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Responding to the U.S. Tariff War: Historical Experience and Current Choices

May 28-2025   



*This article is based on a keynote speech delivered by Professor Lu Feng of NSD, Peking University.

 

Background Analysis of the US Tariff War

Regarding the economic situation in the first quarter, two points of consensus have emerged: firstly, it is a good start; secondly, the subsequent changes are highly uncertain. The question implicit in this consensus is how to assess the subsequent progress of Trump's tariff war and its impact. This question is directly related to judgments on the economic situation this year and beyond.

The causes and impacts of the Asian financial crisis and the 2008 global financial crisis were different: the former was a regional financial crisis, while the latter was triggered by a shock to the centre of the US economy, which in turn had global repercussions. Assuming the Trump tariff shock eventually returns to 50% (current tariffs exceed 140%), preliminary speculation suggests this shock's impact on exports and external demand may reach the level of the 1998 crisis. This is, of course, a rough estimate based on relevant assumptions. Another key question is whether Trump's tariff policy will trigger a recession or a major crisis in the US economy, or even wider turmoil and a new crisis. We therefore need to remain highly alert to additional risks.

 

Current economic situation versus history

The current internal and external economic situation facing China differs from earlier years in at least four aspects.

1. Different stages of economic development

As China's economic growth approaches or reaches the level of high-income countries, the pattern of industrial development and factor endowments will change significantly from those of an earlier development stage. With the advancement of urbanization and industrialization, the different stages of development mean that policy options for coping with external shocks will differ significantly.

2. Different internal and external macroeconomic situations

In recent years, total economic growth has shown a pattern of “strong supply and weak demand’’, and the contraction of external demand in this context will exacerbate the issue of insufficient demand, suggesting that short-term macroeconomic stimulus must be combined with institutional reforms to effectively deal with external shocks.

In terms of the external situation, China's trade surplus reached a new high in 2024, as measured by the proportion of the surplus to exports, which also reached the highest level in history. However, unless the overall scale of global trade expands further, it will be difficult for China's surplus to continue growing.

It should also be noted that the structure of China's trade surplus has diversified. In short, the external structural imbalance pattern in recent years, coupled with tense economic and trade relations between our country and some developed and developing countries, and the United States' unprecedented escalation of trade protection policies, has made the external environment more complex.

3. The overall international economic environment is different

Given China's economic strength and international influence, the United States and the European Union will be seen as competitors. Of course, there is still a lot of realistic cooperation between China and the international community, including Europe and the United States. Even in the event of an intensification of conflict, this could force a higher level of cooperation in the future.

4. Different policy choices are possible

As the situation evolves, China can cut interest rates or moderately expand fiscal deficits and manage liabilities in a timely manner to support economic growth. However, the “flooding” approach to stimulating the economy is neither desirable nor realistic. At the same time, in a “strong supply and weak demand” environment, China's consumption has more prominent deficiencies and greater room for improvement. The lack of domestic demand and weak consumption are indeed structural issues rather than just cyclical problems.

 

Response strategies and suggestions

In response to the tariff war, we should firstly take direct countermeasures, and at the same time, work with the international community to resist the U.S.'s unreasonable policies. Given the current domestic economy, which is characterized by “strong supply and weak demand”, the key to policy lies in expanding domestic demand, raising incomes, and promoting consumption. From a research perspective, subsequent policy strength and flexibility could be further enhanced, particularly with regard to financial transfers to low-income populations. This could involve more detailed stratification of policies to accurately expand domestic demand and promote consumption. At the same time, public resource allocation should be optimized to boost domestic demand at a fundamental level.

Responding to the U.S. Tariff War: Historical Experience and Current Choices

May 28-2025   



*This article is based on a keynote speech delivered by Professor Lu Feng of NSD, Peking University.

 

Background Analysis of the US Tariff War

Regarding the economic situation in the first quarter, two points of consensus have emerged: firstly, it is a good start; secondly, the subsequent changes are highly uncertain. The question implicit in this consensus is how to assess the subsequent progress of Trump's tariff war and its impact. This question is directly related to judgments on the economic situation this year and beyond.

The causes and impacts of the Asian financial crisis and the 2008 global financial crisis were different: the former was a regional financial crisis, while the latter was triggered by a shock to the centre of the US economy, which in turn had global repercussions. Assuming the Trump tariff shock eventually returns to 50% (current tariffs exceed 140%), preliminary speculation suggests this shock's impact on exports and external demand may reach the level of the 1998 crisis. This is, of course, a rough estimate based on relevant assumptions. Another key question is whether Trump's tariff policy will trigger a recession or a major crisis in the US economy, or even wider turmoil and a new crisis. We therefore need to remain highly alert to additional risks.

 

Current economic situation versus history

The current internal and external economic situation facing China differs from earlier years in at least four aspects.

1. Different stages of economic development

As China's economic growth approaches or reaches the level of high-income countries, the pattern of industrial development and factor endowments will change significantly from those of an earlier development stage. With the advancement of urbanization and industrialization, the different stages of development mean that policy options for coping with external shocks will differ significantly.

2. Different internal and external macroeconomic situations

In recent years, total economic growth has shown a pattern of “strong supply and weak demand’’, and the contraction of external demand in this context will exacerbate the issue of insufficient demand, suggesting that short-term macroeconomic stimulus must be combined with institutional reforms to effectively deal with external shocks.

In terms of the external situation, China's trade surplus reached a new high in 2024, as measured by the proportion of the surplus to exports, which also reached the highest level in history. However, unless the overall scale of global trade expands further, it will be difficult for China's surplus to continue growing.

It should also be noted that the structure of China's trade surplus has diversified. In short, the external structural imbalance pattern in recent years, coupled with tense economic and trade relations between our country and some developed and developing countries, and the United States' unprecedented escalation of trade protection policies, has made the external environment more complex.

3. The overall international economic environment is different

Given China's economic strength and international influence, the United States and the European Union will be seen as competitors. Of course, there is still a lot of realistic cooperation between China and the international community, including Europe and the United States. Even in the event of an intensification of conflict, this could force a higher level of cooperation in the future.

4. Different policy choices are possible

As the situation evolves, China can cut interest rates or moderately expand fiscal deficits and manage liabilities in a timely manner to support economic growth. However, the “flooding” approach to stimulating the economy is neither desirable nor realistic. At the same time, in a “strong supply and weak demand” environment, China's consumption has more prominent deficiencies and greater room for improvement. The lack of domestic demand and weak consumption are indeed structural issues rather than just cyclical problems.

 

Response strategies and suggestions

In response to the tariff war, we should firstly take direct countermeasures, and at the same time, work with the international community to resist the U.S.'s unreasonable policies. Given the current domestic economy, which is characterized by “strong supply and weak demand”, the key to policy lies in expanding domestic demand, raising incomes, and promoting consumption. From a research perspective, subsequent policy strength and flexibility could be further enhanced, particularly with regard to financial transfers to low-income populations. This could involve more detailed stratification of policies to accurately expand domestic demand and promote consumption. At the same time, public resource allocation should be optimized to boost domestic demand at a fundamental level.