Before the inauguration, you could see voices in the Chinese establishment, expressed through official media outlets, arguing that Trump is a businessman and someone with whom China can potentially deal. Of course, I don’t think the Chinese elite at that time wanted to offend the incoming president too much because they were always thinking about the possibility of striking a deal with him at some point, as they did during his first administration.

On taking office, the new president started to do a lot of things that were offending the Europeans and causing many US allies around the world to worry. Even before his inauguration, he had already spoken about Europe and Japan needing to take more responsibility for their defense, and then you had the tariff talk as well.

At that point, some commentators within China were suggesting that this was actually a good thing for China: whereas the Biden administration had been very keen to remain on close terms with US allies and friends such as Japan, South Korea, and Taiwan, Trump was now causing states that rely on US protection to become nervous and to see the US as an unreliable partner, so that it might be better from their perspective to be part of China’s sphere of influence instead.

That thinking is still around. Many of the nationalists in China — and I’m sure some Chinese government officials too — still think that it is an opportunity for them to expand their influence when the US is worrying its traditional friends and allies.

As you say, there’s been a lot of going back and forth on this, and we really don’t know what the situation is. The one thing that’s clearly emerging is that the whole setup of tariffs is mainly targeting China and countries like Vietnam and Cambodia that could become transshipment centers for Chinese goods to evade Trump’s tariff regime. Now Trump has suddenly been saying there could be a good chance he will strike a deal with China and the tariff rate will come down.

First of all, I think this confusion is a reflection of the division within the administration. We hear some voices, like Peter Navarro, insisting that the tariff is going to be a permanent measure to re-industrialize the US, while the Treasury Secretary Scott Bessent and some other people within the administration are saying that this tariff move is the beginning of a negotiation process over other issues, so it will be reduced over the long run.

You can definitely see the reaction of capital in the form of capital flight from the US. Not only did we see the stock market performing very badly, but people were also leaving the market for US Treasuries at the same time, which is unprecedented in recent times. Normally when people flee the stock market, they go to the safe haven of Treasury bills. I would see it as a kind of a capital strike in an attempt to exercise discipline over the administration. Trump’s softening of his line over tariffs is a reaction to this capital strike.

At the same time, the Chinese government is under no illusion about what to expect from this administration. The immediate reaction has been for Xi Jinping to suddenly visit Southeast Asian countries like Cambodia, Vietnam, and Malaysia to pledge unity against the tariffs. Those countries have rolled out the red carpet and their leaders have said a lot of nice, polite things in conversation with Xi, posing with him for photos to convey the impression that Southeast Asia is with China on this.

But when you look at the substance, there’s not much by way of concrete agreements being signed. These countries are happy to engage in photo ops and friendly talk with Xi, yet at the same time, they appear to be very nervous about the US tariffs and don’t want to offend Trump. For example, Cambodia, even though it is very economically dependent on China, was the first country saying that it was not going to retaliate against the US.

After Xi’s visit, Cambodia welcomed a historic visit by two Japanese navy ships to a naval base funded by China. Likewise, Vietnamese officials were friendly when Xi was visiting the country, but once he was gone, they were making pledges to crack down on transshipment for Chinese goods that are being presented as if they were made in Vietnam. They don’t want Trump to put a huge tariff on their countries because they are very reliant on exports.

Singapore is another interesting case. The former prime minister Lee Hsien Loong criticized the US tariffs, while at the same time, his wife, Ho Ching, also reposted an article on social media accusing Xi Jinping and China of acting like a mafia boss over the last decade, before trying to get support from Southeast Asian countries all of a sudden now that they are facing Trump’s tariffs. This attracted a lot of attention.

China has not had many real cards to play in terms of solidifying its leadership in Southeast Asia because over the last ten years or so, there have been many complaints about China’s role, despite the surface appearance of friendship. Before Trump’s return to power, many Southeast Asian countries, as well as other countries in the Global South like South Africa and Brazil, had already imposed tariffs on Chinese solar panels, steel, automobiles, etc. On that front, China can only create the optics of solidarity with Southeast Asia and the Global South, while in substance, there’s much less it can do than might appear to be the case.

The best course of action that the Chinese government can follow in order to withstand the tariff policy is to double down on the path toward greater autarky. A few years ago, faced with the Biden administration’s restriction on high-tech exports to China, Xi Jinping was already talking about becoming less reliant on global trade and more reliant on domestic markets.

We saw from that point an attempt by the Chinese government to securitize its regime through actively decoupling from the global economy. I think this idea of greater economic self-reliance is the best option for weathering the economic storm from the perspective of the survival of the regime. This is probably going to involve further slowing down of the Chinese economy.

Economists and policy advisors both within and outside China have always thought that the best course of action is to boost domestic consumption. It is theoretically easy to do. There have also been figures in the Chinese government talking about the need to increase the share of domestic consumption in GDP, from Zhu Rongji in the 1990s to Wen Jiabao in the 2000s and Li Keqiang more recently. But if you look at the data, while domestic consumption may be growing in absolute terms, it is actually stagnant or falling as a share of GDP.

