In his own mind, President Trump is a four-dimensional dealmaker who always outsmarts his counterparties. In his real-world trade war, however, Trump has shown his cards to his most potent adversary and revealed some of his constraints.
Several weeks of manic tariff activity by Trump and mass confusion in financial markets have finally provided some clarity: Though Trump wants to remake America’s entire trade system, his real target is China.
Through April 9, Trump had imposed new tariffs on imports from virtually every country, plus additional import taxes on certain product categories including automobiles, steel and aluminum. Nobody got a reprieve.
As financial markets cratered, Trump finally backed down on April 9 by suspending most of his country-specific “reciprocal” tariffs for at least 90 days, until early July. The one notable exception is China, which got the opposite treatment: even higher tariffs.
The Trump tariff on Chinese imports is now 145%, up from about 6%, on average, when Trump took office and trained his sights on the world’s No. 2 economy. The tariff rate is so high that it’s “an effective blockade on Chinese imports,” according to Heidi Crebo-Rediker, former chief economist at the State Department and a senior fellow at the Council on Foreign Relations.
Read more: What Trump’s tariffs mean for the economy and your wallet
That leaves China in a uniquely adversarial position with Trump. China has retaliated against the Trump tariffs far more aggressively than most other US trade partners, including many that didn’t retaliate at all and instead offered to make concessions.
The China tariff on American goods is now 125%, raised from 84% on Friday, and Beijing has taken other measures to punish American businesses. China’s rhetoric has also been far more bellicose than anybody else’s, with its Commerce Ministry saying in a statement that China “will fight to the end.”
China would avoid a trade war if it could, but it’s a proud country led by a stubborn autocrat, President Xi Jinping, who undoubtedly resents Trump’s trade bullying. Xi and his cadre also view China as a rightful superpower trying to claw its way to parity with the United States, and maybe beyond. Xi has preached a national creed of self-reliance in recent years, and he may very well view a trade war with Trump as a crucible China must pass through on its way to economic greatness.
Xi has some advantages. For one thing, Trump’s tariffs are a tax on American businesses and consumers, not on Chinese exporters, which is why the first line of damage is to US stock prices. Tariffs drive down stock prices because they raise costs for businesses, lowering prospects for future earnings. They hurt Chinese exporters too, since the tariffs effectively raise the cost of their products, leaving American buyers looking for other providers or simply buying less. But the US stock market feels the damage first because stock prices are, in effect, a predictor of future economic developments — which markets now consider to be bad.
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Investor losses driven by Trump’s unilateral tariff moves are a built-in barrier to how far Trump can go. “President Trump does lose leverage if equities keep falling,” Tom Lee, co-founder of investing firm Fundstrat, said in an April 7 video briefing, amid the stock-market sell-off. By the time Trump bailed on his reciprocal tariffs on April 9, the S&P 500 index had dropped nearly 20% from its peak, putting it on the cusp of a bear market. So a 20% plunge in stock values may be one measure of Trump’s pain threshold.
Trade off. From left, President Donald Trump, former Canadian Prime Minister Justin Trudeau, China’s President Xi Jinping, and Mexico President Claudia Sheinbaum (AP Photo) ·ASSOCIATED PRESS
That waterfall decline in stock prices was beginning to have a troubling side effect: Rumblings in the bond market. Bond yields — interest rates — normally fall during a stock sell-off, as investors selling stocks usually put money into highly liquid Treasury bonds. The demand for Treasuries pushes up bond prices while lowering the interest rates investors demand to hold them.
But from April 4 to April 9, US Tresasury yields rose by more than four-tenths of a percentage point, when normally they would have been falling. At the same time, the value of the dollar fell by an unusually large amount against the euro and other currencies, suggesting that a disorderly sell-off of US assets with potentially dire consequences could be underway.
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That added to the pressure on Trump. “The spike in the 10- and 30-year Treasury seemed to be the ultimate pressure point for Trump to pause these tariffs for 90 days,” Crebo-Rediker said.
Investors are suddenly wondering whether China or a group of US trade adversaries could cause a US financial crisis by deliberately selling Treasuries to drive US interest rates up, which could freeze credit markets. A credit crisis is generally worse than a stock sell-off because if can affect the liquidity companies need to pay their bills, especially if it happens fast. A credit crunch and frozen liquidity helped turn the 2008 housing bust into a financial crash that nearly became a depression.
China owns about $760 billion of US Treasury securities, which is 2.6% of total US debt traded in public markets. The share has declined in recent years, and it’s probably not enough for China to weaponize on its own as leverage against Trump in a trade war. China would suffer harm from any credit crisis that hit the United States, which could hinder the ability of many nations to buy Chinese exports at current levels.
But the mere size of the US debt load—which will only get larger as Trump pushes for deficit-financed tax cuts—is a vulnerability Trump may not have counted on when he launched his trade war. The higher his tariffs, the more damage they will cause the US economy and the more likely foreign investors are to pull out, putting upward pressure on rates. China sees that and Trump has now shown his sensitivity to the possibility of a credit crisis.
As an autocrat who no longer needs to deal with elections, Xi can endure political pain longer than Trump can. But China has vulnerabilities too. The Trump tariffs will hurt many Chinese businesses and harm the overall Chinese economy if they stay in place for long. Xi is powerful but not always decisive, and there’s no obvious way for him to outsmart Trump.
“He can escalate and provoke more pain, or hold back and appear weak to both foreign rivals and his domestic audience,” Craig Singleton of the Foundation for Defense of Democracies wrote recently in Foreign Policy. “Either way, the noose tightens.”
Trump says he’s willing to negotiate with trade partners, but he has also shown an interest in “decoupling” the US and Chinese economies, after 25 years of deep integration. That process may have begun, and as long as Trump has a say, it may be irreversible.
By narrowing the focus of his trade war to China, Trump may be marshaling resources he can’t afford to squander elsewhere. China may not be able to win a trade war outright, but it can certainly be a prickly foe that causes a lot of damage—and knows where to aim.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
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