TOKYO – So far, China has had a much better-than-feared experience with the Donald Trump 2.0 presidency.
In fact, Xi Jinping’s Communist Party is probably thrilled to see Trump roiling global markets, torching democratic alliances and trashing the soft power America spent many decades amassing in just 18 days.
All while watching Trump benefactor Elon Musk throw sand in the gears of US institutions and have his way with sensitive data to mysterious ends, undermining trust at home and abroad.
Add in Trump blinking on his big bad trade war. Though Trump went ahead with 10% tariffs on Xi’s economy, that was just one-sixth of the 60% he had threatened. At the same time, the Tariff Man-in-chief backed away from 25% levies on Canada and Mexico. For now, at least.
But Wall Street already senses Trump’s surrender. Days ago, the biggest of the big money was shorting US stocks. Now, many investors are concluding Trump’s tariffs arm’s race is far more bark than bite.
Theories why run the gamut, including fears of tanking the stock market and pushback from the wannabe oligarchs crowding the Trump 2.0 orbit. Trump’s billionaire entourage is clearly worried about their profits.
It’s possible, too, that Trump’s advisers are warning him that threatening a huge trade war are one thing; devastating the global economy, and Wall Street with it, is quite another.
Since Trump’s shock win in November, Xi has been positioning China as a more stable power than the US – as the keeper of free trade and multilateral financial institutions. Beijing says it stands ready to protect globalization from “severe challenges” amid a “new period of turbulence and change” and disruption.
“Dividing an interdependent world is going back in history,” Xi told CEOs gathered in Peru for the Asia Pacific Economic Cooperation (APEC) summit last November.
Xi was harkening back to 2017, when a chaotic Trump 1.0 White House was also spooking world markets. Back then, Xi told CEOs in Davos that trade wars and protectionism would cause “injury and loss to both sides.”
Yet “these days, Washington is located in the policy equivalent of Tornado Alley, battered by a barrage of disorienting and norm-shattering executive orders that promise to upend eight decades of US internationalism,” says Stewart Patrick, a senior fellow at the Carnegie Endowment for International Peace.
Policy analysts, Patrick says, “have become storm-chasers, tracking down the latest provocation in the hopes of answering a basic question: Just what is the White House hoping to accomplish with all this chaos?”
No recent step tells us more about Trump’s “disdain for America’s global reputation” than the “reckless and arguably illegal and unconstitutional effort to dismantle” the US Agency for International Development (USAID) without legislative approval,” Patrick says.
“The episode reveals the transactional nihilism at the heart of Trump’s foreign policy, which recognizes no positive purpose for the US in world affairs. Americans themselves will reap the damage from these misguided decisions.”
Even as Trump complains about China’s dominance, he’s paving the way for Asia’s biggest economy to grow its influence at America’s expense. Ending US development aid creates more space for Beijing’s Belt and Road Initiative (BRI) to expand its colossal infrastructure investment strategy around the globe, particularly in the Global South.
“None of these people has any idea of how the world works,” says Stuart Stevens, a longtime Republican strategist whose latest book is titled “The Conspiracy to End America.” “The world’s greatest power wants to have as little influence as Liechtenstein.” Either by design or inadvertently, Stevens says, the Trump-Musk tag team is “going to give away American power” to China and Russia.
Yun Sun, director of China programs at the Stimson Center, a Washington-based think tank, adds that any “deterioration of US leadership and credibility will benefit China.”
That goes, too, for Chinese assets. Amid the policy chaos emanating from Washington is confusion about why Trump’s Treasury Department gave Musk access to the US federal payments system.
Investors and Asian central banks sitting on mountains of US Treasury securities are already concerned enough about Washington’s US$36 trillion debt load and stubbornly high inflation. Now they must worry about a bunch of tech bros rooting around Washington’s financial plumbing for mysterious reasons.
If Tokyo, which holds more than $1.1 trillion of US Treasuries, or Beijing, with $770 billion, doubt the sanctity of the reserve currency, it might result in titanically large debt sales and surging yields.
Though the financial fallout would shake China’s 2025, the longer-term benefits may be worth the short-term pain. It might, at a minimum, play into Xi’s hands as he works to internationalize the yuan. Xi’s party spent the last decade increasing the yuan’s role in global trade and finance.
On top of Trump’s aggressive power grabs, he’s angling to enact another multi-trillion-dollar tax cut, wrestle decision-making power away from the Federal Reserve and perhaps devalue the dollar. The odds of credit rating agencies sitting back and not downgrading US debt are dropping by the day.
“Trump’s MAGA plan to gut America’s low-cost, high-impact foreign assistance programs to help fund tax cuts for the ultrawealthy is a blow to US influence abroad that will also make Americans less safe at home,” says Alan Yu, senior vice president at the Center for American Progress think tank.
While satisfying to Trump, Musk and their acolytes, “the attacks on aid have also created distrust and uncertainty among partners and allies that the United States depends on to maintain global security,” Yu says.
The programs Trump is pausing, Yu explains, “strengthen the capabilities of partner nations, deter adversaries, and reduce the need for direct military intervention.”
In particular, he adds, the status of assistance to Ukraine, critical to sustaining Kyiv’s war effort against Russia, remains ambiguous. Military assistance to Taiwan, which relies on US training and equipment to deter Chinese aggression, has also been thrown into uncertainty.