There’s a reason why that structure is so difficult to transform. China was integrated into a global neoliberal trading system, coordinating very well with the US. This dates back to the 1970s, when organized labor was becoming more powerful in the US and other Western countries, demanding higher wages, while at the same time there was more pressure for environmental protection, with the formation of bodies like the [Environmental Protection Agency]. The environmental and labor costs of production in Western countries were rising.

This created an opening for China to join the trading system and solve the problem of falling profits for Western capital, because the country offered low labor and environmental protection costs for enterprise. Ever since the 1980s, Western capital has been able to escape the empowerment of workers and stricter environmental regulations by moving production to China.

This is the secret of China’s success: it could offer Western capital, and later homegrown Chinese capital, favorable conditions that you could not really find anywhere else in the world. Even in Southeast Asia, although incomes are low, you have elections and independent trade unions in many of those countries, so they could not go as far down that road as China did. This is built into the core of the Chinese economic model.

The downside of the model is that with such low levels of protection for workers — not only workers in manufacturing and construction, but also now in the platform economy — you have very low household incomes and a very low income share of GDP, which constrains people’s consumption power. I am speaking here about ordinary people, not the big spenders who buy luxury bags in Paris. This structure makes it difficult to boost domestic consumption.

It’s very hard to change this situation, especially since China is not a country like Brazil or India that holds elections, so politicians are not under pressure to carry out policies like Brazil’s much acclaimed Bolsa Família that directly transfers cash income to low-income families. In India, there are incentives for local politicians and the central government to make transfers to rural areas at election time. Some people will see it as a form of vote-buying, but it functions as a kind of income transfer that can boost consumption. The share of domestic consumption in the economy is much higher in Brazil, India, and other large middle-income countries than it is in China.

At the same time, some economists are already saying that if household income is not up to the job of boosting consumption, maybe the government can do it by using some typical Keynesian policy tools and engaging in deficit spending to consume and offer public goods like social housing, free education, and socialized health care. However, Chinese government officials (particularly the central government) have been very conservative when it comes to fiscal policy ever since the 1980s. They have always been afraid of losing control if the government doesn’t have a big surplus in its pocket.

As China has been facing a lot of headwinds in terms of exporting to the US and Europe, with tariffs and other protectionist measures against Chinese EVs, steel, and other products, it has been looking for new outlets for its exports, from the Gulf states in the Middle East to the Global South. But income levels in the Global South are not as high as they are in Europe, Japan, and the US. Many developing countries have also started to impose their own protectionist measures on Chinese products, from Indonesia to South Africa.

In theory, it should be very easy to shift to a model based on domestic household consumption rather than an export-oriented one, but only in theory. Politically, the structure of the regime and the vested interests in China make it much more difficult than theory would suggest, while at the same time, we are seeing new barriers to Chinese exports around the world.

They are caught in a very difficult situation, and if it is not resolved, the economy is going to continue slowing down. Yet an economic meltdown might not be a nightmare scenario for the regime from the perspective of its own security. Examples like Venezuela and Iran show that economic crisis does not necessarily spell trouble for a regime as long as it can maintain the systems of control and surveillance.

I think the Communist Party of China definitely benefits from the current global grievances about Trump’s policy. Previous US governments have had a lot of issues about China’s trade and human rights practices. What the Trump administration has been doing is a kind of slow convergence with China’s model in terms of trade practice and also in terms of human rights, at least on the rhetorical level. Of course, there is still a big gap between the US and China on all of those counts, but the direction of travel is bringing it closer to China.

In this scenario, many allies of the US and even Chinese liberals, both within China and abroad, will be in a position where they will criticize the US and think that the protectionism and abuse of human rights in China is less egregious and less difficult to swallow when compared to the current US scenario. In terms of PR, that will definitely take some of the steam out of the people who criticize the practice of the Chinese government in all of those areas. That is good news for China’s leaders, who will be able to tell their people that the situation in the US is by no means perfect and their own government is not so bad.

Of course, that argument is only being made at a PR level. In reality, there is still a wide gap between China and the US when it comes to human rights. Over the long run, the checks and balances in the US system, including the courts and the midterm elections, will hopefully pay off. But at this moment, people are adjusting to the new reality in the US and the perception it is creating has definitely helped China.

There is another factor that might potentially help China, although it depends on how the Russian invasion of Ukraine will play out. Three months into the new administration, the perception that the US is giving up on Ukraine and granting a free hand to Russia is going to help China a lot both internationally and domestically. However, I have to add the caveat that the situation is very unstable and we can’t be sure whether the Trump administration is acting a certain way as a negotiating tactic.

In the end, there might be a peace deal struck between Ukraine and Russia, after which things begin to stabilize and relations between Russia and the West improve. If that was to happen, it would be a problem for China, but it is not happening yet. Right now, the Chinese government is deriving clear benefits from what has been going on since Trump returned to the White House.