China’s reaction to Trump’s tariffs and beyond: What to expect?

How to understand China’s tariff retaliation?In two words: forced into a corner and with enough leverage to retaliateDuring the previous two rounds of U.S. tariff hikes, China’s response was largely symbolic - loud in rhetoric but restrained in action. This time, however, Beijing raised import tariffs on all US goods directly to 70%. If implemented, this would be tantamount to trade decoupling, with huge consequences for global supply chains. It seems important to analyse why China opted for a direct and comprehensive counterattack. The answer is twofold. First, China was forced into a corner given the size and full coverage of US import tariffs. Secondly, China does have leverage, probably more than any other country in the world.At this stage, mutual trust between China and the U.S. has vanished. The issue goes beyond tariffs, with growing geopolitical tensions - such as the recent Panama port developments - fueling the standoff. Under such conditions, a meaningful agreement is hard to reach. Tactical compromises may occur, but more likely, both sides will prolong the economic stand-off based on self-interest.How will other countries respond?Most other countries are likely to prefer negotiations with the U.S., and even if they do impose countermeasures, the scale will be far smaller than that of China. Southeast Asian countries in particular are expected to back down to avoid collateral damage - cutting tariffs, significantly increasing imports from the U.S., and potentially aligning with Washington in restricting Chinese intermediate goods. In the short term, Trump may well declare a “phase victory” based on the perceived support of other countries which will end up imposing high import tariffs on Chinese goods.Europe has declared it will retaliate but it is hard to imagine it will react like China has. Its leverage with the US is simply too small given how much it depends for security but also critical infrastructure, like cloud, artificial intelligence, etc. In that vein, European countries are likely to become more cautious about a surge of Chinese imports that could threaten domestic industries. In other words, Europe’s concerns about overcapacity will do nothing but increase.Timeline ForecastThe U.S. is likely to extend the negotiation window longer, giving more time to coordinate with multiple countries. It simply isn’t realistic to reach a meaningful agreement across so many parties in just a few days and it is also clear that the US cannot keep such high tariffs with virtually every country in the world (with very few exemptions)Tariff deadlines between China and the U.S. may also be extended. Issues like the Panama port and TikTok could be bundled into the talks and potentially even more issues, such as the war in Ukraine. If the outcome is a delay in the imposition of tariffs, that may already be the best-case scenario.Will global tensions ease as a result?Unlikely. The Pandora’s box has already been opened, and it won’t be easy to close it again.Even if Southeast Asian countries manage to reach a quick agreement with the U.S., there’s no guarantee that Washington will be satisfied - or won’t come back with further demands. Can Chinese firms continue to invest abroad with confidence? These questions are now shrouded in uncertainty.The world may be entering a new era of trade protectionism. This could mark the beginning of a structural shift.