As trade tensions escalate, here’s what’s inside China’s trade war playbook

We are just a few days away from the start of the new Trump Administration. And as the president-elect has made abundantly clear, one of the first items on his agenda will be slapping new tariffs on imports from China.

We can’t know for sure what Trump will do the moment he takes office. But whatever happens this coming week, China will be ready with a full-on game plan to respond.

After all, China’s been dealing with U.S. tariffs on its exports ever since the first Trump administration. And in years since that administration first levied tariffs on imports from China, the nation’s trade war playbook has evolved.

The first item in China’s playbook during the previous Trump Administration was pretty simple: If you hit us with tariffs, we hit you back.

“It was kind of like-for-like, if you will,” said Davin Chor, a professor at Dartmouth College’s Tuck School of Business.

Chor said China has slapped so many retaliatory tariffs on U.S. exports that it’s running out of exports to target. But even if that strategy isn’t as useful for China now, Chor said China will still work to ensure that its products can reach American consumers.

“They’re not going to sit idly on their hands, and allow themselves to be hit by tariffs and give up on the U.S. market,” Chor said. “There are alternative ways in which they can get that product to the U.S.”

This is the second item in China’s playbook: sneaking around U.S. tariffs.

Chor has studied how over the last few years, Chinese manufacturers have moved production to Mexico and Vietnam, which have lower trade barriers with the U.S. In fact, Chor said Chinese investment in Mexican manufacturing grew fivefold between 2017 and 2022.

“They’re trying to make sure that they’re hiring enough Mexican labor, Mexican inputs from local suppliers, and continuing, potentially, to have a way to tap into the U.S. market,” Chor said.

Chor said the U.S. could try to stop those flows of goods. President Trump has said he plans to impose new tariffs on all imports from Mexico.

Kadee Russ, an economics professor at the University of California, Davis, said the U.S. government could also try to limit imports of specific goods, including electronics or auto parts made with Chinese investment, by stepping up what are known as rules of origin.

“[Those are] rules that regulate the third-country content of goods coming to the U.S. from a trading partner like Mexico,” Russ said.

But Russ said if the U.S. cracks down on these indirect Chinese exports, Chinese companies could just start investing in other countries in South America or in Europe.

“That’s the game of whack-a-mole right there,” Russ said. “It’s really hard to cut off all of those channels.”

China also has plenty of other moves in its playbook that it’s been using more recently. Martin Chorzempa, senior fellow at the Peterson Institute for International Economics, said China has started to restrict exports of critical minerals that American manufacturers rely on.

“One of the things they’ve done is put their own controls on exports of critical minerals, like gallium or germanium, which go into semiconductors, and graphite, which is a crucial input into batteries,” Chorzempa said.

Chorzempa said China could also complicate things for U.S. companies that operate within China. For instance, he said China can use its own antitrust laws to make it harder for American companies to do mergers if they have a big presence in the Chinese market.

“One of the latest rounds of retaliation to the U.S. included an investigation into Nvidia, which had a merger a few years ago that China approved,” Chorzempa said. “And now, they’re saying they’re looking at violations there.”

Chorzempa said there are a few reasons why China might not want to go too far. For instance, escalating the trade war can make it more difficult for China to attract foreign investment. Plus, China relies on exports to fuel its economy at a time when consumer spending in China is weak.

Barry Eichengreen, an economics professor at the University of California, Berkeley, said China is also realizing that it should probably start working on making its economy less vulnerable to tariffs.

“They are committed, I think, to shifting away from exports and toward more domestic spending, more consumption spending,” Eichengreen said.

In the short-run, Eichengreen said China will still try to push back against the U.S. using all those other items in its playbook. That’s because re-orienting its economy to be powered by consumer spending instead of exports isn’t going to happen overnight.

“They have to boost household incomes, and that takes years,” Eichengreen said. “They have to increase social spending, build a social safety net, so people no longer feel compelled to save for a rainy day.”

But if China can pull this off in the long-run, the country could have an even stronger position against the U.S., since trade tensions just won’t matter as much.