China did not retaliate during Trump 1.0, despite several provocations; instead, it addressed its vulnerabilities by systematically exploring alternatives
Much of the media coverage of the Trump-Xi Jinping deal struck at Busan leans on hyperbole, lacks context and even basic details about its outcome. From the time Trump announced his “Liberation Day” tariffs in April, the media has persistently mislabelled the attack on the US’s global trading partners as a “tariff war”. It was anything but that.
It became clear that the whimsical, arbitrary and illogical assault had little to do with tariff rates or even trade as commonly understood. Instead, it marked an all-out attack on the productive capacities of those designated as rivals.
Of course, the primary target was always China. After all, Trump, during his first term, had imposed sharply escalated tariff rates on imports from China. The fact that the Biden regime continued with them reflects just how entrenched China-phobia had become in the US political establishment.
Trump’s Liberation Day tariff antics
Let us now look at the key elements of the Trump-Xi “deal”. Since tariffs are what started this, let us begin there to see how far back Trump climbed down at Busan. The first point to note is that even before Trump assumed office for his second term, imports from China already faced an average effective tariff rate of 20.7 per cent. And, even before Liberation Day, in February and March, Trump imposed a 20 per cent penal “fentanyl tariff”. Thus, on the eve of Liberation Day, the effective tariff on imports from China was already at 40.7 per cent.
Liberation Day came with an additional 34 per cent “reciprocal tariff” on Chinese goods, taking the effective tariff now to 74.7 per cent. The retaliation by China resulted in Trump escalating the tariff to 125 per cent, plus the 20 per cent fentanyl penalty – effectively 145 per cent. Inclusive of the tariff levels prevailing since Trump 1.0, the total tariff rate now stood at an eye-watering 165.7 per cent.
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Naturally, Trump has trumpeted the deal at Busan for having won a 47 per cent levy on imports from China, but this bluster just does not wash. In fact, from the Chinese point of view, the effective tariff rate has been scaled down sharply from 165.7 to 46.7 per cent. How? The 50 per cent reduction in the fentanyl penalty – from 20 per cent to 10 per cent – and the pre-existing tariffs on Chinese goods imply that the Liberation Day tariff now stands at just 16 per cent (46.7-20.7-10=16).
Where does this place China among the countries, even so-called allies, targeted by Trump? In comparison, the EU and South Korea, both long-term strategic allies of the US, continue to face Liberation Day tariffs of 15 per cent. That Xi Jinping did not gloat about this testifies to the Chinese ability to focus and bargain hard on substance, rather than dwell on claims to be the Vishwaguru.
Difference in China’s response
The difference between the Chinese response to escalatory tariffs imposed by Trump during his first and second terms is striking for several reasons.
Most critically, China did not retaliate during Trump 1.0, despite several provocations. Grave provocations such as the arrest and intimidation of Huawei officials, for instance, did not result in Chinese retaliation. Nor did China impose retaliatory across-the-board tariffs on American goods.
The case of soyabean trade
Instead, it addressed its vulnerabilities – not all of them arising strictly from trade relations – by systematically exploring alternatives in order to minimise risk from dependence on the US.
It deliberately reduced its reliance on US debt instruments like the US Treasury Bills, for instance, or diversified its sources of supply. For instance, China systematically diversified imports of soybeans, which is not just a crucial food source but also a significant ingredient in its livestock economy.
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The accompanying charts illustrate just how systematically this was done by pivoting towards imports from Brazil. China explored this alternative even while realising that securing supply sources meant that US imports, in the event of shortages from Brazil, could not be eliminated altogether. The pivot gathered momentum soon after Trump’s first strike during his earlier term.
While soyabean imports from Brazil doubled over a 10-year period, imports from the US were almost stagnant – although they dropped dramatically in 2018-19 after China imposed retaliatory tariffs of 33 per cent on US soyabean. Imports recovered after China negotiated what was termed as the Phase One Trade Deal with the US in 2020-21.
Building resilience, the Chinese way
In 2023, China imported 65 million tonnes of soyabean from Brazil, worth $39 billion; the same year it imported 25 million tonnes from US, worth $17 billion. Most strikingly, a decade earlier, the two main suppliers enjoyed parity. Within a decade, China had protected itself from the caprices of a powerful seller, while in the bargain also undermining Trump’s electoral base in the US Midwest.
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The lesson is unmistakable – resilience hinges critically on the pursuit of national self-reliance objectives. Hugs, handshakes and rhetoric mean little in the absence of a dogged search for alternatives and options. At Busan, although China agreed to “expand agricultural product trade,” possibly referring to the resumption of soyabean imports from the US, it is unlikely to arrest the long-term pivot towards Brazil.
The US Entity List and China’s rare earths salvo
Missing in most of the commentary on the Busan outcome is the US decision to scale back the so-called “50 per cent rule” which the US imposed on September 29, which is what provoked the Chinese clampdown on rare earth supplies. The “rule” meant that any company anywhere in the world, which had more than 50 per cent investment by Chinese companies in the “Entity List” set unilaterally by the US, faced sanctions. Along with the “rule” the US Administration also sharply increased the number of Chinese companies on the “Entity List” from 1,400 to 20,000 – a 14-fold increase in the number of Chinese companies prohibited from having access to not just product markets but even access to financial markets.
