The First Shots: How China Secured an Early Advantage
Beijing’s Calculated Response to Section 301
In April 2018, the United States Trade Representative published a list of 1,333 Chinese products worth $50 billion targeted for a 25% tariff. China responded within hours. Beijing matched the $50 billion figure exactly, but their selection of products revealed a strategic depth that Washington had not anticipated. While the U.S. tariffs primarily hit industrial components and manufacturing equipment, China targeted American agricultural exports—particularly soybeans, which accounted for 60% of U.S. agricultural exports to China.
Chinese officials had studied U.S. electoral maps, targeting products from politically significant regions. The soybean tariffs hit hardest in Republican-voting agricultural states that had supported President Trump in 2016. This initial countermove established a pattern that would characterize China’s approach throughout the trade conflict: precise, politically calculated responses designed to maximize economic and political pressure while minimizing domestic disruption.
Supply Chain Reconfiguration
By late 2018, as U.S. tariffs expanded to cover $250 billion of Chinese goods, the impacts on global supply chains were becoming evident. Chinese manufacturers began executing a strategy that combined several approaches:
The Southeast Asian Shift
Chinese manufacturers accelerated the relocation of low-margin, labor-intensive production to Vietnam, Thailand, and Malaysia. Foreign direct investment from China to Vietnam jumped 86% in the first eight months of 2019 compared to the same period in 2018. This shift allowed Chinese companies to maintain market share by circumventing U.S. tariffs while preserving higher-value production processes within China.
Strategic Customs Classifications
Chinese exporters demonstrated remarkable adaptability in reclassifying products to avoid tariffs. Minor product modifications allowed goods to be categorized under non-tariffed HTS codes. This practice became so widespread that U.S. Customs and Border Protection created dedicated task forces to address tariff circumvention, but enforcement proved difficult given limited inspection resources and the volume of imports.
Currency Adjustments
The Chinese yuan depreciated by nearly 10% against the U.S. dollar between April and September 2019, effectively offsetting much of the tariff impact on Chinese exports. While U.S. officials accused China of currency manipulation, the depreciation occurred through market mechanisms as capital sought safer havens amid trade uncertainty. This currency movement provided Chinese exporters with a crucial buffer against tariff impacts.
The Digital Battlefield
As the trade conflict intensified, China leveraged its position in emerging technologies to establish advantages that would extend beyond the immediate tariff battle.
Accelerating Technological Self-Sufficiency
The May 2019 addition of Huawei to the U.S. Entity List prompted an intensification of China’s technological independence initiatives. Chinese semiconductor design firms received expanded state funding, with government-backed funds investing $20 billion in domestic chip production in 2019 alone. While these investments would not yield immediate results, they represented a strategic pivot that would reshape supply chains for decades.
Digital Standards and Market Access
China simultaneously expanded its influence in international standards-setting bodies for emerging technologies, particularly in 5G, artificial intelligence, and Internet of Things. Chinese representatives increased their leadership positions in International Telecommunication Union working groups by 67% between 2017 and 2020. These positions provided China with considerable influence over technical standards that would govern next-generation technologies.
The digital economy became a parallel battlefield where Chinese firms pursued market share in developing regions. Between 2018 and 2020, Chinese technology companies increased their investments in Southeast Asia by 74%, establishing ecosystems of services and hardware that expanded Chinese technological influence while U.S. attention remained focused on tariffs.
The Domestic Consumption Shift
Perhaps the most significant long-term advantage China secured during the early phase of the trade war was the accelerated reorientation of its economy toward domestic consumption. This represented not a reactive measure but the expedited implementation of long-standing economic goals.
Dual Circulation Policy
In May 2020, President Xi Jinping formally introduced the « dual circulation » economic strategy, which emphasized domestic consumption (« internal circulation ») while maintaining China’s role in global trade (« external circulation »). This policy codified a shift already underway, with domestic consumption contributing 57.8% to China’s GDP growth in 2019, up from 45.2% in 2017.
E-commerce Expansion
Chinese authorities reduced regulatory barriers for e-commerce platforms serving smaller cities and rural areas. These measures expanded the domestic market for Chinese producers facing export pressures. Rural e-commerce sales grew by 27% in 2019, creating alternative revenue streams for manufacturers previously dependent on export markets.
