It seems that everyone is hurting from the ongoing tariff wars. But I believe the US will emerge as the winner very soon, even though its citizens will have to bear some of the negatives in the shorter run.
My belief is derived from three key facts: (1) The US remains the largest and most profitable consumer market for businesses all over the world; (2) The US holds some of the most important and most advanced technologies that many other countries rely on. Therefore the US has the most bargaining chips; and (3) The US Dollar is still the dominant world currency.
The US has its vulnerabilities, of course. For example, we do not have our own manufacturing capacities for solar panels or rare earth elements. We also rely on imports for many basic needs, such as food and medicine. The inflationary pressure may wreak havoc to the economy. There are significant risks, to be sure. But if the US somehow overcome those risks, then it will emerge as “the only one standing”, so to speak.
A key case will be the conflict with China, so let us unpack that. Faced with President Trump’s tariff threat, China announced that it will double down in its retaliation against the US. But unfortunately those retaliate measures will harm China itself, which is already in economic peril, much more than it does the US.
First, the US does not rely on Chinese goods as much as China relies on American goods. US exports represented about 11% of its GDP. U.S. exports to China made up 6.9% of total U.S. exports in 2024. Therefore its export to China is only 0.51% of its GDP. But the reverse is not true. Exports from China to the U.S. accounted for approximately 2.86% of China’s GDP in 2024. The imbalance is more than five fold.
But it is not just the quantity that matters. China’s vulnerabilities stem from the fact that China’s exports to the U.S. are heavily concentrated in consumer and light industrial goods, including: Electronics and computers: ($125 billion), Furniture, toys, and plastics ($100 billion), and Machinery($89 billion). These sectors are not only heavily dependent on U.S. demand but also labor-intensive and low-margin, making them highly sensitive to demand fluctuations. Many Chinese firms in these sectors cannot easily find alternative markets that match the U.S. in size, affluence, and consistency in demand. The U.S. is simply the largest and the most lucrative market in the world.
As a result, China’s macroeconomic performance is more sensitive to trade with the U.S. than the reverse. A disruption in the U.S. market would create tremendous ripple effects in China’s production, logistics, and employment, not to mention a nearly 3% direct dent in China’s GDP from lost exports alone.
On the other hand, the U.S. could weather a loss of exports to China with relatively little impact.
U.S. exporters have a more diversified customer base, including Canada, Mexico, the European Union, and East Asia, and for most (not all) of its imports the US can readily find alternative sources of supply.
What is more, the U.S. exports a different set of goods to China, such as Oil, gas, and coal ($14.7 billion), Semiconductors and components ($15.3 billion), and Soybeans and agricultural goods ($12.8 billion). These sectors are either capital-intensive or knowledge-intensive, and for the time being China has to rely on those US-made products. The US, on the other hand, benefits from broader demand across multiple regions. U.S. semiconductor companies, for example, also sell to Europe, Korea, Taiwan, and Southeast Asia in large quantities. Even U.S. agriculture has active markets in Latin America, Japan, and the EU.
China is already facing multiple headwinds in its economy: An aging and fast-declining population with weak consumer demand, a real estate sector in crisis, high unemployment rate with declining manufacturing activities. Now with the deepening trade woes, China is more likely to go into stagnation or even face a real possibility of economic collapse.
To be sure, both the US and China will suffer if there will be a full-blown trade war. But China’s economic model is more exposed to shifts in U.S. demand, making it more vulnerable to any disruption in the bilateral relationship. Therefore it is in China’s own interest to join Vietnam and the other 70+ countries to come to the negotiating table and ask for a better deal, although for non-economic reasons it seems unlikely to happen any time soon.
Leave a Reply
You must be logged in to post a comment.