The U.S.-China Trade War, With Zoe Liu

LINDSAY:
Welcome to the President's Inbox. I'm Jim Lindsay, the Mary and David Boies Distinguished Senior Fellow in U.S. Foreign Policy, at the Council on Foreign Relations. This week's topic is, The U.S.-China Trade War. With me to discuss China's response to President Donald Trump's tariff hikes, and what it means for the future of U.S.-China relations is Zoe Liu. Zoe is the Maurice R. Greenberg Senior Fellow for China Studies here at the Council in Foreign Relations. Her work focuses on international political economy, global financial markets, and critical mineral supply chains. She recently wrote a piece for Foreign Affairs titled: How China Armed Itself for the Trade War. Zoe, thank you for coming back on the President's Inbox.

LIU:
Thank you, Jim, for having me. It's always a great honor and pleasure.

LINDSAY:
Zoe, U.S. tariffs on most Chinese goods now stand at a hundred and forty-five percent. There are some exemptions, at least for now, on smartphones, computer semiconductors and some auto imports. China meanwhile has imposed tariffs of a hundred and twenty-five percent on most U.S. goods, with exemptions for some pharmaceutical semiconductors and airplane parts. What's the economic significance of the tariffs, Zoe, especially given that the United States remains China's largest trading partner while China is the United State's third-largest trading partner.

LIU:
Jim, if I can take a step back by pointing out some numbers. Since 2018 to now, the United States and China, in fact I'd argue, has been engaging in a low-level trade war. It suggested that during the Biden administration there was not a tit for tat, back and forth, but now we are back on again. And since then, the U.S. share of Chinese export has declined from eighteen percent to fifteen percent. Now, this is to say that a direct trade between the United States and China has declined, but that does not include trade diversion through countries like Vietnam, Morocco, or Mexico.

LINDSAY:
Explain for me briefly what trade diversion means.

LIU:
It means Chinese companies for reasons such as fierce domestic competition, they want to sell overseas, and for reasons that they want to find places that they can bypass tariffs and get closer to their end market such as the United States. Chinese manufacturers themselves, they want to move overseas. And on top of that, of course the Chinese government has provided the incentive for them to expand overseas.
As a result, direct trade between the United States and the China has declined, but that does not necessarily to say, U.S. is no longer relevant for China. And in fact, it is the U.S. consumers, it is the U.S. factories that keeps the Chinese factory working. In that perspective, I'd say, the economic pain for China is real.

LINDSAY:
Is it real in the sense of, an inconvenience but a relatively minor one or is it something that you think is going to knock the Chinese economy sideways?

LIU:
I think this is the part where I think I may disagree with some Washington-based China hawks with regards to their assessment of the Chinese economy in terms of it's resilience and the Chinese government's response. And I think since the last year we've heard a lot of discussions about, not just pessimism about the Chinese economy, but including U.S. officials repeatedly say that the Chinese economy is in a severe recession or depression. I would say that is wrong. Just the GDP numbers, the Chinese economy was growing at a five percent level, although some China analysts would discount that to two percent. But that is still faster than a lot of economies in the world, especially advanced economies.
And yes, it is accurate to say that the Chinese economic growth is much slower than any point in time in the past three decade. But President Xi Jinping, viewing from his perspective, his measurement of China's national rejuvenation is not purely economic GDP growth. He views China's technological progress, innovation, as the measurement. From his perspective, the Chinese economy has never been better. But that aspect is different from how normal Chinese people would feel about it or for that matter, the small and medium-sized enterprises. It's the small and medium-sized enterprises, these are the backbone, the primary driver of Chinese exports.
And one number here is that, export to the United States is about three percent of Chinese GDP. Basically means, it's all these small and medium-sized enterprises drive the line share of this GDP growth. Shrinking export market, especially to the U.S. means, lower or even less purchasing orders, that is going to lead to slower factory activity, that is going to lead to factory workers being laid off. And it's not just the factory workers, there are also truck drivers, there are also people who work at the ports to facilitate—

LINDSAY:
But that's true both ways, isn't it, Zoe? I would imagine the Trump administration has to worry that a consequence of the decisions it has made, is going to be a slowdown in the American economy. We've already seen economists drive those numbers down and people are talking about the R word, recession. So, that's something that cuts both ways, doesn't it?

