The principal target of US tariffs is China, and while the world may bear the brunt of these measures, Beijing’s economy faces significant challenges. Heightened tensions could lead to military confrontations—an outcome that must not be discounted.
The recent US announcement of tariffs poised to impact every American trading partner threatens to ignite inflation and recession on a global scale. The US aims to erect barriers to facilitate its reindustrialization essential to face China’s strategic and economic challenges. The US stock exchange shed 4.5 trillion in two days.
In preparation, the United States has crafted a series of measures to cut government spending and deregulate the internal market, hoping to offset the fallout from the tariffs. The international community now grapples with a new economic order, met with widespread surprise and frustration.
China remains the central focus of these tariffs, having reported a $1 trillion trade surplus last year, and it faces accusations of undermining the global economic structure. Despite being the world’s second-largest economy, China’s currency is not fully convertible, and its market is not completely open, creating an unequal playing field compared to many other nations.
In addition to the new 34% tariffs, the US has canceled China’s tax-free shipments for parcels valued under $800. This trade through such parcels evades official statistics. Beijing escalated by announcing 34% tariffs on US imports and barred a group of American companies from doing business in China.
Following the collapse of the real estate market approximately four years ago, the trade surplus has become China’s primary engine of growth. However, another key driver, infrastructure spending, contributes to a massive budget deficit.
The IMF estimates that by the end of 2025, China’s debt-to-GDP ratio could surpass 300% for a 5% GDP growth, incurring about 15% of the budget deficit. This situation predated the wave of American tariffs.
Foreign economists have determined that international trade has contributed approximately 1-2% to economic growth. Reducing this surplus may mean Beijing will miss its 5% growth target or need to increase its budget deficit, further elevating its debt-to-GDP ratio.
A Scenario of Mutual Suffering?
Consequently, if the global economy falters in 2025, China’s economic standing may be even more precarious. Politically, China might be preparing for this eventuality, positioning itself to gradually isolate its market in a “North Korea” style. However, sudden economic shocks could destabilize domestic consensus despite propaganda efforts to blame foreign adversaries.
In the short term, China’s stock market may maintain buoyancy due, in part, to the impressive performance of its AI companies and the flight of investors from the US tariffs. Yet, whether these stock market gains will extend to the long-depressed consumer sector remains uncertain.
China may seek to strengthen ties with the EU and other US allies dissatisfied with Washington’s administration, but the outcome is unclear. The UK, Japan, Canada, the EU, and other allies are working to coordinate their positions. They possess different foreign and economic agendas than China, supporting Ukrainian resistance against Russia, while China is Russia’s main backer.
Moreover, these countries face significant trade disputes and trade deficits with China, with some, like Japan, grappling with unresolved territorial issues. It remains uncertain how much common ground can be found regarding US tariffs, but there could be room for exploration. In the meantime, the political and social consequences of the tariffs and market crash in the US are unclear.
Should trading tensions escalate in the coming months and the Chinese economy falter, military outbursts could emerge as a troubling possibility.
One scenario could unfold in the South China Sea, where Beijing may deploy hundreds of fishing vessels and Coast Guard patrol boats. Unarmed or lightly armed, these vessels can be as large as frigates and could swarm around US Navy ships, protecting Chinese naval vessels behind them.
A clash could lead to the sinking of several Chinese non-navy boats and damage to one or more US Navy ships. Beijing might leverage the outcome to claim victory and bolster domestic confidence, but global trade would further deteriorate, isolating China from the US.
