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On 1 February 2025, United States (US) President Donald Trump signed an executive order to impose additional tariffs on products from Canada, Mexico, and China. However, following talks with Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum Pardo on 3 February, Trump agreed to postpone the implementation of tariffs by a month. There were also discussions about a prospective call between the Chinese and American leaders on the same day, which apparently could not take place. On 4 February, President Trump announced that he is not “in a rush” and would speak to the Chinese leader at an “appropriate time”. China responded by announcing a slew of retaliatory measures on the same day. First, it imposed additional tariffs of 10-15 percent on 80 imported goods originating from the US. Additionally, it included US companies like PVH Corp. and Illumina Inc. in the ‘Unreliable Entity’ list, implemented stringent export controls on key minerals like tungsten, tellurium, bismuth, molybdenum, and indium, initiated investigations into Google Inc. for a suspected violation of China’s Anti-Monopoly Law, and officially sued the US at the World Trade Organization.
Forcing the US to accept China’s rise
‘Counter-sanction’ (反制裁) has become a buzzword in Chinese policy circuits in the past few months. In December 2024, when the Biden administration sanctioned a large-scale chip export ban on China, the latter instantly retaliated with export controls of key raw materials such as gallium, germanium, antimony, and graphite on the US. It also took action against several US companies such as NVIDIA, Lockheed Martin Missiles, and Fire Control on various grounds. Chinese scholars are of the opinion that, through these strong measures, the Chinese government has formally set the tone for its prospective relations with Trump 2.0.
Chinese scholars are of the opinion that, through these strong measures, the Chinese government has formally set the tone for its prospective relations with Trump 2.0.
The Chinese state media, on the other hand, has been running a propaganda blitz, claiming major breakthroughs in various disruptive technologies including sixth-generation fighter jets, the Type 076 amphibious assault ship, the KJ-3000 early warning aircraft, the Hongqi-19 missile defence system, and a new laser-based radar technology that can detect submarines at a depth of 1,000 metres—showcasing China’s scientific and technological prowess. The message emerging from Beijing is clear: “China has made great progress and surpassed the US in many areas. It now has considerable strength, including in equipment production and industrial chain… to force the US to accept China’s rise. Afterall China is the only country with all industrial sectors, and the most complete industrial system in the world that can provide almost all the products of the Fourth Industrial Revolution to the world…no country or countries can decouple from China and that is the source of Chinese confidence,” asserted Zhang Weiwei, a professor of International Relations at Fudan University.
Who bears the cost of the Trump tariffs: US consumers or Chinese enterprises?
Despite the tall assertions, concerns persist, the key being who will ultimately bear the cost of the current round of Trump tariffs: US consumers and end-users or Chinese enterprises. The Chinese side hopes that their merchants will pass the burden on to American consumers, triggering inflation and intensifying public grievances, thereby forcing Trump to retreat on the tariff issue.
On the other hand, China is aware and increasingly concerned about the worsening trend of “involutionary” (内卷) competition within the Chinese manufacturing industry. Competition is often considered to be positive as it can result in innovation and creativity. Low prices brought about by this involutionary competition among Chinese manufacturing enterprises has created competitive advantages for its export companies, securing itself a dominant position in the international trade system. Nonetheless, in the new sets of development, with intensifying China-US trade friction and continued downward pressure on the Chinese economy, involutionary competition among Chinese companies is proving to be counterproductive.
Low prices brought about by this involutionary competition among Chinese manufacturing enterprises has created competitive advantages for its export companies, securing itself a dominant position in the international trade system.
The primary manifestation of the involutionary competition among Chinese companies is the endless price wars based on cost reduction through salary cuts, layoffs, and research and development cuts. Domestically, it is leading to a sharp decline in commodity prices, driving down corporate profits, and in turn, pruning the wages, employment, and consumption power of the Chinese populace. Many Chinese speculators are of the opinion that the ongoing uncontrollable price competition in various industries, if not prevented, can devolve China from disruptive technological innovations to the age of “cutting corners, counterfeiting, and shoddy products”.
Furthermore, excessive price competition in overseas markets is becoming increasingly unsustainable for Chinese companies where, despite surges in deliveries and revenue, Chinese companies (especially in the domains of automobile, solar panels) are facing widening losses as prices plummet to the bottom. Complementing this, China’s export boom based on price-advantage is triggering trade disputes and anti-dumping investigations in various countries including those that otherwise share comparatively closer ties with China, such as the European Union, Brazil, and South Africa.
For instance, the involution in China’s automobile manufacturing industry is one of the fiercest, where a common strategy for automakers has been to boost sales by “trading price for volume”. According to Chinese estimates, the scale of price reduction in the Chinese auto market from January to December 2024 reached 227 models, exceeding the figures of 2022 (95) and 2023 (148). Although the new energy-vehicle sector is certainly the hardest hit, with new car prices dropping by an average of 18,000 yuan (a dip of nearly 9.2 percent), additional relevant data highlights a 7.3 percent year-on-year decline in the profits of the Chinese automobile industry between January and November 2024. The same dataset delineated that profit margins were 4.4 percent lower than the average profit margin of 6.1 percent of downstream industrial enterprises. The profits of the automobile industry in November 2024 fell by 35 percent year-on-year, and the profit margin was only 3.3 percent.
Industry experts believe that, under the heavy pressure of price wars, the capabilities of technological innovation within Chinese new energy vehicles are bound to be impacted, with product homogeneity translating into an unwelcome trend.
Chinese media reports further claimed that, among 71 passenger car companies in the country, only three could remain profitable and only for three consecutive years. Even BYD Auto, the leading Chinese automaker, has seen its gross profit margin drop sharply despite a global heft in the sales of its new energy vehicles. Industry experts believe that, under the heavy pressure of price wars, the capabilities of technological innovation within Chinese new energy vehicles are bound to be impacted, with product homogeneity translating into an unwelcome trend.
Responding to the negative effects of involutionary competition in various industries and bringing the Chinese economy out of deflation continue to pose critical questions before the Chinese strategic community, which has been desperately urging Chinese enterprises “not to further reduce prices to bear the new US tariffs. That, in foreign trade, Chinese manufacturers need to maintain the bottom line of profitability and cannot further engage in vicious price competition…instead, they should compete for core competencies.”
As succinctly put by Xuetao Song, Chief Macro Analyst at Tianfeng Securities, the limit of the tariff war between China and the US is actually a question of the limits of US consumer tolerance of inflation on the one hand and the profit margin of China’s export manufacturing industry on the other. India must closely follow and accurately gauge the direction of the US-China tariff war if it hopes to leverage the situation to its benefit.
Antara Ghosal Singh is Fellow with the Strategic Studies Programme at the Observer Research Foundation.
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