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Trump’s Tariff War: China Weighs Response as Trade Tensions Escalate

U.S. President Donald Trump’s recent tariff escalation has placed China in a delicate position, forcing policymakers in Beijing to consider their next move. The White House announced a 10-percentage point increase in tariffs on Chinese exports, set to take effect Tuesday, labeling it an “opening salvo” in a potential broader trade offensive.

Despite this pressure, China has yet to retaliate, a move that analysts view as a strategic and economically sound decision. If negotiations between Trump and Chinese President Xi Jinping fail to yield a reprieve, the anticipated impact on China’s GDP growth remains manageable, with UBS analysts estimating a 0.5% reduction due to the new tariffs.

China’s Negotiation Strategy: The 2020 Trade Agreement

Reports suggest that Beijing may propose a return to the 2020 “Phase One” trade agreement, which originally committed China to purchasing $200 billion worth of American goods and services. However, since China never fully honored that commitment, Trump’s administration is unlikely to accept a delayed fulfillment as a major concession.

Beyond trade, Washington may seek more ambitious demands, including China’s cooperation in ending Russia’s war in Ukraine. While such a move could ease restrictions on Chinese businesses investing in Europe, it also risks deepening tensions if Beijing resists.

China’s Countermeasures: Currency Depreciation and Fiscal Stimulus

If the U.S. intensifies trade pressure, China has limited but powerful response mechanisms. Analysts from Capital Economics suggest that a 1.4% depreciation in the renminbi could effectively offset the impact of a 10% tariff hike. However, further currency weakening would constrain Beijing’s ability to implement additional monetary easing, shifting the burden toward fiscal stimulus to support economic growth.

This shift demands unprecedented agility from Chinese policymakers, who typically favor long-term economic planning. Clarity on China’s next economic measures is expected next month when Beijing convenes a key political summit, though U.S. trade policies could further evolve as an ongoing investigation into unfair trade practices concludes in April.

With Trump warning of tariffs reaching up to 100%, China must tread carefully. A prolonged waiting game will only exacerbate economic challenges, potentially forcing President Xi’s hand sooner than anticipated.

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