LIU:
I think it does cut both ways, but the way how societies and social pressure can be managed in the United States and in China would be different.

LINDSAY:
Oh, I take that point. But before we get into who has the better bargaining leverage, I just want to ask one other antecedent question if I may. You're quite right to point out that the United States and China have been in an economic struggle for a while, certainly going back to the first Trump administration. You could say that what happened on April 2nd with Donald Trump's Liberation Day just opened a new chapter, maybe, a more ambitious chapter.
One of the things I'm struck by though as President Trump and his team rolled out their tariffs on April 2nd, was that Secretary of the Treasury, Scott Bessent, signaled to the world that they should not impose retaliatory tariffs, because it would lead to escalation. My sense is a number of foreign capitals took that message to heart, kept their powder dry, so to speak, but Beijing didn't. Beijing went forward with retaliatory tariffs and that led to an escalation, where we get to a hundred and forty-five percent on one side and a hundred and twenty-five percent on another side, which is effectively a trade embargo for all practical purposes. I'm just curious, why is it that China didn't follow the lead of other countries and simply turn the other cheek and wait to see what happened?

LIU:
I think the U.S. government and Trump administration officials have sent the message clear to Beijing that China is a different kind of a challenge. It's not just a economic challenge, but also a security challenge. And the China takes that seriously. Unlike previous U.S. economic arrivals like Germany or Japan, China took the message to the heart. Recognize that, if China does not stand up for itself, there is going to be this domestic narrative, which is, this is another type of one-hundred years of humiliation, invoking that all over again.
And President Xi Jinping, his political career has been shaped by political struggle, it bitterness, and largely I'd say, his legacy is going to be very much about putting the one-hundred years humiliation behind. That's the ideological or leadership thinking aspect of not—

LINDSAY:
Can I just get you to hold right there, Zoe? And maybe just take a moment to explain to people who aren't China experts, what you mean or what the Chinese people mean, Chinese leaders mean when they talk about, a century of national humiliation. What is the historical memory that is well known to all Chinese, it may not be well known to others outside of China?

LIU:
Jim, that's a good question. The narrative of one-hundred years humiliation has been a essential part of Chinese history education, from when kids are in pre-elementary school, go all the way to college and graduate school. And embedded in this one-hundred year humiliation is the part of Chinese history. When China used to be one of the world most proud and most prosperous country, up until the first Opium War. When the British and subsequently a series of western imperial powers, basically carved out China and led to China's decline. And embedded in this historical background, the rise of the Communist Party of China and Chinese Leader, Mao Zedong, became part of the myth, the founding myth of the People's Republic of China, which is—and there are revolutionary songs, talking about only the Communist Party of China can save China, and if there were no Communist Party of China, there would not be modern China.
And for that matter, people call Chairman Mao Zedong Chairman, as he's the supreme leader of China and he was the founding father of China. Fast-forward to President Xi Jinping, he grew up in the sixties and seventies, his personal political outlook and his worldview is about a political struggle and domestic turbulence and resistance of foreign interference. If we put that into the current context of trade war, and this has a lot to do with when he first came to power in 2013.
In 2013 when he first came to power, he basically emphasized the two things. The first one is, national rejuvenation, achieving national rejuvenation. And who is going to lead to national rejuvenation? Is the party. In that context, what he has done, in a lot of ways, he's the honest person. He said he's going to do this, strengthen the party's control, he's going to stand up against the foreign coercion, he's done that. But I also say that at a tactical level, the Chinese officials and the Chinese government, they've seen it coming and they have prepared a series of playbook to retaliate against the tariff tension.

LINDSAY:
You make it sound like they were itching to respond. That they had drawn up a series of plans, they were waiting for it came, boom, they applied their game plan.

