China’s Slowdown Has Changed the Trade War

The China that President-elect Donald Trump will face in 2025 is fundamentally different than the one he encountered when his first administration began in 2017, or even the one with which he negotiated a trade deal near the end of his term. Now, for the first time in more than four decades, China’s share of the world economy is shrinking—it peaked at just above 18 percent of global GDP in 2021 and stands at around 16 percent today.

China’s growth has slowed significantly since the property sector collapsed in 2021 and COVID-related restrictions impeded all types of economic activity in 2022. Domestic demand and household consumption made only a limited rebound after those restrictions were lifted at the end of 2022. Official Chinese GDP growth rates showed just a minor blip, but rising trade imbalances and falling domestic prices tell a grimmer story. China remains an investment-led economy: it is the world’s largest source of investment (around 28 percent) and gross manufacturing output (35 percent), but it represents only around 12 percent of global consumption. China’s domestic economy cannot generate nearly enough demand to absorb everything China produces. To create growth, therefore, Beijing has come to rely even more on exports of excess industrial output that cannot be absorbed in the domestic market. But China can only make further relative gains if other countries reduce their manufacturing investment or if Beijing expands its share of global exports.

This weakening economic outlook in China gives the United States new ways to constrain Beijing. Washington can leverage the influence of U.S. consumer and capital markets, offering its allies and partners a better alternative to being crowded out by Chinese exports. Given rising concerns about China’s dominance of global manufacturing supply chains, U.S. allies and partners may now be more likely than they were a few years ago to align their own policies, including tariffs and technology-related controls, with Washington’s as part of a broader “de-risking” strategy—an effort to reduce the exposure of Western economies to China.

If the incoming Trump administration is to manage such a strategy effectively, however, it will need to think hard about its tariff plans. Trump has floated tariffs as high as 60 percent on all Chinese imports and ten percent tariffs on goods from everywhere else. But applying high tariffs to all U.S. trading partners risks setting off a harmful chain reaction in Western economies, with rising costs, cratering demand, and a slowing of supply chain diversification. A better option would be to apply tariffs selectively to critical sectors in which Chinese exports threaten the competitiveness of Western industries, and to combine this with a proactive investment strategy to build and scale critical supply chains that exclude China. The United States and its partners have an opportunity to build on the current momentum to rewire the global trading system in line with their national security goals. No matter how Washington proceeds, economic disruption is inevitable, and China will surely retaliate. But the scope of the second Trump administration’s tariff strategy could determine just how painful the process will be.