As tariffs escalate and alliances shift, China’s economic model faces new pressure—but it may still outlast attempts to contain it.
The global trade war erupted just as the Chinese economy was already struggling. China’s economic growth has been on a sustained downward trajectory, with limited signs of recovery. Weak domestic consumption continues to exert deflationary pressures, while excess capacity across multiple sectors was intensifying competition and undermining corporate profitability.
As many scholars have noted, the challenges the Chinese economy faces today stem from its distinctive growth model adopted since the reform era, particularly from the 1990s onward. Commonly referred to as the “China model,” this approach to economic growth features a set of institutions and policies including government subsidies for businesses, financial and labour repression, and a regulatory environment that prioritises economic growth over broader societal concerns. The model promoted investment and production at the expense of labour income and domestic consumption. As a result, China relies heavily on exports and debt-fuelled investment to absorb the excess manufacturing capacity and sustain economic growth.
Recent developments further deepened China’s reliance on the global market. Concerned about high levels of indebtedness, especially among corporations and local governments, the central government tightened its financial control, thereby limiting the space for further debt expansion. Moreover, the bursting of the real estate bubble has undermined one of the most important drivers of economic growth and dampened consumer confidence and spending. Under these conditions, the importance of the global market becomes even more critical. In 2024, net exports contributed 1.5 percentage points—accounting for 30.3% of China’s GDP growth.
Against this background, it is no surprise that the trade war and its escalations—to date, the US and China have levied tariffs of 145% and 125%, respectively, on each other—have given rise to deep concerns about the Chinese economy. There is broad consensus among economists that the short-term damage is going to be massive. Exports to the US are estimated to drop by 80%, generating ripple effects on domestic income and consumption. Without effective mitigation measures, the tariffs could reduce China’s GDP growth this year by 2.4 percentage points, according to Goldman Sachs.
Beyond the short-term disruptions, the more pressing question is what the long-term impact the trade war will have on the Chinese economy. More specifically: will the “China model” survive? The key to answering this question lies in the new global trade regime that will emerge from the trade war. “The world as we knew it has gone,” the British Prime Minister Keir Starmer has recently lamented. But what comes next?
A close examination of how the trade war has been unfolding so far suggests that it is unlikely to lead to a broader economic alliance against China for the following reasons.
First, the Trump administration has never articulated or convinced its trade partners of the strategic goals it seeks to achieve through the trade war. The officially claimed ones, including addressing trade deficits, rectifying unfair trade practices, raising tax revenue through customs duties, revitalising domestic manufacturing, and containing China, are full of contradictions among themselves and therefore lack credibility. In particular, such ambiguity has led to widespread confusion about whether China is just one target of the war or whether it is intended for the U.S. to renegotiate and reach a “fair deal” with other countries as part of an “economic and security alliance” to contain China, as some analysts have suggested.
By contrast, China’s retaliations are far more unambiguous and credible. While they are predominantly driven by a political imperative—President Xi cannot be seen as yielding to external threats or pressures, as doing so would signal weakness and undermine his own political authority—from a strategic point of view, they can also generate a deterrence effect to prevent other trade partners, especially the European Union, Japan, and ASEAN countries, from raising their own tariffs against China, either as measures to protect their own economies or to reach a deal with Trump. After all, the U.S. now only accounts for 15% of China’s exports while the remaining 85% come from elsewhere.
Second, President Trump’s U-turn on “reciprocal” tariffs highlighted a major fault line in his approach—the economic and political costs of across-the-board tariff hikes are too high to be sustained. Mounting pressures arose from not only political opposition and the market but also some of his closest allies, such as Elon Musk, whose business empire is highly dependent on both overseas markets and global supply chains.
The retreat from the universal tariffs could bring about radical changes to the dynamics of the upcoming negotiations, shaping their outcomes in profound ways. Without the capacity to sustain the tariffs universally, the chance has diminished for President Trump to induce major concessions on shared issues, such as value-added taxes, exchange rates, state subsidies, and the containment of China. On these shared issues, a preferred tactic for negotiating partners is to wait for others to act and observe their outcomes before committing themselves. In other words, while countries are still keen to reach a deal with the U.S., they are more inclined to make bespoke offers, such as buying more American products and improving market access for American companies, to appease Trump rather than making concessions on shared issues, especially regarding China.
Lacking a clear strategic master plan or a demonstrated capacity to forge new realities single-handedly, Trump’s tariff adventure risks fostering a global trade regime that is more fragmented and volatile. The breakdown of existing rules and growing uncertainty compel countries to diversify their trade by building more bilateral ties. Within just a few days of the trade war, the UK and India moved closer to finalising a long-delayed trade agreement. Talks have also taken place between the EU and many other countries, including a phone call between European Commission President Ursula von der Leyen and Chinese Premier Li Qiang. During his recent visit to China, Spanish Prime Minister Pedro Sánchez has also called for “closer trade ties with China as part of an effort to diversify away from the US.” More such bilateral endeavours are likely to follow.
To be sure, the increased fragmentation and volatility also pose significant challenges for China—major trading partners, such as the EU and Japan, are bound to set their own trade policies that can be more restrictive towards China in certain areas; the escalating US-China rivalry also strengthens their bargaining leverage; and some of the overseas supply chains Chinese companies have worked so hard to build in recent years are now risk wasted investment. However, such a fragmented and volatile trade regime may also help China avoid the far worse outcome of a globally coordinated effort to contain its economic power.
If the world as we knew it has gone, the China model may well endure in the emerging one—for better or for worse.
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This article gives the views of the author, and not the position of the China Foresight Forum, LSE IDEAS, nor The London School of Economics and Political Science.
The cover image of the Signing Ceremony Phase One Trade Deal Between the U.S. & China by Trump White House Archived is licensed as in the public domain, via Flickr.
