By Zhao Hao

On April 2, 2025, U.S. President Donald Trump, now in his second term, announced a sweeping 10% baseline tariff on all imports into the United States, with even steeper rates targeting specific countries. More than 100 trading partners are affected, including the EU, China, the UK, and Vietnam. The announcement has sparked strong backlash from multiple governments and triggered consecutive drops across global stock markets. In the case of China, the cumulative tariff burden on its exports has now climbed to a staggering 54%. For many Chinese private exporters—especially those heavily reliant on the U.S. market, including many led by CEIBS alumni—the consequences could be severe.

1) What is Trump's goal?

Many believe Trump’s “reciprocal tariff” policy is irrational. After all, the US has long championed free trade, with low tariffs at the heart of its economic philosophy. So why is he now flipping the table, risking a trade war in which everyone stands to lose?

Even from an American perspective, the logic seems questionable. Isn’t the current setup a win-win? US consumers gain access to affordable Chinese goods - often purchased on credit - while China recycles its trade surplus by investing in U.S. Treasury bonds, effectively keeping the capital within the American financial system. If China isn’t complaining, why is Washington?

Trump’s move may seem impulsive, but there’s a clear strategic rationale behind it. Raising tariffs was part of his first-term playbook and featured prominently in his 2024 campaign - it was never a hidden agenda. In his view, a flood of cheap imports has hollowed out American manufacturing, cost jobs, and pushed the country deeper into debt. His strategy is straightforward: use tariffs to nudge consumers toward U.S.-made products, pressure trade partners to lower their own tariffs or relocate production to the U.S., and redirect the resulting tariff revenue toward income tax cuts at home.

Even more urgent than hollowed-out industries is America’s spiraling national debt. Over the years, the country’s external liabilities have reached alarming levels, with annual interest payments now exceeding $1 trillion. If left unaddressed, the sustainability of the US financial system could be at risk. This makes curbing further borrowing a top priority, and reducing the trade deficit one of the few remaining levers the government can realistically pull. This isn’t about walking away from the good old days of swiping the national credit card to buy cheap imports - it’s that the country can no longer afford to. The era of easy spending is over; it’s time to tighten the purse strings.

Trump’s background as a businessman and former host of the reality TV show The Apprentice has shaped his style. He is accustomed to using price-squeezing tactics and high-pressure negotiation strategies to achieve his goals, often delivered in a forceful and theatrical manner. His playbook follows a simple rule: If you don’t comply, I’ll raise tariffs; if you do, I might lower them. While commonplace in the business world, this confrontational approach feels jarring when applied to the stage of international politics.

2) Are tariff hikes really terrifying?

While increasing tariffs undoubtedly harms both the US and its trading partners - a classic case of “the cure being worse than the disease” - it actually represents a relatively moderate approach. Consider the more extreme alternatives the US could pursue to reduce its debt burden and deflect domestic pressure:

• The Federal Reserve could dramatically increase money supply, deliberately weakening the dollar to erode the real value of its external debt. But this would risk capital flight and trigger inflation - something voters won’t tolerate.

• It could simply refuse to honour debt obligations - but that would wreak havoc on the global financial system, potentially triggering cascading economic crises worldwide.

• It could resort to outright confrontation, such as using ideological opposition or anti-terrorism as a pretext to freeze foreign governments’ assets in the U.S., launch wars or proxy wars, annex foreign territory and wealth, or demand reparations. Such actions carry enormous risks and global backlash. Though unlikely for now, we’ve already seen hints of this approach in the hardline stance of the US and its allies toward countries like Iran and Russia.

Put simply, no country wants to run persistent trade deficits, and tariffs offer a way to act without resorting to more extreme measures. While they do make goods more expensive and complicate cross-border business, they’re still milder compared to what might be used in more desperate situations. What’s more, tariffs are inherently flexible - they can be raised, lowered, or withdrawn entirely, giving policymakers room to maneuver in a way few other tools allow.

3) Can China afford to cut ties with the US completely?

With Trump’s steep tariffs squeezing profit margins for Chinese companies, some may be wondering - is it time to walk away from doing business with the US? Emotionally, a “breakup” might feel cathartic in the heat of a dispute - but economically, the numbers still speak for themselves. Exports remain one of the three key engines driving China’s economic growth, and global trade has brought significant benefits over the years.

