As the China-U.S. tariff war enters yet another phase of escalation, with Trump 2.0 proposing new hikes that push the effective U.S. tariff burden on Chinese goods to a staggering 145 percent and Beijing responding by raising its tariffs on U.S. goods to 125 percent, Chinese policymakers have shed any lingering illusions of an imminent thaw. The headlines may center on retaliatory tariffs and shipping slowdowns, but beneath the surface, a more consequential shift is unfolding: a long-term strategic recalibration aimed not at out-escalating Washington, but at enduring it.
In addition to matching Washington blow-for-blow, China is moving cautiously yet deliberately to manage exposure, mitigate damage, and reposition itself globally. This emerging strategy is organized into three concentric layers of response. At its core is an all-out push to stabilize the domestic economy. The middle ring focuses on placing targeted pressure back on the United States, measured and mindful of cost-benefit tradeoffs. The outermost circle turns to the broader world, where China is working to counter diplomatic isolation and carve out space in an increasingly polarized global order.
Bolstering China’s Economy
The most immediate priority is internal resilience. Chinese policymakers are under no illusion that the tariff escalation will subside anytime soon. Accordingly, they’ve doubled down on their ongoing pivot toward internal demand – now elevated from an economic goal to a strategic imperative. The long-discussed, intermittently pursued shift toward domestic consumption is no longer optional: it has become the only viable hedge against external coercion, and the system is mobilizing to match.
On the policy front, a broad package of measures is underway. Direct subsidies for vulnerable households, accelerated distribution of consumption vouchers, property market stabilization incentives, tax credits, and both fiscal and monetary support are being prepared for rapid deployment. Local governments have been directed to prioritize household support. Mortgage restrictions will be relaxed in dozens of cities. Subsidies and tax credits will be expanded for childcare, education, and eldercare.
More broadly, Beijing is steering growth toward services, which are less exposed to trade disruptions and more capable of absorbing labor. Inbound tourism is quietly taking on new urgency, bolstered by relaxed visa policies, improved digital payment infrastructure, and curated campaigns targeting high-spending travelers.
Fiscal and monetary levers are also being pulled with greater force. The central bank has lowered the medium-term lending facility rate and expanded credit access for small and medium enterprises. On the fiscal side, Beijing has front-loaded deficit spending and could ramp it up further, depending on the fallout from the trade war.
This transformation of economic policymaking – from long-term aspiration to immediate necessity – is already shifting the tone of internal discourse. Whether it will result in durable reform remains uncertain; many observers remain skeptical that the government’s proposed measures will translate into effective implementation. After all, announcing policies is one thing – funding and executing them on a scale is another. But this time, the incentives are aligning in ways that might finally move the needle.
Complementing these policy efforts is a tightly coordinated narrative campaign. Xi Jinping has emphasized economic self-reliance and “national resilience.” State media has revived themes of foreign pressure and historical struggle, positioning current tensions as part of a longer historical arc rather than a dramatic rupture. The goal is clear: manage public expectations amid volatility while reinforcing the message of political triumphalism.
Hitting Back at the U.S.
The second layer centers on China’s posture toward the United States. After raising tariffs on U.S. goods to 125 percent, Beijing signaled that additional moves from Washington would be “ignored” – not because they’re inconsequential, but because at the current tariff levels, U.S. products are already economically nonviable in China, and vice versa. Beyond that point, tit-for-tat retaliation loses its strategic value.
Unsurprisingly, China has resorted to more surgical retaliation. Though not new, these targeted strikes are now being deployed with a speed and scale that exceed previous rounds of retaliation. Customs authorities have ramped up scrutiny of U.S. aviation and semiconductor components. U.S. agricultural imports are once again facing logistical hurdles. U.S. companies are encountering new regulatory bottlenecks – just as Washington moves to remove the de minimis exemption for Chinese fast-fashion platforms like Shein and Temu.
While Beijing hasn’t officially labeled these moves as retaliatory, they function as strategic signals to the U.S. business community: access to China’s market can be modulated – and will be.
Moreover, export restrictions on critical minerals have already been rolled out in several tranches, including those targeting gallium, germanium, and graphite exports to the U.S. and allied markets. Still, Beijing has not fully deployed its most disruptive tools. Export restrictions on rare earths, battery precursors, and pharmaceutical ingredients have been floated in policy discussions and state media but remain implemented only selectively. The rationale is pragmatic: China seeks to avoid roiling global supply chains in ways that could backfire domestically. But should Washington fail to heed the warning, policymakers want U.S. officials to consider the implications of a full-scale rollout.
Ratcheting up the cost of U.S. escalation while keeping the door open to diplomacy has become Beijing’s default mode. That said, China is no longer betting on a negotiated breakthrough. Low-level diplomatic outreach continues – via business proxies, think tank dialogues, and multilateral forums – but it has yielded little. At the top, engagement has stalled. Beijing sees Trump’s approach – where world leaders are expected to come to him to plead for resolution – as incompatible with Xi’s own desire to project strength. China prefers bottom-up diplomacy that nails down the substance before Xi enters the picture. A high-profile meeting without clear guarantees risks political whiplash – and that’s a risk Beijing is unwilling to take, particularly given the potential for embarrassment.
