The Trump administration’s trade war and withdrawal of the US from world leadership presents China with a major opportunity. Global Insight assesses how it’s responding.

In a recent interview, US president Donald Trump compared his two terms in office: ‘The first time, I had two things to do – run the country and survive […] the second time, I run the country and the world.’ In a speech in Michigan celebrating the first 100 days since he returned to the White House, President Trump said he was using his second term to deliver ‘profound change’. It has certainly been consequential so far, with the president signing 151 executive orders, 53 proclamations, 39 memoranda at the time of going to print, in addition to various pieces of contentious legislation for Congress.

While espousing the virtues of a non-interventionist foreign policy, President Trump has threatened to reassert US control of the Panama Canal, declined to rule out taking Greenland by force and suggested he’d like to annex Canada. He has withdrawn the US from multilateral bodies and pacts such as the World Health Organisation, the UN Human Rights Council and the Paris Climate Agreement.

Meanwhile, on the economy, while admitting his policies might cause short-term turbulence and arguing they’ll be economically beneficial in the long term, President Trump has begun a trade war by implementing an array of tariffs that sent markets plummeting. Following the announcement of a large set of tariffs on 2 April – which Trump termed ‘Liberation Day’ – some deals were reached between the US and other countries to mitigate these measures. Most recently, the US and China agreed in mid-May to substantially roll back tariffs on their respective goods for an initial 90-day period.

A new report by the International Monetary Fund (IMF) has predicted that, as a result of the tariff war, the global economy will only grow by 2.8 per cent this year – down from its previous forecast of 3.3 per cent – and by three per cent in 2026. And the US faces the biggest downgrade among advanced economies – 1.8 per cent growth in 2025, down from the previous estimate of 2.7 per cent – with the IMF estimating a 40 per cent chance of a recession in the country.

After Liberation Day

A major consequence of the US decision to pivot from its traditional role as architect of the existing world order to becoming its main disrupter is that China has been afforded the perfect opportunity to rethink and renew its soft power projects. ‘This move by the US may be perceived as a signal that the US is relaxing its global leadership position,’ says Adrian Wong, a partner with Prolegis, the alliance firm of Herbert Smith Freehills in Singapore. ‘This presents a prime opportunity for China to step up.’

The US administration may have presumed that Chinese leader President Xi Jinping would be desperate to negotiate a trade deal to avoid economic pain and a domestic backlash, at a time of slowing GDP growth at home. This misapprehension may, ironically, prove liberating for China over the next few years.

Prior to Trump 2.0, Beijing had been facing significant diplomatic, economic and military pressure from various alliances that had been bolstered by former US president Joe Biden. For example, at its annual meeting in 2021, NATO branded China as presenting ‘systemic challenges’ – a position it ‘defined’ in its new strategic concept a year later, when China failed to condemn Russia’s invasion of Ukraine.

By 2024, and fortified by the admissions of Finland and Sweden, many NATO members were adopting an increasingly tough stance on trade with China. The EU, for example, imposed new tariffs on Chinese electric vehicles among other measures.

Now, in the aftermath of ‘Liberation Day’, China has been granted the opportunity to cast off the geopolitical restrictions nurtured under Biden. ‘The Liberation Day tariffs have not spared any developing countries, which is sad,’ says Charles Yi Zhan, an officer of the IBA International Trade and Customs Law Committee. ‘This will not help the decline of the US in soft power influence and credibility in the Global South. But it will help reinforce the pro-development stance of China, and most likely help to make initiatives such as Belt and Road and the Asian Infrastructure Investment Bank more influential.’

‘A lot of people want to understand where we are really heading with Trump and his tariffs,’ says Rene Medrado, Co-Chair of the IBA International Trade and Customs Law Committee. ‘It has created a lot of uncertainty, and companies and associations want to know what to do and how they can protect themselves if they are not able to dismantle the tariffs.’

Medrado, a partner at Pinheiro Neto Advogados in São Paulo, says the uncertainty derives from a lack of clarity over the policy objectives of the Trump administration. ‘I think there is a cost benefit analysis that they are doing, which is probably aimed at reaching a specific goal, ie, not only trade objectives but also non-trade objectives. What is interesting is how different countries will respond.’