From a purely market-driven perspective, the US remains an ideal customer: it’s the world’s largest economy, with a large population, high per capita income, strong purchasing power, and consumers who upgrade frequently and aren’t shy about discarding the old for the new. Its market mechanisms and legal framework are relatively mature and stable, and payments are usually settled quickly. The sheer size and diversity of the US market means there is demand for almost everything, providing opportunities for Chinese companies of all sectors and sizes.

A significant number of Chinese exporters rely heavily on the US market, and behind them are tens of millions of workers and entire supply chains. Severing trade ties entirely would hit not just companies, but families across China whose livelihoods depend on these jobs.

Over the past few decades, China and the US have built a deeply intertwined economic relationship. China excels at efficient, cost-effective manufacturing, while the US offers strengths in design, branding, and distribution. Despite rising tariffs, many Chinese-made products - from components to appliances and everyday necessities - still cannot be easily replaced by domestic alternatives in the US, meaning American businesses and consumers will likely continue to rely on them despite higher costs. For China, leaving the US market isn’t a straightforward option either, as other export destinations are often smaller or constrained by hidden trade barriers, making them harder to penetrate. Given China’s vast production capacity, many firms may eventually find their way back to the US market. This inherent economic complementarity makes a complete decoupling between China and the US not only difficult, but improbable.

4) How should China respond?

With “reciprocal tariffs” now a fixture of US trade policy, how should China respond? The following four measures are worth considering.

First, provide targeted support to exporters. The latest tariff hikes will hit many private Chinese exporters hard, including those rerouting shipments through Southeast Asia. A sharp decline in orders could put these firms at risk of collapse. To prevent a broader shock to supply chains and avoid mass layoffs, the government should step in with timely, targeted support. This could include subsidies, tax relief, financing assistance, and loan extensions to help companies weather the storm. With the real estate sector still struggling, widespread job losses in manufacturing could intensify the economic downturn.

Export-oriented private enterprises have been one of the pillars of China’s rapid growth over the past decades. They embody the entrepreneurial drive and resilience essential to a market economy. If they can make it through this crisis, they will continue to be a vital force in China’s future economic development.

Second, keep the door open for negotiations. Even if both sides have imposed tariffs, that shouldn’t be the end of dialogue. China should maintain communication with the US, just as it did during the tariff negotiations of Trump’s first term. Disagreements are inevitable, but so are opportunities for reaching interim agreements.

At the same time, China should strengthen relations with other major export markets and underscore the strategic value of its own market, discouraging them from siding too readily with the US. China must also stay actively involved in shaping international trade rules, promoting multilateralism and fair competition, and ensuring it’s not excluded from future trade frameworks. Otherwise, traditional partners like Europe and Japan - facing shrinking trade surpluses with the US - may try to make up the difference by imposing tougher conditions on China, further complicating the situation.

Third, broaden the foundations of growth. In the coming years, exports may contribute less to China’s overall growth. The country must adapt by diversifying its economic engines - boosting domestic consumption, investment, and innovation. All of this will require upfront investment. The Government Work Report 2025 proposes raising the deficit-to-GDP ratio to around 4%, up one percentage point from the previous year, and increasing the deficit by RMB 1.6 trillion year-on-year. This reflects the government’s intention to ramp up fiscal spending and enhance the countercyclical role of fiscal policy. If deployed effectively, these measures could help cushion the impact of declining exports.

Fourth, prepare for the worst-case scenario. While no one wants the worst to happen, a bottom-line mindset is essential. That means building reserves of critical resources like food, energy, and chips; developing contingency plans to maintain self-sufficiency if global supply chains are disrupted; and reducing financial dependence on the US dollar by promoting the digital yuan and settling trade in local currencies with other countries. Only by being alert in times of peace can we avert risks before they arise. For most consumers, tariff increases may not have an immediate effect, as most US exports to China - such as engines - are industrial rather than consumer goods. But for families with medical patients who rely on US-made medicines or medical equipment, it may be prudent to stock up or seek alternatives. After all, trade wars not only drive up prices - they can choke supply chains and lead to shortages.

5) Conclusion

Over the past 30 years, China has benefited greatly from global trade. But as globalisation enters a new phase, it is time to reassess the pillars of future growth.

Tariff hikes do not spell doomsday - they simply signify changed rules. China must respond by strengthening its fundamentals to build greater economic resilience while staying globally engaged. Waiting out Trump or closing doors isn’t the answer. This is more than a reaction to Trump 2.0's tariffs - it is a step toward securing China’s long-term position as a leader in global trade.

Zhao Hao is Professor of Management at CEIBS.