LIU:
I think Jim, you are absolutely right. And this is the part where I think China's response is different from a lot of U.S. allies and partners. Like Canada probably never thought about them being viewed as an economic or tariff war subject or for that matter—

LINDSAY:
Well, that may be changing.

LIU:
Right. And I think the new Canadian leader, Mark Carney, he's going to meet with President Trump. But see, the asymmetric way of leadership talk is different. Asymmetric in sense that, President Trump has been talking about him being the chief negotiator or chief deal maker, but so far President Xi Jinping has not talked about anything. It's China's technocrats.

LINDSAY:
Before we talk about how the deal might be made, if a deal can be made, I want to talk about perceptions of vulnerability. You laid out earlier, Zoe, the view from Washington among China Hawks. The notion is that, the United States is a big export market for China. Chinese economic growth has slowed. The United States has leverage over China. If you can't sell Chinese goods into the U.S. market, where do they go? Social unrest, lots of pressure on the Chinese Communist Party, as embodied by Xi Jinping. Who I think you're quite right to stress is the President of China but more important he's the General Secretary of the Chinese Communist Party. And he sees his number one job is maintaining the legitimacy and power of the Chinese Communist Party.
What I'm curious is, what is Beijing's read of the vulnerabilities of the United States? My assumption is that, by being willing to get into this tariff war escalation, new chapter of the tariff war, that Beijing has a calculation that it has a leg up. Generally speaking, you don't start fights that you think you're going to lose.

LIU:
I think Jim, you're absolutely right. And Beijing probably recognize that at least in the short run, Beijing has the upper hand in the trade attention in the short run. And that upper hand can be explained primarily at the risk of oversimplifying it. On the one hand is supply chain and in particular, inventory management. And the second part is critical mineral supply chain. On the inventory level, I think the U.S. business and supply chain management, over the past decade, we've been specializing, we've been doing this so good. That our inventory management model is the so-called, just-in-time inventory. Beijing realized that, if the tariff tension hikes up, American shelves are going to run out of stuff, American factories are going to run out of the intermediary input. And you started to see the pressure bubbling up in the U.S. as well.
If I can explain this a little bit more. On average it takes about twenty days for a container ship to leave China and come to the United States to a port, and then take about one or two weeks for the U.S. truckers to deliver them to American factories or shops and all that. Overall, we can safely imagine that the wholesale inventory level is about forty to fifty days. In other words, if there is no container coming over to the United States from China, with forty to fifty days, after that, we are going to experience empty shelves. If I knew this, I'm pretty sure Chinese leaders, Chinese economists know that.

LINDSAY:
I believe that the heads of companies like Home Depot—

LIU:
Exactly.

LINDSAY:
Walmart and others recently told President Trump that, we're likely to see in a few weeks some empty store shelves. But I thought you were going to give me a different answer, Zoe. Because I would've thought you would've said that the calculation from Beijing's point of view is that the United States is a soft declining power, that is not used to adversity. That China and the Chinese people can eat the leaves of bitterness, to borrow a phrase you just used, far longer and more happily than the United States can. Because at the end of the day, the United States is democracy. It's used to responding to public moods. And that if Beijing hangs tough, Washington will break.

LIU:
I think Jim, you're absolutely right. The narrative of the east is rising, the west is declining or the line was, east wind prevails over the west wind, right? I think it was in political narrative, I would say up until 2024, when the Chinese leadership recognized that in fact, the U.S. economy is growing way much more robust and more sustainable. And by the way, the U.S. economy was leading the pack of a developed economies, whereas the Chinese economic performance was sluggish.

LINDSAY:
But that's interesting, Zoe, because the current press of the United States had a very different view of the strength of the U.S. economy.

LIU:
I'm afraid that he and I are looking at the different news. I don't look at Fox News and guess what, Jim? Xi Jinping and the Chinese leaders and the Chinese economists, they do not look at Fox News in China.

LINDSAY:
They're looking at the numbers. Let's talk a bit about getting a deal. President Trump has been very clear that he wants President Xi Jinping to pick up the phone and call him. My understanding so far is that the Secretary General has not picked up the phone to call President Trump. Maybe you could help me understand a bit about how this negotiation, leader to leader, is viewed in Beijing. Because my sense is that this is not how the Chinese leadership wants to handle this issue.

