How China Is Fighting Back in Its Manufacturing War With the US

Negotiators from China have signaled steady progress toward a peaceful end to the country’s many trade disagreements with the United States, but, beneath the surface, Beijing is quietly girding itself for a long-term economic war.

Chinese leader Xi Jinping may have perceived U.S. President Donald Trump‘s sky-high tariffs as a test of his resolve ahead of an expected showdown over the future of their economic relationship. Indeed, China’s state media hailed this month’s trade talks in Switzerland as a decisive victory that had fully justified the decision to retaliate rather than immediately renegotiate.

That Beijing is now also waging a narrative war suggests what began as a trade dispute between the world’s only true superpowers has become a battle of political wills. And, crucially for Xi, it is also about China’s ability to grow its slice of the global manufacturing pie despite internal and external headwinds.

“The [U.S.] president should not make a deal of convenience with China. Instead, he should withstand the business pressure, engage Congress, phase in permanent tariffs on Beijing, invest in our industries, and enlist our allies in deleveraging China’s grip on strategic industrial sectors,” Scott Paul, president of the Alliance for American Manufacturing, or AAM, said in a press statement after the trade talks.

“China’s manufacturing industry will continue to grow and develop. The U.S. needs to compete in an open and aboveboard manner. Cooperation leads to progress for everyone. The Earth is big enough for China and the U.S. to prosper together,” Liu Pengyu, spokesperson for China’s embassy in Washington, D.C., told Newsweek.

China is fighting back by trying to issue a collective rebuke of Washington over its use of import levies as an economic weapon. Xi visited his Southeast Asian neighbors in April and hosted Latin American and Caribbean leaders in May to rally allies against the sweeping U.S. tariffs. Chinese officials also made overtures to Japan and South Korea—two U.S. treaty allies—in a bid to turn them against Trump.

Then, in a flurry of new moves in early May, officials sought to offset the impact of the Trump’s tariffs, which threatened to further trouble an economy already beset by a property crisis, falling consumer demand and a high level of local government debt.

The People’s Bank of China announced 10 new measures intended to stabilize financial markets, including a reduction of deposits held in reserve and a lowering of interest rates across the board. Pan Gongsheng, the central bank’s governor, said it could unlock over $130 billion in liquidity for business loans.

Beijing knows how to hit America where it hurts. As Xi and Trump climbed the escalation ladder last month, the Chinese government sanctioned over two dozen U.S. companies and limited exports of rare earth metals, the mining and refinement of which remain heavily concentrated in China. Beijing suspended the restrictions for 90 days as part of the temporary concessions struck with the White House.

Meanwhile, Chinese producers are expanding alternate export channels to the United States through third markets that are currently subject to lower tariffs. The U.S. will crack down on transshipment, but China’s global footprint, which includes Chinese-owned factories registered in third countries, means it can quickly become a game of whack-a-mole.

Zero-Sum Game

China‘s factories make around a third of all products purchased worldwide, according to the United Nations (U.N.). In the last 15 years, this data point alone has been responsible for generating much of the country’s wealth and for the rise of its middle class.

The Chinese government has put its economy on a path to capturing 45 percent of global manufacturing by 2030, up from just 6 percent in 2000, the U.N. projects; a move that will make China richer and therefore stronger. The same data makes for stark reading for the United States, however. Its share of global industrial output is projected to fall to just 11 percent by the end of the decade, down from 25 percent over the same period.

The loss of jobs at home and economic influence abroad associated with this overall decline is driving the Trump administration’s strategy to revive U.S. manufacturing. But Xi has no reason to simply allow America to reverse its fortunes at China’s expense.

China was guaranteed an early win in the new phase of the trade war. Its manufacturing sector’s enduring foothold in the supply chains of myriad consumer products—from low-end perishables to high-end precision tools—saw the American public take the first hit via import taxes on made-in-China goods.

The U.S. trade deficit with China—nearly $300 billion—means that, for now, American buyers are bearing the brunt of the manufacturing war. However, Chinese manufactures will be the ones to feel the long-term pain as buying from China becomes more and more prohibitive.