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One of the most immediate casualties of the “rule” was Nexperia, a company based in The Netherlands. A major chip supplier to the global auto industry, the company relies on Chinese production bases for 70 per cent of its chip packaging needs. In fact, US automobile companies lobbied for the withdrawal of the “rule” as it endangered supplies of a cheap, but critical, electrical control chip widely used in automobiles. Following the US strike, the Dutch government proceeded to take control of the company, negating the interests of its Chinese owners. The agreement at Busan resulted in a sharp climbdown by Trump, which is why China agreed to a one-year pause on its own entity list of companies that were barred from Chinese rare earth supplies.
China upped the ante during Trump’s second term
Indeed, the Busan agreement differs dramatically from the Phase One Agreement that was negotiated during Trump’s first term. Every “suspension” of a retaliatory measure by the Chinese has been matched by a corresponding climbdown on the US side. In fact, on the eve of Trump’s second term China had already established the legal framework for retaliatory strikes, closely mirroring those in the US.
The contest between the US and China, unevenly balanced a decade ago, had forced China to explore all the contradictions among the global powers. And, China has used adversity adroitly to bridge the gap between the two countries. For instance, Trump or no Trump, Nvidia cannot afford to ignore the large Chinese market for its products. This has resulted in the company and its chief acting as a spokesperson for less stringent curbs on chip exports to China.
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This was revealed stunningly when DeepSeek released its AI model that shook the industry; despite being severely hamstrung on the hardware front, it turned the tables on the American biggies by using what little it had far more efficiently. These innovations are already driving AI research everywhere. More ominously for American companies, the fast-gathering consensus that the AI bubble – signified by the wide gap between share values and earning potential – is in danger of bursting soon. This may provide Chinese and other smaller players elsewhere a possible opportunity to enter the fray with substantially lower investment.
Building industrial ecosystems to build resilience
However, the biggest advantage that China has enjoyed – and which it has used to the hilt – is that it has built entire ecosystems for large swathes of industries, ranging from electric vehicles and renewable energy solutions to rare earth minerals and products.
Unlike most of the world, China has not been hamstrung by the neoliberal orthodoxy, whose main pillar has been to urge governments to give primacy to markets A natural corollary of this rationale is that states have to eschew any ambitions of an industrial policy whereby they orchestrate entire ecosystems, driving and sustaining industry segments.
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China’s dominance of the global rare earths industry, especially given its relevance for the new and emerging technologies in renewable energy systems, is an example of why building an ecosystem is so critical. The simplistic notion that China’s dominance arises from its control of rare mineral supplies is far from the truth. In fact, its commanding presence arises from its ability to establish chains of industries at scale, which enable processing, much of it arising from manufacturing prowess. And, fondly hoping that the market would do this, is utterly misplaced.
The curious case of Gallium
In a recent post on his blog the avid China-watcher Arnaud Bertrand has taken the case of one rare earth, gallium – just one of the 21 rare earth minerals on which China recently imposed curbs on US entities – to illustrate just how complex the task of building an ecosystem is and how leaving it to the market is doomed to fail. Gallium – critically important for a new class of semiconductors based on gallium nitride and for military radar applications, among other uses – is a metal, not exactly a rare earth. According to Bertrand, China has control over 98 per cent of primary low-purity gallium.
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China produces about 600 tonnes of gallium annually and has a capacity to produce 750 tonnes. But here is the catch: gallium is not a mineral that occurs in ores, so you cannot mine it. Instead, it is a by-product of aluminium production.
Now consider this: in 2022, Chalco (China Aluminium), the world’s biggest aluminium producer, processed about 18 million tonnes of alumina, from which it extracted 6.88 million tonnes of primary aluminium. All this effort resulted in it producing 146 tonnes of gallium. Thus, to produce one unit of gallium it had to produce 47,000 units of aluminium. The moral of Bertrand’s story is that you need to build a very large aluminium industry just to produce a little bit of gallium.
The utter inadequacy of the neoliberal playbook
But it gets even more complicated. The US would need to increase its aluminium output from the current 0.8 million tonnes per annum to 4.7 million tonnes so that it can produce 100 tonnes of gallium, less than one-seventh of China’s current capacity. This would require investments of about $30 billion, in smelters and alumina refineries. But since aluminium production is such an electricity-intensive process, generation capacity expansions would cost another $100-110 billion, give or take a few billion.-
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Thus, the total cost of this massive project would be about $140 billion. But even after all this effort, what would the US do with the new aluminium that is produced? Where would be a market to justify such an expansion? Since the annual consumption of aluminium in the US is about 4 million, we are talking about a market failure even before a dime has been spent on creating this capacity! And, we are not even talking about sourcing raw materials, thousands of skilled personnel to run the facilities, investment in R&D and other not-so-insignificant costs. In a word, leaving the market to do this is a pipedream.
It is not that China does not face vulnerabilities. The challenges it faces in the production of the more advanced semiconductor chips are an obvious one, one that even Chinese officials have admitted. But the point is that they are trying to do something about it even as they struggle.
Contrasting responses from China and India
The contrast between the Indian and Chinese responses to Trump’s tantrums could not be more stark. India, under Narendra Modi, has allowed the trade agenda to be vitiated by extraneous factors, the question of oil imports from Russia being the most obvious one. In fact, we do not even know what else that has nothing to do with Indo-US trade is on the table.
The significance of the Chinese response – not just since Trump assumed office for a second time, but ever since his first term – lies in its dogged pursuit of self-reliance. Nobody seriously expects the ceasefire at Busan to hold for long, not least the Chinese, but what it has shown the world is that the biggest bully in town can be tamed if only you stay the course.
(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)