LIU:
I think this is the logistical challenge to diplomacy right now. And the way that I tend to think about the Chinese top leader is that, they maintain a kind of imperial aloofness. They are not going to be bogged down by day-to-day mundane governance, or for that matter, tactical trade details or trade negotiations. These are the jobs of the technocrats. And President Xi Jinping's job is to put his blessings on a deal negotiated by the technocrats. And in addition to this different style in leadership, I think there is also the uncertain nature of President Trump's leadership style and the way he exercised the policies.
Going back to 2017, President Trump visited China and met with Xi Jinping. That was a pretty good state visit and there was a lot of deals achieved including a U.S.-China joint investment fund. But right after President Trump came back, he basically started the first trade war. Those people have that kind of memory. They understand that things could have rapidly change, and then on top of that, the Chinese leadership would not walk into a room where they realize that they cannot control the result and let alone the public display of PR.

LINDSAY:
But that's true for a lot of leaders of government. They want a symphony, they don't want jazz. They're not there to improvise because things can go horribly wrong. And I think Donald Trump feels very comfortable improvising.

LIU:
But for a Chinese leader is not the case, because Chinese leadership needs to present a sense of stability and a security. The sense of things going out of control is going to jeopardize the stability image of the party or, for that member, the leader. And guess what? China spends more money on domestic security than on defense. That's how much they emphasize the stability or the stability nature, the image of the leader.

LINDSAY:
Do you have a sense, Zoe, of whether or not Beijing has a clear idea of what it is that Donald Trump wants from a deal? I'm not even sure I could call it a trade deal, because the Trump administration and President Trump himself, has put a number of other objectives out on the table besides pure economic goals over tariff rates or the size of the trade deficit. And how does Beijing deal with trying to go into negotiation, where there may be uncertainty over what problem it is you're trying to solve?

LIU:
From my interaction with visiting Chinese delegations, as well as visiting China myself, consistently, I get one question repeatedly, which is, what is the end goal of President Trump? I think for the Chinese foreign policy establishment or for that matter of the community, they are confused and when they are confused, they tend to think or imagine or assume the worst of the Trump administration.

LINDSAY:
That is not just a Chinese characteristic, I want to point out.

LIU:
From that perspective, the worst-case scenario, of course, would be, the U.S. Government intends to deny the right of China to develop, to grow. And then on the other hand, there is the sovereignty issue of the Island of Taiwan. I would say, those are the two core issues that the Chinese Government, Chinese officials, needs clarity, from the U.S. Government. But of course so far the Trump administration have been sending a mixed message that has been interpreted by Beijing as, the Trump administration is going to build a big tariff wall, is going to arm up Taiwan so that they are going to contain China.

LINDSAY:
I understand the point about Taiwan. The two countries have different views and it's long-standing. And I can certainly understand the point of view of Chinese citizens and how they see Taiwan as being part of the People's Republic of China. I'm curious about the other issue you flag, which is the sense that the United States is trying to hold China down. Because as I look at it, and if I were to tell the story of the last forty years, it's been one of the United States welcoming China into the, let's call it, modern global economy, facilitating China's rise. I'm trying to understand that gap between how I would see this issue and how you're telling me the people of China see the issue.

LIU:
I think, Jim, you are also familiar with the note, and in the previous President's Inbox episodes, you touched upon the issue of how the backlash against globalization. And in fact, there are still Chinese leaders and the Chinese people to just random people. You walk on the street, you ask them, they recognize the rise of China benefited tremendously from the U.S. incorporating China into the world trading system. And since December, 2021, China joined the WTO, that's basically China started to rocket rise, double-digit growth.
But things started to have changed, I would say, at least from the first Trump administration. And we can even go back to 2012 presidential campaign. At that time, presidential candidate, Obama and Romney, they both ran campaigns saying that a China steal American jobs and Huawei is doing espionage against American citizens and industrial espionage and all that.