As U.S. consumers look elsewhere, Chinese factories will try to redirect their capacity, but few new markets can match the purchasing power and profit margins of the U.S. economy. Those that cannot adapt will close, potentially taking with them millions of jobs that once helped anchor China’s export-driven economy.

In April, demand in the Chinese manufacturing industry fell by the biggest margin in 16 months, according to official data. Zhao Qinghe, a central government statistician, said the decline was due to “drastic changes in the external environment,” in the first sign of pain inflicted by the trade war. The business stimulus measures Beijing rolled out a week later were meant to help cushion the blow.

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Beijing’s Choice

China’s goal is to be not only self-reliant, but also relied upon by the world. To achieve the former, it must solve its lack of domestic consumption, while the latter requires it to continue down the path of deindustrializing the West.

Because China only consumes about half what it produces, it is often accused of exporting its way out of an overcapacity crisis. Officials deny this.

Liu, China’s embassy spokesperson, said that “China’s participation and leadership in globalization, as well as its manufacturing advantages, are the result of economic laws and the trend of history.”

“Some politicians in the U.S. and the West have once again hyped up the so-called ‘China overcapacity,'” Liu said, adding that the basis of this claim is “completely untenable.”

“They argue that ‘China’s overcapacity stems from over-investment and massive government subsidies,’ saying that China’s industrial subsidies are 10 times those of the U.S. Such claim not only contains arbitrary and erroneous data, but also reflects a blatant ‘double standard.’ Experts found that this set of comparative data used different calibers. If the caliber was the same, the scale of spending on subsidies by the U.S. was much higher than that of China,” Liu said.

“Essentially, accusing China of ‘overcapacity’ is turning economic concepts into a weapon for political purposes. What is excessive here is not capacity, but anxiety. The widening of the U.S. trade deficit and the unemployment of manufacturing workers are determined by its own macroeconomic imbalances and changes in comparative advantages. Simply attributing these problems to the impact of China’s production capacity is ‘treating one’s own problems by giving others prescription’ and cannot fundamentally solve the problem. Instead, it will hinder global technological progress, harm the interests of global consumers, and may trigger global economic risks.”

Faced with the choice between its decades-long industrial policy and rebalancing its economic model amid Western economic security concerns, Xi may find it easier to double down than to climb down. But for each of its actions, Beijing must count on an equal and opposite reaction from its largest trading partners, a dynamic that will accelerate China’s decoupling from the West.

“It will be quick,” according to Alicia Garcia-Herrero, chief economist for the Asia-Pacific at the investment bank Natixis.

She told Newsweek in a recent interview: “It’s like the pandemic. Suddenly you cannot import from China. What do you do? You produce. How costly is it going to be? Very much in the first year, then less in the second year and less in the third year.”

“Those in the new markets will be making the biggest returns because the demand is humongous. And because the returns will be so high, everybody will try to emulate it, so it will be very fast.”

“It’s like the economy of war—some lose, some gain. We’re seeing one huge market close, but it will not be life-threatening. Companies will have such an incentive to produce somewhere else that they will do it very quickly,” she added.

The outcome of the Geneva talks was a temporary de-escalation of a wide-ranging cold war that is in fact much bigger than trade. The 90-day pause may be a grace period, but not for China; rather it is a warning to U.S. businesses about their bottom line if supply chains and capital markets are not diversified.

However the trade war ends, the message from American industry is clear: there can be no going back to the pre-Trump U.S.-China economic relationship.

“The U.S. cannot settle for a commodity purchasing agreement like 2020’s U.S.-China Phase One Trade Deal. China’s economy benefits from more than $400 billion in goods exports to the U.S., and it has been boosted by unfair practices and market-distorting policies that it is extremely unlikely to change. Beijing’s policies have eroded U.S. manufacturing capacity and will continue to do so, unless comprehensive measures are implemented,” AAM’s Paul said.