Relations between Washington and Beijing have been complex for a long time. China’s gradual rise from an economy based on low-cost production to another based on research and innovation worries Washington, which sees this as a threat to its dominant position. China will not be unhappy with Trump's arrival. He is not a man of armed conflict, so the rhetoric around Taiwan should calm down.
The conflict will be commercial
The conflict will, therefore, be commercial, and this reassures Beijing, which can concentrate on what it knows how to do: find common ground in the commercial field for the benefit of all.
Of course, Beijing knows that Trump will not give a gift since he has promised to introduce up to 60% tariffs against Chinese products. Nevertheless, China would prefer to negotiate with a strong man who prides himself on his ability to reach agreements, who would not hesitate to shout out loud that he managed to make China bow to the slightest victory, and who does not lack respect for Xi Jinping, rather than with an American administration whose representatives of the White House finding compromises are immediately criticised by other members of the same government.
One of China’s grievances is that Washington does not recognise the integration of the Chinese and US production chains. Giants such as Apple or Tesla are examples of the strong integration of production chains in both countries. So far, Washington has been happy to ignore this reality, with the political world preferring to bet on the multiplication of sources of supply.
However, the Chinese ecosystem is only sometimes replicable elsewhere. And this time, far from being surrounded exclusively by career politicians, Trump will have someone very aware of this web of interdependencies between the two markets and highly appreciated by Beijing. Elon Musk, the boss of Tesla (among others), will have his say regarding the relations between the two powers since he has mastered this subject perfectly.
Preparations in progress
Beijing hopes for the best, but it is preparing for the worst. At a time when domestic demand is lagging, and consumer confidence remains weak, the authorities are well aware that a collapse in exports would destroy any chance of achieving the growth goals they have set. Therefore, they are looking for alternative markets to better diversify their clientele. They also keep significant funds at hand to keep the economy afloat in the event of a considerable shock.
Suppose the new stimuli that investors were expecting in November have yet to be announced. In that case, it is partly because Beijing is waiting for the arrival of Donald Trump and stands ready to help the economy limit the damage caused by US tariffs to the levels announced. They will need to be more to achieve this.
So, China will continue. It has strengthened its legislative framework to better respond to trade disputes. It has an anti-foreign sanctions law, which allows it to take corrective measures. It has also established a list of unreliable foreign entities (Unreliable entity list), which prohibits investment, trading, and trade between these entities and China. Applied first against aeronautics and defence companies, this law prohibits their procurement of goods or products. In a commercial dispute, this law will apply to others. That will be important.
We know how China dominates energy transition sectors, which Trump cares little about. However, a study funded by the US State Department found that China dominates 37 out of 44 critical and emerging technologies in fields as diverse as defence, aerospace, energy or biotechnology. To do without Chinese advances in these areas will have a specific cost and weigh on Western products' competitiveness.
A strong impact, despite everything
However, China, which depends on its exports of goods and services for just over 20% of its GDP, is at significant risk. If the share of exports going directly to the US is at most 15%, this country remains the first export market for Made in China.
In addition, some exports to other countries likely have the US as their ultimate destination. Therefore, The impact will be significant and have unexpected consequences for the rest of the world, which will experience a flood of Chinese products. China will not be alone: Given the willingness of Donald Trump to impose tariffs against everything that will not be manufactured in the United States, a large number of countries are likely to find themselves in a similar situation, seeking outlets for their products in world markets that are expected to be highly competitive.
In this game, those with the most competitive advantages will do better than others. China is certainly not the worst off. So you can expect to see it pleading for free trade and continuing to benefit from it.
Even if few countries have prepared as much for Trump’s return to power as China, it is clear that the new president will pose a significant challenge to the world’s second-largest economy. The impact of the dynamic between the two major powers will be global. It could lead to a flood of Chinese products on world markets that would undermine the principles of free trade and globalisation on which we have lived for several decades. The stakes are, therefore, high.
China may have difficulty dethroning the US, but it will remain unstoppable in many sectors. Given the attractive price level at which Chinese shares are traded, we stay invested in this country.