In previous examples of trade retaliation, some countries have been able to narrow the countermeasures they apply in a way that changes the decision-making process internally in the opposing countries. ‘This happened previously in some cases where the World Trade Organisation [WTO] allowed countries to apply countermeasures because a certain country was not complying with a WTO ruling,’ says Medrado.

But a country’s ability to apply countermeasures in the form of tariff increases will depend on its size and strength, he adds. ‘There will be some countries that are strong, in terms of being wealthier, who will be able to counter those measures through tariffs or other [actions] that will lead to price increases, and not only in the two countries,’ Medrado explains.

‘Then there will be some countries that are of middle strength, and their strategy will probably be more of a negotiation rather than imposing tariffs because then they’ll probably lose in any escalation of a trade war,’ he says. ‘Finally, small countries will have no option and will have to follow what will be indicated by the Trump administration.’

China falls into the first category and, far from desperately wanting to negotiate a trade deal with the US, it’s very much ‘holding the cards’ in the trade war.

Playing the long game

As the world’s second-largest economy, China can absorb the impact of President Trump’s tariffs better than smaller countries. With a population of more than a billion people, it has a huge domestic market that could – if consumer spending increased – take some of the pressure off exporters. To this end, Beijing has been offering incentives such as increased wages and a range of subsidies to boost spending.

In any event, China can accommodate rising prices and even a recession in a way the US can’t. For one thing, the US administration needs to be mindful of next year’s midterm elections in, after which Congress may have the power to undo all the tariffs, depending on the results.

As an authoritarian regime unconcerned by short-term public opinion, China is playing the long game safe in the knowledge that they’re up against someone who’s impulsive. And China has been preparing for this moment for many years.

It has, for instance, worked to become less reliant on the US market. Three years ago, the US relied on China for 532 key product categories, in areas such as machinery, electronics and pharmaceuticals. This equated to four times the level they relied on in 2000. In sharp contrast, China’s reliance on US products halved during the same period.

A recent example of this is soya beans, the top US agricultural export. The US has more than 500,000 soya bean producers, according to a census taken by its Department of Agriculture, with the industry accounting for 0.6 per cent of GDP and worth approximately $124bn – more than the entire economies of Kenya or Bulgaria, according to the most recent data from the IMF.

China was by far its most important market, importing $15bn of US soya beans. However, aware of the importance of its market to US farmers, China has increasingly turned to Brazil for its soya imports since the first trade war began between the two powers during President Trump’s previous administration.

At the start of that trade war, US-bound exports made up almost 20 per cent of China’s total exports whereas in 2023 this number was down to 12.8 per cent. In short, the US market is no longer as important as it once was to China.

In addition to weaning itself off the US market, China has invested heavily in homegrown technology – from renewables to chips to artificial intelligence (AI) – as it competes with the US for tech dominance. The recent launch of DeepSeek, which is seen as a formidable rival to ChatGPT, took the AI world by complete surprise. In other sectors, BYD has usurped Tesla as the world’s largest electric vehicle maker, while Apple has lost market share in China to Huawei and Vivo.

Soft power opportunity

President Trump’s tariff campaign has focused the minds of other nations on how best to respond. In addition to countries having to consider the implementation of countermeasures in the form of tariff increases, the campaign has increased the impetus for separate trade deals to be struck – the recently announced agreement between India and the UK being a case in point.

The soft power damage that President Trump is doing to the US is also opening up opportunities for improved trade and diplomacy for China. For example, relations between the EU and China have notably improved since Trump returned to the White House, with a number of Chinese ministers and diplomats visiting Europe.

European ministers and diplomats have also headed to Beijing, and this paid dividends recently when China lifted sanctions on members of the European Parliament and their families – a concession aimed at prising Europe away from the US.

China’s involvement in the BRI was historically framed by the country as one of ‘mutual assistance’ rather than operating on a ‘donor-recipient’ basis. It was heavily geared towards infrastructure investment projects that had significant reciprocal benefits for Chinese state-owned enterprises.

