No trade war now

Finally, the China-U.S. trade tensions are unlikely to escalate because both sides are inclined to manage the situation to serve their domestic policy objectives. International observers, still recalling the intensity of the trade war during the Trump era, are understandably concerned about a sudden escalation in trade relations this year. However, it is more plausible that trade tensions will remain controlled.

On the U.S. side, Biden needs a stable environment ahead of elections. While Biden has frequently emphasized the need for a tough response to China’s overcapacity issues in his campaign rhetoric, a stable external environment is crucial for his re-election campaign. Key swing states currently show uncertain electoral prospects, making stability a priority.

Additionally, to avoid severe retaliation from China, the Biden administration has deliberately moderated the severity of its tariff policies. Before implementing these measures, high-level visits by Treasury Secretary Janet Yellen and Secretary of State Antony Blinken to China facilitated policy communication, indicating an intention to manage tensions proactively.

China, for its part, had already anticipated these tariff increases. Retaliation is expected but will likely be measured. Beijing may impose reciprocal tariffs on major U.S. exports such as agricultural products, pharmaceuticals, and aircraft. However, China is unlikely to escalate trade tensions unilaterally, for several reasons.

First, China needs to weigh the risks to its domestic economic growth. Despite recent efforts to stabilize the economy, there are still significant concerns and a lack of confidence among various sectors within the country. This uncertainty stems from ongoing structural issues, such as high levels of debt and challenges in the real estate market, which continue to dampen economic optimism. Thus, China is likely to approach any escalation in trade tensions with caution, prioritizing economic stability over aggressive retaliation.

Second, escalating trade tensions now could severely restrict China’s economic policy options, particularly if former U.S. President Donald Trump returns to office in 2025. This potential scenario could limit Beijing’s flexibility in managing its economic strategies, forcing it to navigate an increasingly complex and hostile international environment with reduced options.

Notably, on April 26, China’s National People’s Congress Standing Committee passed a new Tariff Law, set to take effect on December 1, replacing the previous import and export tariff regulations. This move is widely seen as Beijing’s preparation for potential trade tensions with the United States in 2025 and beyond.

Despite these trade frictions, high-level cooperation between U.S. and Chinese officials continues in other areas. For instance, the U.S.-China Climate Action Working Group met in Washington on May 8-9, and the first U.S.-China Intergovernmental AI Dialogue took place in Geneva on May 14. Additionally, on April 16, Chinese Vice Minister of Finance Liao Min and U.S. Deputy Secretary of the Treasury Wally Adeyemo co-chaired the fourth meeting of the U.S.-China Economic Working Group in Washington. This ongoing high-level communication helps prevent further escalation of tensions.

At present, we can feel somewhat reassured about China-U.S. trade relations. However, if Trump secures the presidency in the upcoming election, this relative stability may become precarious, introducing a significant degree of uncertainty for the coming year.