Trump isolates China with tariff pivot, setting up Xi showdown

With the exception of China, countries that were hit with the higher, reciprocal duties that went into effect Wednesday will now be taxed at the earlier 10% baseline rate applied to other nations. Bessent said he would be speaking to officials from Vietnam, Japan, India and South Korea in the coming days.

The tactic puts Trump on a collision course with Chinese President Xi Jinping, whose government has vowed to fight “to the end” in any confrontation and looks to shore up ties with trade partners to resist Trump. Beijing forcefully hit back at the reciprocal levies and hasn’t shown any clear signs of trying to contact Trump, who said on Wednesday that he was “waiting” for China to call.

Trade tensions have spilled beyond economics. The Pentagon on Wednesday criticized Beijing for its influence on key infrastructure. China has warned citizens of traveling or studying in the US, even though Xi has called for more people-to-people exchanges to improve relations.

“Trust has gone,” said Da Wei, director of the Center for International Security and Strategy at Tsinghua University in Beijing. “On the balance between economic development and economic security, you will always emphasize security. This is a long-term change.”

Investors are now watching for whether Beijing will escalate with additional duties or signal openness to negotiations. While Chinese authorities have repeatedly expressed willingness to engage in dialogue, their prerequisite of “mutual respect” makes meaningful talks unlikely.

Power Rivalry

In response to Trump’s earlier 50% tariff threat, Beijing raised levies on all US goods by the same rate to 84% — an announcement that seemed deliberately timed to land just before US markets opened. China also added primarily American defense companies to its unreliable entity list and export control list, a largely symbolic move as most targeted companies have minimal China exposure.

On the military front, tensions persist even though defense officials from both countries have made formal contact since Trump returned to the White House. On his first official trip to Asia, Defense Secretary Pete Hegseth said the US needed to “re-establish” deterrence against China by bolstering its military power in the region — and by supporting similar efforts by its allies.

This week, he also criticized China’s military for having “too large of a presence in the Western Hemisphere,” calling on the region’s governments to work together to deter China.

As ties with the US spirals, China has courted Europe and Southeast Asia, attempting to find common cause over Trump’s tariff threats.

China’s Commerce Minister Wang Wentao called on the European Union to deepen trade tie to “inject more stability and certainty” into the world at a meeting with European trade commissioner Maros Sefcovic on Tuesday.

The next day, Xi chaired an upgraded Central Work Conference on Diplomacy with Neighboring Countries, highlighting China’s increased focus on regional relationships.

Stimulus Outlook

Domestically, Beijing has signaled increased urgency to bolster the economy that relied on exports for a third of growth last year. China’s top leaders are poised to meet Thursday to discuss additional economic stimulus after Trump ratcheted up tariffs, according to people familiar with the matter.

China has also urged Shein and other companies to refrain from diversifying supply chains by sourcing from other countries, as Beijing seeks to stave off a manufacturing exodus.

At a meeting with experts and entrepreneurs Wednesday, Premier Li Qiang reiterated the need to expand domestic demand. Fujian province, a coastal region that relies on trade, is planning to help exporters sell their goods to Chinese customers to absorb some tariff impacts, a move that could be followed by other trade hubs in China.

In a further warning sign for the economy, China’s consumer deflation extended for a second month in March and factory deflation persisted for a 30th month. Prices could come under pressure to weaken further should exporters redirect some goods to the domestic market or if other countries facing higher US tariffs divert their products to China.

Peak Tariffs

For now, the frenzy of tariff threats from the US seems to have peaked. Trump said he didn’t think he’d have to raise the rate higher to force talks. Economists have also suggested that the effect of tariff hikes is getting increasingly marginal.

An initial 50% tariff would decrease Chinese GDP by 1.5 percentage points, Goldman Sachs economists including Andrew Tilton wrote in a note Tuesday. A second 50% tariff, however, would have a diminished impact, reducing GDP by only another 0.9 percentage points.

“China’s leadership doesn’t seem to be in any rush to make a deal,” Julian Evans-Pritchard, head of China economics at Capital Economics, wrote in a note Wednesday. “They appear to have concluded that they can afford to weather the impact of US tariffs and that Trump will be in a weakened position further down the line as the economic and political fallout from the tariffs mounts.”