But Wong says China’s enthusiasm for BRI has softened in recent times due to slowing growth resulting from domestic issues such as its housing crisis and youth unemployment. ‘It’s unclear whether China intends to revive efforts in continuing the BRI,’ he says. ‘Many of the infrastructure projects it invested in as part of the BRI have proven to be quite unprofitable, with concerns that many debtor countries are now unable to repay their loans. President Xi has signalled that BRI cooperation will likely shift away from “giant projects” to “fine brushstrokes”, focusing on smaller projects instead.’

The current trade war with the US could see China attempt to revitalise the BRI as the Initiative enables the country to circumnavigate direct tariffs by shipping their products to the US via countries that aren’t subject to high tariffs. Known as ‘trans-shipment’, it’s a practice that China has successfully exercised for a long time. ‘Countries need to have instruments to deal with an increase in imports that could be very large,’ says Medrado, ‘because trade diversion from exports to the US will generally be of a sizable amount.’

Ravi, who’s an international human rights lawyer at M Ravi Law, based in Bangkok, says that environmental, social and governance (ESG) considerations are also behind China’s reassessment of the BRI. ‘ESG considerations are becoming very important in Chinese businesses, and China is recognising this’, he explains. ‘In my conversations with some of the largest Chinese law firms, I can see that there is a rethinking of the Initiative because of the environmental degradation it previously caused. So, Chinese lawyers are taking this opportunity to recalibrate and improve the BRI, which could provide the opportunity for China to lead with its soft power.’

Ravi also sees the opportunity for China to be more strategic in terms of solidifying its influence in regions of strategic interest, rather than projects being established across a very broad range of jurisdictions. ‘I can see that [this is] happening in places like Sri Lanka and Pakistan, and to a certain extent in some parts of Africa as well,’ he explains.

If China is to revive the BRI, then the financing will be important given China’s current economic challenges. ‘It could serve as an economic stimulus for China’s domestic industries such as construction, steel and technology,’ says Ravi. ‘And co-funded projects may offset the risk of China’s slowing economy. Two good partners could be Singapore and Malaysia, both of which are not so dependent on Chinese investment but are prepared to co-fund.’

But Ravi says China probably won’t invest a great deal more than it has already. ‘There is a very strategic realignment happening whereby China is refining its approach given its experiences with [allegations of] debt-trap diplomacy, environmental concerns and project inefficiencies,’ he explains. Ravi adds that China is scaling down the number of projects to focus only on those that are high impact.

Green finance and digital technologies weren’t previously a large aspect of the BRI. But Ravi says the issuance of green bonds in China has secured the participation of investment bankers and is proving very popular across the region. ‘China is aligning itself with global sustainability goals and this gives it an opportunity to counter the negative narrative around the environmental harm caused by the BRI,’ he says.

In May, China’s major financial regulators announced a series of measures to shore up the country’s economy and capital markets in light of the trade war. ‘What I find very interesting, in terms of the trade war and tariffs, is the extent to which we’re not seeing the US banking system coming out with similar policies,’ says Ravi. ‘There needs to be some synergy or symbiotic approach in terms of what the banking system and the US administration is doing. Contrast that with the People’s Bank of China, which has shown its ability to adjust to the government’s monetary policies by cutting interest rates and adapting to its reserves requirements. So, it’s China that is really holding the cards.’

Moral high ground

‘The global economic system that has operated for the past 80 years is being reset,’ declared the IMF’s chief economist while presenting its recent report predicting global growth. He cited the surge in uncertainty related to trade policy as the major driver of the IMF’s economic outlook.

China holds a number of cards in its trade war with the US, such as its near monopoly in extracting and refining rare earths, and the extent to which some large American companies are locked into Chinese supply chains. Another ‘card’ in China’s hand is the fact that the US has ceded the moral high ground.

This has enabled President Xi to deflect attention away from the country’s domestic challenges and allowed him to position China as the defender of rules-based trade while painting the US as a reckless rogue nation. On his recent tour of Southeast Asia, Xi told the Secretary-General of Vietnam’s Communist Party to ‘jointly oppose unilateral bullying.’ The Chinese President said that ‘we must strengthen strategic resolve […] and uphold the stability of the global free trade system as well as industrial and supply chains.’

Stephen Mulrenan is a freelance writer and can be contacted at smulrenan@lextelpartners.com

Image credit: AdobeStock