Strategic Consumer Subsidies
Local governments implemented consumer subsidy programs targeting products affected by export declines. In Guangdong province, a $14 billion subsidy program for household appliances, electronics, and automobiles helped manufacturers redirect excess capacity toward domestic consumers. Similar programs across 23 provinces cushioned export-oriented manufacturers during the transition toward domestic markets.
Agricultural Market Restructuring
China’s agricultural strategy during the trade war demonstrated both defensive adaptability and offensive opportunity-seeking.
Supply Diversification
Chinese importers quickly established alternative supply sources for key agricultural imports. Soybean imports from Brazil increased by 29% in 2018-2019, while Russian soybean exports to China rose by 64% in the same period. This diversification permanently altered global agricultural trade flows, reducing China’s future dependence on U.S. suppliers even after trade tensions might ease.
Domestic Production Expansion
The Chinese government increased subsidies for domestic soybean production by 30% in 2019, reversing a decades-long decline in acreage. While Chinese domestic production could not fully replace imports, this policy shift signaled a long-term strategy to reduce vulnerability to trade disruptions in critical agricultural commodities.
Strategic Reserves Management
China strategically released portions of its agricultural reserves during price spikes, demonstrating sophisticated commodity market management. These releases targeted periods of maximum price pressure, ensuring that domestic food processing industries maintained stable input costs despite import disruptions.
Regulatory Asymmetry
A less visible but equally important Chinese advantage emerged through asymmetric regulatory responses to trade tensions.
Administrative Measures
Chinese authorities increased inspection rates for U.S. goods at ports of entry, focusing on product safety, documentation requirements, and customs classification. These enhanced inspections created unpredictable delays that disproportionately affected perishable goods and time-sensitive deliveries, imposing costs on U.S. exporters without technically violating trade agreements.
Licensing and Approval Delays
Approval timelines for U.S. businesses operating in China lengthened across multiple sectors. Pharmaceutical approvals, financial services licenses, and merger reviews involving U.S. companies experienced delays averaging 53% longer than those for companies from other countries between 2018 and 2020. These delays operated beneath the threshold of formal trade violations while creating significant competitive disadvantages.
Selective Enforcement
Chinese regulators conducted anti-monopoly investigations of U.S. companies at three times the rate of investigations targeting domestic or third-country firms during 2018-2020. While each investigation cited legitimate regulatory concerns, the pattern revealed selective enforcement as a trade response tool that avoided the visibility of tariffs while achieving similar pressure effects.
Diplomatic Counterbalancing
As the U.S.-China trade relationship deteriorated, Beijing launched a coordinated diplomatic initiative to strengthen alternative economic partnerships.
Regional Economic Agreements
China accelerated negotiations for the Regional Comprehensive Economic Partnership (RCEP), which was signed in November 2020. This agreement created the world’s largest trading bloc, encompassing 30% of global GDP and excluding the United States. By establishing deeper integration with Asian trading partners, China reduced its relative economic exposure to U.S. market access.
Belt and Road Expansion
Chinese Belt and Road Initiative investments shifted toward higher-quality, strategically significant projects during the trade war period. Annual BRI investment decreased in total value but increased in strategic focus, with digital infrastructure projects rising from 11% of total BRI investment in 2017 to 26% by 2020. These investments expanded China’s economic influence precisely as U.S. trade policy sought to constrain it.
Strategic Resource Agreements
Between 2018 and 2020, Chinese state-backed companies signed 18 major agreements securing access to critical minerals in Africa and Latin America. These agreements locked in supply chains for materials essential to advanced manufacturing and renewable energy technologies, providing China with resource security advantages that would extend far beyond the immediate trade conflict.
Forward Positioning
By early 2021, three years into the trade conflict, China had established advantages that would shape the next phase of economic competition. While U.S. policy focused primarily on tariff levels and trade balance metrics, Chinese strategy encompassed supply chain restructuring, technological independence, market diversification, and domestic economic reorientation.
These early moves positioned China to weather prolonged economic friction while pursuing longstanding development goals. The trade war had not derailed China’s economic trajectory but rather accelerated its evolution toward a more resilient, domestically-driven model less vulnerable to external pressure—a foundation that would prove valuable as the economic competition between the world’s two largest economies entered its next phase.
This article is an excerpt from the book The First Round – Inside the US-China Trade War and China’s Early Edge by Olivia Brown -ISBN 978-2-488187-20-6.
