Donald Trump is threatening to restart his trade war with China when he becomes president, but this time Beijing is ready

More than a month before his inauguration, Donald Trump has already started making threats that could kick off a trade war with the world’s second largest economy.

But when the president-elect announced his plans to introduce a 10 per cent tariff on all Chinese goods on his first day in office, Beijing didn’t respond quite how you might expect.

There were pointed statements initially from Chinese Ministry of Commerce spokesperson He Yadong, who said: “Arbitrarily imposing additional tariffs on trade partners cannot solve America’s own problem.”

But then within days, Beijing extended a policy which benefits some United States businesses.

The Chinese government extended tariff exemptions for the import of some American products until February 28 next year.

It means items bought from the US into China, including rare earth metal ore and nickel-cadmium batteries, will continue to be free from additional taxes until Trump takes back the reigns.

“It’s about presenting China as the more responsible steward of international trade order.

“And so, if a trade war still ensues after the Trump administration is sworn in, China can point the finger and say the US is the one that started it.”

How will Beijing respond to Trump’s tariff plan?

Trump campaigned on a promise of putting tariffs of more than 60 per cent on all Chinese goods coming into the US, and so far his political appointments certainly indicate the next administration will be hawkish on China.

“We know that has an impact on the Chinese economy,” said Wei Li, from the University of Sydney Business School.

“The US remains the largest export market, accounting for 15 per cent of Chinese exports.”

Trump has said the tariffs on Chinese goods would be in place until the country stemmed the flow of fentanyl to the US.

Fentanyl is a powerful synthetic opioid, which has been adapted to become a popular illicit drug that is often cut with heroin, cocaine, or methamphetamines.

It is a highly controlled substance in the US, but most of the US fentanyl supply is manufactured in China and American authorities have struggled to control the flow of the drug into the country via illegal channels.

The issue has long been a focus of Trump’s and dates back to his first term in office, though the new tariffs being floated by the president-elect are dramatically larger than before.

But Beijing has been laying the groundwork for the prospect of another US trade war for some time.

Research by Derek Scissors of the American Enterprise Institute, a public policy think-tank, shows that after reaching a peak of $US53 billion in 2016, Chinese investments in the US last year dropped to $US1.8 billion.

That’s the lowest since 2006, with the exception of 2020, when Chinese investment was $US1.7 billion.

China looks to its allies for investment opportunities

As Beijing has moved away from investing in the US, Dr Li said it has stepped up its engagement with countries involved in its Belt and Road Initiative (BRI).

The BRI has been one of the most important projects under President Xi Jinping to spread Chinese influence and presence internationally.

More than 140 countries have signed on to the program, which funds infrastructure projects overseas, with the largest cohort in Sub-Saharan Africa.

“For example, for the year 2023 … China’s import and export volume with the countries participating in the Belt and Road initiative has actually increased 2.8 per cent,” Dr Li said.

“Likewise … in 2023, investment in the Belt and Road countries increased 22.6 per cent and this is quite significant in the sense that Belt and Road countries now accounted for over 20 per cent of China’s global outbound investments.”

During his recent trip to South America for the APEC meeting, Mr Xi opened a port in Peru alongside President Dina Boluarte, which was built with a $US1.3 billion investment from Beijing. It is 60 per cent owned by Chinese company Cosco.

The two countries also agreed to upgrade their free trade agreement and do more together through the BRI.

“Although China and Latin America are thousands of miles apart, we have carried forward our exchanges in spite of the vast Pacific Ocean,” Mr Xi said in a speech to the APEC CEO Summit.

“As early as in the second half of the 16th century, China ships, laden with silk and porcelain, reached the far coast of Latin America, starting friendly interactions between China and the region.

“Several hundred years later, today, China and Latin America and the entire Asia-Pacific are deeply woven into the fabric of economic globalisation.”

This trip to South America might also be well timed.

Trump announced concurrently that he would place 25 per cent tariffs on goods from US neighbours Canada and Mexico.

He said he would impose the duties on Mexican and Canadian goods in response to both drugs and illegal immigrants making it across the border to America.

So Latin American countries — typically considered by America as its backyard — may start to take this attitude as a signal to look elsewhere for trade and investment dollars.

Mr Xi’s trip to South America included state visits to both Peru and Brazil, he held his first meeting with a British Prime Minister in six years and he spoke highly of China’s relationship with Australia.

This too could be a foreshadowing of what is to come during the next Trump presidency.

If like his first term in office, Trump removes the US from international alliances and agreements, it could open the door for Mr Xi to move into the spotlight, particularly for trade.

But ultimately, the prospect of a trade war couldn’t come at a worse time for the Chinese government, and mitigating it in any way possible is as important as ever.

A new trade war comes at a delicate time

Unlike during the first Trump administration, China’s economy is struggling, and after holding off for months, Beijing recently announced a raft of stimulus measures worth well over $US1.4 trillion.

And the US is still the biggest individual destination for Chinese goods, worth about $US500 billion last year, which is almost as much as the entirety of its exports to the European Union.

“I think [Beijing] is really stuck in a hard place, ultimately they want an export economy,” said Fraser Howie, an independent analyst.

“You can’t get away from the fact the US is the world’s largest economy, and certainly with a very hungry consumer base — they simply buy a lot of stuff and China makes a lot of stuff.

“So if the States wants to get much tougher on where it’s buying things from, there’s very little China can do to avoid that.

“[Beijing] may weaken their currency a bit more, but you can’t weaken your currency to offset 60 per cent or 100 per cent tariffs.”

That’s something that isn’t lost on commuters travelling between Hong Kong and mainland China on the cross border high speed rail.

“For sure [the economy] is worse, money is harder to make now, a lot of factories were closed down during COVID-19,” says a Chinese traditional medicine practitioner from Shanghai, who now lives in Hong Kong.

“I think there will be a huge impact [from the incoming Trump administration].

“When you work with [Trump] he needs to make more money from it than you … this is his mentality.”

But a computer science student from Zhejiang, now studying his masters in Hong Kong, was more confident Beijing could navigate the choppy waters.

“I understand [Trump] may impose a lot of tariffs on China [and] since China relies heavily on export trade, I think those will pose a huge impact on China,” he said.

“But I believe the Chinese government will have corresponding measures to counteract the challenges brought by these tariffs.”