Trump’s personalist approach to diplomacy – driven by optics, leverage, and theatrical flourishes – makes it hard for China to believe any deal would be durable. Even a carefully crafted agreement could be undone by a late-night social media post, a casual conversation, or a fleeting mood. That’s no basis for strategic trust. So Beijing is absorbing the volatility, and planning for the long haul – not because it prefers confrontation, but because it doesn’t see a credible off-ramp. Still, despite the current impasse, the possibility remains that the U.S. and China could find themselves back at the negotiating table in the coming months.
China’s Pitch to the Rest of the World
The third layer of China’s response unfolds in the global arena. Here, Beijing is working to expand its margins – politically and economically – by doubling down on regional diplomacy and offering itself as a more predictable, if not always less complex, partner.
The recent Central Party Conference on neighborhood diplomacy – the first of its kind since 2013 – was more than symbolic. It marked a pivot toward consolidating ties with regional neighbors as a buffer against great-power pressure. In his keynote, Xi described China’s relationships with its neighbors as “at a critical phase,” calling for “new breakthroughs” in cooperation. That message now undergirds Xi’s visits this week to Vietnam, Malaysia, and Cambodia – countries where Beijing is positioning itself as both a partner and a counterweight to U.S. influence.
Easier Said Than Done
Of course, this three-ring strategy is far easier to articulate than to execute.
China’s shift toward domestic demand runs up against entrenched obstacles: deep income inequality, patchy social safety nets, high costs for health care and education, and – most critically – a state-led financial system that prioritizes control over consumer empowerment. These are structural, not superficial, barriers. Overcoming them requires rethinking fundamental priorities, from the preferential treatment of state-owned enterprises to the impulse for state-directed investment. Reform in these areas has been long promised, rarely delivered.
Meanwhile, nationalism is both a strength and a constraint. Domestically, the government has successfully cast the trade war as a test of national fortitude. The narrative of “foreign bullying” resonates deeply with a population shaped by historical memory and national pride. Many citizens appear willing to endure hardship if it means standing tall.
But nationalism imposes limits. It narrows the space for compromise and raises the political cost of flexibility. If public sentiment becomes too hardened, leaders may find themselves trapped by the very narratives they’ve constructed – especially if economic conditions deteriorate or global dynamics shift.
Today, the message to the Chinese public is one of defiant confidence: “We’ve weathered worse – and we’ll weather this too.” That message still holds weight. But maintaining it will depend not just on resilience, but on the leadership’s ability to manage expectations, avoid backlash, and chart a steady course through uncertainty.
Globally, China aspires to position itself as the custodian of globalization – a lofty ambition. Yet it enters these conversations burdened by a history of sharp-edged diplomacy. Nations like Australia, South Korea, and the Philippines have all felt Beijing’s coercive side when taking political stances that clash with Chinese interests. That history is not easily forgotten.
More broadly, many countries are not choosing sides. Trump’s return has only reinforced this trend. They are hedging, not aligning. His unpredictability has opened new space for China, but with conditions. If Beijing wants to seize the moment, it must offer more than infrastructure projects or market access. It must demonstrate that it can be a stable, fair-minded partner, even in disagreement. That means more listening, greater predictability, and genuinely mutually beneficial arrangements.
Europe illustrates the challenge. Brussels has grown increasingly skeptical of China’s industrial policies, particularly around state subsidies, forced technology transfers, and lack of transparency. Yet many European economies remain tightly linked to China’s manufacturing ecosystem. If Beijing can show flexibility – particularly on industrial overcapacity – it may rebuild more functional business ties. But the road is steep.
The same holds true in Southeast Asia. China’s economic pull is strong, but so is the anxiety it provokes. No country in the region wants to be collateral damage in a great power showdown. If Beijing aims to lead, it must first persuade. And that begins with reassurance, not muscle.
Beijing must also overhaul its legal and regulatory system to address longstanding concerns about other unfair trade practices, as well as new worries arising from the surge in exports to these markets, which have already prompted defensive trade measures in both Brussels and Southeast Asia. These regions now fear even greater inflows if the U.S. market closes further.
Ultimately, China’s three concentric circles of strategy are designed not to outmaneuver, but to outlast. Chinese officials are not counting on a return to pre-2018 normalcy, nor are they banking on a sweeping diplomatic resolution. The goal is staying power: to buy time, contain vulnerability, and adjust expectations – domestically, bilaterally, and globally.
Whether this approach will prove sustainable remains uncertain. Headwinds abound: economic slowdown, wary foreign investors, and unresolved tensions with neighboring countries. But for now, Beijing is proceeding with a logic that sees the trade war not as an aberration, but as a feature of the new landscape – and is shaping its posture accordingly.