To be sure, many observers think the tariffs will eventually be imposed. The rationale: you don’t spend years talking up the magic of trade curbs and how important they are to making America great again and not do them. Also, the ways in which Xi is pushing back may have Trump’s gang of anti-China advisors, including Peter Navarro, apoplectic.
As such, says Dominique Dwor-Frecaut, chief US economist at advisory Macro Hive, “tariff increases are likely to proceed on two tracks. The long-term track is broad-based, gradual and meant to generate revenues and support reshoring. Meanwhile, the ‘opportunistic’ track is country-specific, aggressive and meant to exert leverage on trade partners.”
Dwor-Frecaut notes that during his confirmation hearing, Treasury Secretary Scott Bessent explained that tariff policy had three objectives: revenue generation, reshoring and leverage in trade negotiations. “The revenue generation and reshoring objectives are long term and therefore require a permanent increase in tariffs. Also, this is likely to lift prices, possibly inflation, and lower growth.”
Thickening the plot, Xi’s party struck back with tit-for-tat tariffs on US energy, manufacturing and minerals while hitting Google with an antitrust investigation. Overall, economists and analysts say, it’s a reasonable and proportional response that leaves the door open to future negotiations.
“Fairly modest” is how Capital Economics China analyst Julian Evans-Pritchard describes it.
But Ian Bremmer, CEO of Eurasia Group, thinks optimism that Washington and Beijing can avoid a market-wrecking clash fundamentally misunderstands both the limits of Trump’s approach and the nature of US-China relations in the Xi era.
“The most geopolitically important relationship in the world is fundamentally adversarial and devoid of trust,” Bremmer says. “The only reason why it was comparatively stable in 2024 was that the Biden administration expended serious effort to develop and maintain 25 high-level bilateral channels across the cabinet.”
Team Trump, by contrast, “has no interest in putting in that kind of painstaking diplomatic work for a relationship they view as fundamentally adversarial,” Bremmer says. “Without those guardrails, there will be few management and communication mechanisms to prevent even minor provocations from spiraling into a major crisis.”
Can Trump somehow overcome this reality and bully Beijing into a deal? Bremmer thinks not.
“The problem,” he says, “is that his strongman tactics only work against much weaker countries. When he threatens Colombia and Panama with tariffs, they have no choice but to capitulate – their economies would collapse otherwise. But punching down is easy. China is an entirely different ball game. It has the size and leverage to punch back against the US in ways that other countries cannot. And punch back it will.”
The question no one can answer is whether Trump might retaliate in bigger ways to Beijing’s initial retaliation, says economist Alicia Garcia Herrero at Natixis. “If [Trump] doubles down, China will have a problem,” she notes.
Agatha Kratz, economist at the Rhodium Group, tells AFP that “given the current economic downturn, China cannot afford – and does not want – to impose excessive trade barriers. China’s economy is in a fragile state, and this limits its ability to act freely. Beijing cannot afford to take reckless actions, and I don’t think it wants to.”
The bottom line is that no one really knows, so perhaps it’s best to remain agile, says Yung-Yu Ma, chief investment officer at BMO Wealth Management. “Be patient and opportunistic – there may be a time to be aggressive, but it isn’t upon us yet,” Ma notes.
“President Donald Trump may be willing to let the US take considerable economic pain in an attempt to achieve his stated goals of reducing trade deficits, bringing jobs to the US, and enhancing border security,” Ma adds.
Economists at Morgan Stanley write that “we still expect the US will levy more tariffs on China later this year as part of its larger trade policy goals,” which will just invite more retaliatory moves from China.
Part of the issue is Trump’s frustration that efforts to date haven’t slowed China’s trajectory. That goes both for Trump 1.0 policies and those of Joe Biden’s White House. “From DeepSeek to Huawei, US tech restrictions on China are backfiring,” says Diana Choyleva at Enodo Economics.
In fact, Choyleva argues, US efforts to curb China’s technological advancements may be having the opposite effect: accelerating China’s move upmarket toward self-reliance and innovation.
DeepSeek, Huawei and others are offering case studies on how China Inc is devising workarounds to US chip and other tech export controls. Along with creating genuine obstacles, decoupling efforts are incentivizing domestic innovation.
China stands to benefit in other ways from the Trump 2.0 tariffs. For one thing, they’ll cost America’s friends, particularly staunch US allies Japan, South Korea, Taiwan and certain governments in Southeast Asia.
Hard feelings between Washington and top Asian democracies could generate greater distrust, increasing China’s appeal as an alternative. It has allowed Xi to claim the moral high ground and appear more wedded to capitalist norms than tycoon Trump.
Xi’s party is also still reaping the rewards from Trump 1.0 pulling out of the US-initiated Trans-Pacific Partnership trade pact, which went on to become the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) without the US.
Instead, Trump 2.0 is clinging to a misguided focus on bilateral trade deals over broader efforts to construct a bulwark against Chinese dominance.
In particular, Carnegie’s Patrick notes, the demise of USAID is an early win for Beijing. If the agency dies, so will many innocent people around the world. And, Patrick concludes, “so will the still-lingering reputation of the United States as a country that takes an enlightened view of its own self-interest and stands for more than just itself in world affairs.”
Follow William Pesek on X at @WilliamPesek
