure compared to Trumpian campaign rhetoric. As my colleague Walter Russell Mead has pointed out, Trump’s reversal of subsidies and regulations promoting a green economy will damage some of China’s faster growing exports of renewable products such as solar panels, EVs and batteries. Another growing sector in China, refined petroleum products and chemicals derived from below-market priced oil imports from Russia, are starting to impact exports utilizing “shadow fleets.” We are beginning to see Chinese ports refusing crude oil shipments from those rickety fleets, and banks declining to handle their financing. Trump’s order to limit tax-free imports to the US under the “de minimis” exemption affect another 10% of Chinese exports to the United States.
The collapse of the real estate industry in China and growing resistance to flooding the world with industrial exports have contributed to major reductions of foreign direct and portfolio investments in China and a collapse in profit margins for Chinese private firms, the source of growth in the Chinese economy since the era of Deng Xiaoping. Profit margins among public companies are at their lowest point since 2009, and 23% of firms saw an outright loss on their operations in the most recent quarter for which we have data, the third quarter of 2024. Electric vehicle exports peaked in late 2023 and excess product capacity relative to local demand, along with the accumulation of excess inventory of such vehicles in major markets – 22 months supply in Brazil for instance – will keep sales under pressure. Another weakness is that Chinese commercial airlines cannot fly without crucial components such as engines, landing gear and avionics produced in the West.
Xi believes that internal economic interests in the US, Pacific Rim and European nations will be a counterweight to further Trump-led restrictive actions. But even in Europe, the largest collective market for Chinese exports, the recognition of domestic damage due to Chinese mercantilism is fostering growing pressure to step up efforts pushing back against its export-driven policies.
The US agriculture sector still needs an open Chinese market, and Wall Street remains a bulwark of open trade. But Silicon Valley technology companies have shifted in their opposition to Trump because they perceive a better operating environment under his MAGA regime, as Vice President Vance articulated in a speech at Macron’s recent AI forum in Paris. American social media platforms, software providers (including Microsoft), and telecommunications and cloud computing companies have little chance to operate and prosper in the Chinese market. Their embrace of Trump will offset any pushback by Apple, which is already shifting production out of China. Elon Musk apparently is more interested in his newer ventures and confident of his position in China than in opposing Trump’s pressure on Xi to change course.
China still enjoys around a $300 billion trade surplus with the United States and has gained dominance in some industries crucial to technology and defense industries. Most important is its dominance of rare earths and other minerals and required processing facilities. The PRC is growing more competitive in so-called legacy semiconductors and advanced telecommunications equipment. Its overcapacity in these and other manufacturing sectors erodes US manufacturing market share both domestically and in third markets. Even if Trump were to change course on green technology subsidization for EVs and related energy products, US providers could not compete with the Chinese.
An underappreciated vulnerability of the Trump administration is its evident indifference or lack of political will to address the deterioration of the fiscal situation which it inherited from the spendthrift Biden administration’s embrace of “new monetary theory.” The spiraling federal debt load and the easy money to pay for it now advocated by Trump could easily result in higher inflation. Trump’s victory in the 2024 election was driven in large part by exhaustion with post-Covid inflation. Trump’s tariff threats, if converted into reality to match his rhetoric, would contribute to higher inflation and erode his political support.
Xi has signaled his intention to exploit US dependence on imports of rare earths, green technology and legacy chips, whose shortages during Covid led to bottlenecks in auto and weapons production and fed the surge in inflation. The negative economic and political impacts of these threatened actions would certainly affect Trump’s calculus on how much to rely on the tariff weapon.
Another potential problem with Trump’s go-it-alone industrial and trade policy is the impact on traditional allies. To counter China effectively, he will need support so that Xi cannot easily replace his lost exports to third countries, especially Europe but increasingly in the developing world. Xi has deployed the Belt and Road Initiative (BRI), access to development financing, and generally competitively priced goods to win markets around the world. The recent history of US efforts to develop “friend shoring” and gain support for countering China loses credibility as a result of Trump’s attempts to pressure erstwhile friends with tariffs and other threats.
Trump is determined, with good reason, to achieve more balance in sharing the burdens of defense, blunting Chinese mercantilism and adjusting global economic structures. Many of these were put in place after World War II to help major countries to recover and prevent them from falling into the orbit of the Soviet Union. Maintaining a strong and stable dollar as an anchor of global financial stability is seen by Trump advisors as an additional burden on its chronic balance of trade which needs to be adjusted, but it also benefits US interests in other areas.
Some argue that Trump’s apparent effort to force Europe to bear the principal burden of a Ukraine settlement is designed to free up resources better devoted to the China threat, and to separate Russia from China, but this too weakens the transatlantic alliance needed to counter China.
The comprehensive macroeconomic impact of the tariffs, potential weakening of the dollar, and retaliation by China and other economics to those tariffs, along with differences between domestic economic sectors in the United States will very quickly force Trump to reassess his aggressive tariff and other retaliatory policies. For these contradictions will threaten inflation and materially slowing the now robust growth in the Trump economy.
The strategic objectives of Trump’s agenda would be better served by a realistic program to negotiate new investment and trade openings and cooperation with allies to build a new global economic order. Xi is highly unlikely to change his drive for an authoritarian global order which Beijing would dominate through programs like Made in China 2025, BRI, the BRICS grouping and the Shanghai Cooperation Organization. Trump needs strong allies to meet Xi’s aggressive pursuit of the “China Dream,” a new order loosely recalling the centuries of dominance by the Middle Kingdom and undermining the dominance of the Bretton Woods system.
Pursuit of dominance in a changing world
Given the much-changed realities of 2025, how is the pursuit of dominance by both Trump and Xi likely to unfold? Trump has the stronger hand in terms of economics. China does need the US market due to the weaknesses and vulnerabilities of the economic structures Xi has put in place. Trump could and certainly will apply new tariffs, export controls and sanctions. Trump’s objectives and justification for decisive actions, in addition to relief from mercantilist practices, include changes in fentanyl trafficking and associated money laundering, support for Russia and undermining the Bretton Woods system. Xi will strategically retaliate. He has cautiously begun exploiting rare earths dominance and access to China’s voracious appetite for agricultural goods with new restrictions. He will redouble efforts to expand his own group of allies.
A key question is: will Xi attempt to placate Trump by helping settle the war in Ukraine, contribute to a lasting peace in the Middle East or make an offer for some version of a “Phase Two” agreement?
The US president will want to avoid peace agreements that look more like capitulation to Putin or even Iran, raising the specter of repeating Biden’s withdrawal from Afghanistan or West European capitulation to Hitler in the 1930s. He will also require measurable progress on the economic issues raised since his first term in any settlement.
The problem for Trump at this point is that he is alienating key allies who are needed to convince Xi that he can outlast his American competitor’s pressure campaign. The reaction and decision of European leaders on how to use their economic weight in the confrontation will be important to both sides.
In conclusion, we can only observe that if Trump doubles down on pressuring the Chinese economy, moving to shore up help from allies, and avoids reviving inflation, he has the ability to do considerable damage to the “China Dream.” Xi has more limited options since his economy is faltering and has shown little willingness to change his economic growth strategy.