China’s Economic Slowdown Reshapes the Trade War: U.S. Poised to Leverage Its Advantage
Executive Summary
China’s economic slowdown marks a dramatic shift in the dynamics of the U.S.-China trade war, placing Washington in a position of strength as President-elect Donald Trump prepares to assume office in 2025. For the first time in decades, China’s global economic influence is contracting amid a collapsing property sector, weak consumer demand, and deep structural challenges. The U.S. has an opportunity to harness its dominant consumer and capital markets, while rallying allies to collectively “de-risk” supply chains and limit China’s dominance in global manufacturing. However, Trump’s proposed maximalist tariffs—such as 60 percent on Chinese imports—pose significant risks, including inflation, economic disruption, and retaliatory measures from Beijing. China’s fiscal response, including record deficits and increased exports, highlights its determination to stabilize its economy, but its weaknesses have exposed it to greater U.S. leverage.
Analysis
The China that President-elect Trump will confront in 2025 is vastly different from the economic powerhouse of 2017 or the trading partner Washington engaged during the Phase One deal in 2020. China’s economic share of global GDP peaked at over 18 percent in 2021 but has since declined to roughly 16 percent. This sharp reversal is the result of multiple converging crises, with no clear solutions in sight for Beijing. The collapse of China’s property sector in 2021 triggered a chain reaction across major industries, including steel, cement, and home furnishings. New real estate construction has plummeted by two-thirds, gutting domestic demand and eroding confidence in the housing market, where Chinese households have tied up the majority of their wealth. Developers like Evergrande became symbols of overleveraging, culminating in defaults on hundreds of billions of dollars and a prolonged liquidation process that continues to dampen growth.
Beijing’s response has been twofold: attempts at fiscal stimulus and an aggressive export push. Chinese leaders announced a record-high fiscal deficit target of 4 percent of GDP for 2025, signaling a renewed commitment to infrastructure spending and local government debt restructuring. Yet, stimulus measures rolled out since 2022 have had limited effect. Household consumption remains stagnant, and consumer prices are in decline, creating dangerous deflationary pressures. Without meaningful reforms to boost household incomes, China’s investment-led growth model remains unsustainable. Analysts suggest China’s official GDP figures are overstated, with real growth having contracted sharply in recent years.
China’s overreliance on exports as a growth engine exacerbates its vulnerability to U.S. trade policies. Its efforts to diversify markets, particularly in Southeast Asia, have been superficial. Goods originally bound for Western consumers are now routed through third countries like Vietnam and Mexico to avoid tariffs, a practice Washington has grown increasingly aggressive in addressing. Many Chinese manufacturers, sensing the risks, have begun shifting production abroad. Even so, China’s export reliance has not meaningfully decreased, leaving Beijing exposed to targeted measures from its largest markets, including the United States and Europe.
The United States now holds the upper hand in the trade war, with an opportunity to leverage China’s economic weaknesses to restructure global supply chains and address national security concerns. Trump’s return to office will bring renewed focus on tariffs as a tool to counter Beijing, but his proposed maximalist approach carries considerable risks. Applying 60 percent tariffs on all Chinese imports and broad 10 percent tariffs on goods globally would likely trigger severe economic disruption in the United States and among allies, inflating prices, driving up costs for manufacturers, and slowing supply chain diversification efforts. A more strategic alternative would involve targeted tariffs on sectors where Chinese dominance threatens Western competitiveness, such as semiconductors, clean energy technologies, and industrial goods, combined with proactive investment in U.S. and allied manufacturing capabilities.
Unlike Trump’s first term, the global environment now favors greater alignment with U.S. trade policies. The economic strain China has placed on other manufacturing-heavy economies has fostered shared concerns over Beijing’s aggressive export strategy. European nations, in particular, face mounting pressure to align with U.S.-led “de-risking” strategies to avoid being flooded with redirected Chinese goods. This shift reflects a growing international consensus that supply chain dependencies on China pose economic and national security risks that must be mitigated.
China’s response to U.S. tariffs and export controls will be forceful. Beijing retains tools to retaliate, such as weakening the renminbi to make Chinese exports cheaper, as it did after Trump’s election in 2024. However, excessive currency devaluation risks triggering further capital outflows and worsening domestic instability, limiting China’s maneuverability. Additionally, China could weaponize its dominance in critical inputs for clean technologies and semiconductors, such as graphite, gallium, and germanium, through expanded export controls. These restrictions would disrupt Western production in key sectors, underscoring the stakes of the U.S.-China trade conflict.
Simultaneously, Beijing is likely to court U.S. partners with promises of investments, technology partnerships, and market access to undermine the coalition Washington has cultivated. Yet, China’s economic slowdown, rising debt, and policy failures have weakened its appeal as an alternative partner, especially to nations in the G-7. Many of these countries are now contemplating their own safeguards against Chinese imports to protect domestic industries, further isolating Beijing.
While China can still expand its export market share over the short term, its longer-term trajectory is constrained by international backlash and the limitations of its current economic model. For the United States, effectively managing this moment requires a careful balance. High tariffs and trade restrictions are inherently disruptive but can be mitigated through targeted measures and strategic investments in domestic manufacturing. The scope of Trump’s tariff strategy will ultimately determine the costs and benefits of this restructuring. If managed effectively, the United States and its allies can emerge with more secure, resilient supply chains and reduced reliance on China’s unstable economy.
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