LINDSAY:
Well, the industrial espionage was true. We know that.

LIU:
Right. I would say, we started to see this pattern. In some ways, the perception of U.S. Government trying to deny China's rise is nothing new because, at least there has been a pattern, at least since the presidential campaign, presidential race in 2012. And then fast-forward 2017, U.S. National Security Strategy identified China as a strategic competitor, and our Pentagon calls China as a pacing threat. And then, during the first Trump administration, you have Huawei ZTE and basically cut Huawei out of a lot of market.
From that perspective, you not only have Chinese entrepreneurs, but also Chinese leader, Chinese people, the sense of nationalistic pride, we got invoked. It's the idea that, if you do not allow Chinese tech companies to thrive, you wanted to deny their existence, then China needs to double down on self-sufficiency or self-reliance. And guess what? This is literally the background of why President Trump's tariff policy actually offered President Xi Jinping, not just a convenient cover to walk back some of his previous policy missteps, but also give him additional legitimacy to double down on self-sufficiency, invest in technology—

LINDSAY:
Well, because he's standing up for China, in the face of being bullied by another global power.

LIU:
Exactly. But I would wanted to point out to your earlier point, the pain point being felt by China. The Chinese officials have said there is not going to be a winner from the trade war, and they know that they cannot win from the trade war. Not just because of shrinking export, but also because of pressure on the stability of the currency, domestic stability from unemployment and all that, they recognize they cannot win. Earlier de-escalation would be less damaging. I would say they have a lot of incentive to de-escalate.

LINDSAY:
Let's talk about that then. That's a very interesting point to make. Because I do think nationalism, and it's on both sides of the Pacific, is a very powerful force and very powerful forces can lead you to make decisions that when you have a cooler head, you may have regret having made. I would say that, over the last month, Beijing has towed a very strong line, in essence saying, it is not ready to meet Donald Trump's terms. And that may represent a sincere position on the part of the government in Beijing. It's also, even if it isn't sincere, it's good negotiating practice. Which is to say, I'm not ready to concede, because nobody wants to be the first to concede. You want to get someone else to do so.
But I also get a sense that, at least in the last several days, there've been news stories coming out of Beijing, suggesting that perhaps Chinese leaders are open to finding some off-ramp, to get to de-escalation. Among other things, talked that the Chinese security chief is inquiring into how China might be able to meet the Trump administration's concerns about China's production of the precursors to fentanyl. Give me a sense of where you think thinking is right now in Beijing. To what extent are they interested in finding off-ramps and do they think they exist?

LIU:
Oh, I think they definitely are interested in finding an off-ramp, Jim, there is no doubt about that. Because, despite all the tough talks by officials of Chinese Ministry of Foreign Affairs, or for that matter, the Ministry of Commerce, trade war is not what they want. And in fact, I would say probably the existing trade embargo is also not what President Trump and his people planned, right?
But the reality is somehow the world's two largest economies are now at this very costly trade attention. And by the way, the rest of the world could not afford to have this continue. Getting that out there, I would say, in fact, both sides have unwinding or dialed down, in different ways, so subtly. On the one hand you see us carve out all the semiconductors and autos that you mentioned earlier. And then on the Chinese side they also carved out exemptions including semiconductors as well.
But then at the same time, if we look at how China reacted, it's not until after Liberation Day, that China hiked up tariff to one-hundred twenty five percent. And by the way, when they imposed one-hundred twenty-five percent, the left a gap. When Chinese goods entering into the U.S., that would be one-hundred forty-five percent. China did not match. And on top of that, the Ministry of Commerce also said that, "You know what? We are going to impose at this level and we are not going to further escalate." I think the interpretation could be two-folded. The one is that they retaliate. They said they're going to retaliate, they did it. And then the second part is, they realize that, if tariff level is this high, you can jack up to a thousand percent. It means nothing. I describe theirs as very calculated retaliation, but they also leave room for negotiation as well as further retaliation.
But that is different from the Chinese government or Chinese officials to say, I'm a willingness to bow, I'm a willingness to kneel. I think those are, the sentiment would be different. At the tactical level, they want to talk, but at a strategic level, they wanted to be treated equal. And by the way, around the time of Liberation Day, the Chinese State Council issued a white paper and the title of that policy paper is like, the Chinese government position on several issues related to trade. And that whole paper concluded with the section talking about, China's willingness to talk as long as the United States treat China as equal or treat China with respect.

