How China Plays the Long Game Against Trump

There’s a phrase which China’s President Xi Jinping likes to use: “The world is undergoing changes which have not been seen in a hundred years.” Now, these changes have appeared to arrive, but they’re delivered unexpectedly by Donald Trump. Epic Fury. I said I like that name! Amid the noise of war, the stance of another major power is speaking volumes. The US is demonstrating itself to be a force for instability in the world. And that gives President Xi and China a chance to present themselves

as the adults in the room. China is happy to see the United States getting bogged down in the Middle East. China has long viewed the existing order as being too dominated by the US. So Trump’s challenges to that order actually presents Xi Jinping a very good opportunity and the question is

whether Xi is ready to seize it. In many ways, he already has. Trump’s first trade war made China realize that dependence on the US is a very dangerous thing. China’s exports to the US fell about 20% last year. But in the end, China had a record trade surplus hitting $1.2 trillion dollars. China deliberately tried to diversify away from the US as a consumer base. So do Trump’s actions strengthen China, or expose it to more risk it cannot control? The US-China relationship is the most important bilateral relationship in the world and it will help define the century. And it’s in the hands of two very different leaders. It’s hard to imagine two people with more different approaches to leadership. President Trump is brash. He’s impulsive. You don’t have the cards right now. Xi Jinping is guarded, methodical, someone who plays the long game, not the Twitter game. China’s policy makers see Trump as someone who’s transactional and pragmatic, who likes to make deals. They also realize that Trump

is very unpredictable. President Trump makes a lot of threats. What the markets have realized is that he doesn’t execute all of those threats. A lot of them are just quietly forgotten. And the internet, as usual, has found a name for it. TACO. TACO, as you would call it. Trump Always Chickens Out. The term is actually pretty popular on Chinese social media too. On Chinese social media, people love Donald Trump. He actually has many nicknames. Another really popular nickname for Trump is Chuan Jian Guo, which actually means “Trump, the Nation Builder.” It’s not praising Trump as a nation builder for the United States. It’s more like Trump helping China

to become a superpower. We’re seeing Xi is basically just sitting back to enjoy the benefits as a flurry of Western leaders coming to Beijing. Mark Carney meets Xi Jinping in Beijing. It’s vital that we build a more sophisticated relationship. They know that China, like all nation states, will act in its own self-interest. What they are seeking, and signalling, is a hedge against the United States, which they now view as an unreliable partner. And China has learned this the hard way. China was really caught off guard by Trump’s first trade war because it was launched just months after his first visit to China where he received a lavish welcome. So since then, it has been preparing itself. In China, there’s a famous saying: “Learning is like sailing upstream; pause, and you’re pushed back.” And this mindset now shapes Beijing’s strategy

in the second trade war. President Trump tried to deal a knockout blow to China. What the US wasn’t expecting was that China would hit back. China retaliated on the US with tariffs of 125%. China has learned how to play this game and President Trump knows that. This latest headline coming in from the Supreme Court, global tariffs struck down. China says it is assessing President Trump’s second tariff investigation this week as the US continues its effort to rebuild the key trade policy. The rollercoaster has had an impact. Last year, China’s exports to the US fell about 20%. But if you look at India, they jumped 12.8%. To Southeast Asian countries, they rose 13.5%. And to the EU? Up 8.4% . But trade flows are just one arm of China’s strategy. Explicit export controls on rare earth magnets. Rare earth materials is the trump card. China imposed export controls on seven types of rare earth minerals and magnets made of them. These export controls are really inflicting pain on the US manufacturing base. Because these rare earth magnets are used in everything from iPhones and EVs to big-ticket weapons like fighter jets and missiles. The pain goes beyond US manufacturers, since producers around the world

are impacted by these controls. And, although these measures could backfire as countries explore ways to lessen their reliance on China, those efforts will take time. China dominates the supply chain: mining over 60% of the world’s rare earths and refining over 90% of them. Rare earths by themselves are not big deals. The entire category, the market cap was not even $10 billion dollars. As a result, other countries, they have pretty much given up on

rare earth production and refinery process. China had its own advantages. Its labour costs is really low, and its environmental standards are pretty lax. The rare earth industry has

been considered strategic for decades. China has the world’s most complete industrial catalogues. But despite the trade wins against Trump, China has issues its industrial success can’t fix. Beijing set a GDP growth target of 4.5% to 5% for the year. That’s the lowest since 1991. China’s economy has a lot of really serious problems. Local governments, businesses, real estate developers. They borrowed too much, and they used those borrowed funds

to build too much capacity. Bridges to nowhere. Steel mills producing more steel

than anyone could ever need. Ghost towns of empty property. As a result of that overcapacity, China now has a deflation problem. For years, China’s economic rise has been fueled by its

booming exports and investment. But last year we saw China’s fixed-asset investment decline for the first time on record. So it’s really just the exports

that keeps the economy going. Chinese workers are seeing their pay cuts

or even getting fired and struggling to find jobs. Some of them choose to go into the gig economy, which doesn’t really provide a sense of job security. What a lot of countries realized was that

China was actually exporting its deflation overseas. Whatever they couldn’t dump to the United States, they were dumping to Southeast Asia,

Latin America or Europe. That complicates the relationships China is forging, even as more countries engage China to hedge against an unreliable US. China has been keen to exert its

economic strength for political influence, but it’s not willing to get entangled

in military conflicts far from home. Seizure of Venezuelan President Nicholas Maduro. Iran continues to attack its Gulf neighbors. China certainly has never committed to put troops on the ground to defend Venezuela or Iran. There’s a lesson there which other friends of China

are going to take away from that. For Iran and Venezuela, China is their most important economic lifeline. But for China, these two countries are ultimately not that important. Iran accounts for about 13% to 14% of China’s oil imports and Venezuela only accounts for 4%. So this is not a small number,

but it is replaceable for China. But the bigger problem here is the Strait of Hormuz. If Iran continues to close down the strait, then China will have a problem

sourcing nearly half of its oil imports. The Strait of Hormuz is a vital lifeline

for 20% of the world's gas and oil flows. The reduction in traffic increases the threat of an inflation crisis and global recession. If this war drags on and spreads to other countries, then China’s economic interests can be threatened. So for now, China seems focused on only fighting the trade war, an arena where it holds more advantages. The United States is the world’s biggest economy. It has the world’s most powerful military. Is China quite the equal of the United States? I think the answer on that, at least for now, is still no. For nations caught in the middle, there’s really only one way forward. Hedging will be the key word for 2026 or 2027. When two superpowers are having this historical fight, they want you to take sides but no one wants to.