LINDSAY:
It is notable how many Chinese communiques, contain just that language. I don't recall many, if any American communiques that use similar language. I'm left asking you, Zoe, where do you think we are headed? Do you think that we're going to be able to find an off-ramp? Because, I think most observers would argue, it's in the interest of both countries to find some way to resolve this because, a trade war generally creates damage, not just to the participants, to other countries as well. There's a lot of fear about a global recession. Do you think we're going to get there or are there other things out there that haven't happened yet that could happen that going to send us in a much more dangerous place?
I have in mind, for example, talk that the Trump administration is going to impose so-called secondary sanctions in any country that buys oil from Iran. China happens to be a pretty big customer of Iranian oil, which I would imagine would be seen in Beijing as yet another affront to Chinese sovereignty, another attempt to hold down China. Where do you think we're headed?

LIU:
This question I guess can be answered in three ways, right? The first part is for global business multinationals. I think for multinationals is going to be, we are heading into a compliance nightmare. The reason is because in China's export control law, they introduced extraterritorial clause, which basically means for foreign companies, if they are in compliance with U.S. law, especially on export controls or sanctions, they are going to be in violation of Chinese law. And then at the second level, if we are talking about off-ramp to achieve a U.S.-China trade deal, I think it really depends upon how we describe a deal. If this deal is simply a agreement on general principle or an agreement on general intent, I think that can flip overnight. Because, the party's monopoly over power and the party's monopoly over information basically give the party a lot of flexibility. And they can frame it. Frame any even direct interaction between President Xi Jinping and President Donald Trump, as a way of President Xi Jinping stand up and gaining respect from President Trump.
I think if we are talking about just a sudden change, reaching some general sense of, okay, so these are the principles we agree on, I think that can change very fast. However, if we're talking about reaching a detailed trade deal agreement in terms of how the U.S. and China restructure bilateral trade and how the U.S. can restructure its trade deficit with China, I think that is going to take a long time.
For example, last time, the 2018 to 2020, it takes almost two years to reach the phase one trade agreement. And now the Trump administration needs to figure out who they are going to send to do the trade negotiation. They haven't really assembled the people yet. And then on the Chinese society, they also need to figure out who they want to send and where they want to meet and on what conditions, in addition to all these other set of issues with regard to the technical details.

LINDSAY:
And I would note that's in addition to all the negotiations the United States is conducting with countries around the world. While Peter Navarro, President Trump's trade advisor talked about ninety trade deals in ninety days, I think that's highly ambitious and very unlikely to be achieved,

LIU:
That it would be a logistic and negotiation nightmare.

LINDSAY:
That it would. But I don't work for USTR and you don't either, so we don't have to worry about actually meeting that goal. On that note, I'm going to close up the President's Inbox for this week. My guest has been Zoe Liu. She is the Maurice R. Greenberg Senior Fellow for China Studies here at the Council on Foreign Relations. I encourage you to read her recent Foreign Affairs piece, How China Armed itself for the Trade War. As always, Zoe, it was a delight to chat.

LIU:
Thank you, Jim, for having me. It's always a great honor and a privilege. Thank you.

LINDSAY:
Please subscribe to the President's Inbox, on Apple Podcasts, YouTube, Spotify, or wherever you listen and leave us a review. We love the feedback. The publications mentioned in this episode and the transcript of our conversation, are available on the podcast page for the President's Inbox on CFR.org. As always, opinions expressed on the President's Inbox are solely those of the host or our guests, not of CFR, which takes no institutional positions on matters of policy. Today's episode was produced by Justin Schuster and director of podcasting, Gabrielle Sierra. This is Jim Lindsay. Thanks for listening.