How China Secured an Early Advantage in the Trade War
The Strategic Response to Tariffs
China’s response to the first round of American tariffs in 2018 demonstrated a level of preparation that caught Washington off guard. When the Trump administration imposed 25% tariffs on $34 billion of Chinese imports in July 2018, Beijing immediately retaliated with equivalent tariffs on American goods. This swift response resulted from months of advance planning by Chinese economic officials who had mapped out affected industries and prepared targeted countermeasures.
The Chinese Ministry of Commerce had assembled a specialized team that analyzed American export vulnerabilities and drafted multiple response scenarios before the first American tariff was even implemented. This preparation allowed China to strike back at politically sensitive American agricultural exports, particularly soybeans from midwestern farming states, maximizing economic and political pressure.
Currency Devaluation as a Buffer
Between April and August 2018, the yuan depreciated by nearly 9% against the dollar. This currency movement effectively absorbed much of the impact of American tariffs by making Chinese exports more affordable despite the new duties. While Washington accused Beijing of currency manipulation, the People’s Bank of China maintained that market forces were responsible for the devaluation.
Currency strategists noted that the timing and magnitude of the depreciation closely tracked the escalation of trade tensions, suggesting deliberate management by Chinese monetary authorities. This tactic reduced the effective burden of tariffs on Chinese manufacturers while preserving their competitive position in global markets. By October 2018, export data showed that Chinese shipments to the United States had actually increased despite the tariffs, confounding initial American predictions.
The Data Behind the Currency Effect
Statistical analysis revealed that for every 1% depreciation in the yuan, the effect of a 25% tariff was reduced by approximately 4%. The cumulative 9% depreciation therefore offset over a third of the tariff impact. American importers continued purchasing Chinese goods because the effective price increase was significantly less than the headline tariff rate suggested.
Rapid Supply Chain Adaptations
Chinese manufacturers demonstrated remarkable agility in modifying their supply chains to circumvent tariffs. Many companies quickly established assembly operations in countries not subject to American tariffs, particularly in Southeast Asia. Components would be manufactured in China, shipped to these third countries for final assembly, and then exported to the United States under a different country of origin.
Vietnam emerged as a primary beneficiary of this strategy, with Chinese foreign direct investment into the country increasing by 65% in the first year of the trade war. Chinese-owned facilities in Vietnam specialized in final assembly operations that added just enough value to change the product’s official origin. Electronics, furniture, and textile manufacturers led this transition, setting up operations that could be activated within months of the tariff announcements.
The Vietnam Transshipment Hub
Vietnamese exports to the United States increased by 34% in 2018 and 41% in 2019, with particularly sharp rises in categories where Chinese exports faced high tariffs. Trade data showed suspicious patterns where Chinese exports of specific components to Vietnam rose in almost perfect correlation with Vietnamese exports of finished goods incorporating those components to the United States.
American customs officials identified these transshipment strategies but struggled to address them due to limited resources and the complexity of proving country-of-origin violations. By the time enhanced enforcement mechanisms were implemented in late 2019, supply chain adaptations had already become entrenched.
Strategic Stockpiling of Semiconductors
Beginning in early 2018, when trade tensions first escalated, Chinese technology companies initiated an aggressive semiconductor stockpiling program. Huawei and other Chinese tech firms accumulated a three-year supply of critical American chips before export restrictions were implemented. This foresight provided these companies with a substantial buffer against supply chain disruptions.
TSMC, the Taiwanese semiconductor manufacturer, reported a 33% increase in orders from Chinese customers in the six months preceding the first major technology restrictions. Similar patterns appeared across the semiconductor industry as Chinese buyers front-loaded purchases of components they anticipated might become restricted. This stockpiling gave Chinese technology firms critical breathing room to develop domestic alternatives.
Accelerated Domestic Substitution
The trade war catalyzed China’s existing plans to reduce dependence on foreign technology. Government funding for semiconductor research doubled between 2018 and 2020, with the establishment of the China Integrated Circuit Industry Investment Fund (known as the « Big Fund ») receiving an additional $29 billion in capital. These investments accelerated domestic development of technologies that previously relied on American suppliers.
Chinese companies filed 35% more patents related to semiconductor manufacturing in 2019 compared to the previous year. While many of these technologies remained less advanced than their American counterparts, they provided viable alternatives for applications that did not require cutting-edge performance. The emphasis on technological self-sufficiency transformed what might have been a temporary trade dispute into a permanent restructuring of supply chains.
The Rise of Domestic Alternatives
HiSilicon, Huawei’s semiconductor division, rapidly expanded production of its Kirin mobile processors as alternatives to Qualcomm chips. Similarly, Chinese software companies accelerated development of operating systems to reduce dependence on American software platforms. Though these alternatives often lagged in performance, they provided functional substitutes that Chinese manufacturers could immediately deploy if access to American technology was restricted.
Selective Market Opening
While trade tensions escalated, China strategically opened specific sectors of its economy to foreign investment, particularly in industries where it sought technology transfer. Automotive and financial services sectors saw significant liberalization, with the removal of foreign ownership caps and streamlined approval processes.
These targeted openings served multiple purposes: they divided the American business community by creating winners and losers in the trade war, provided China access to needed expertise in strategic sectors, and generated positive headlines about market reforms that countered the American narrative about unfair Chinese practices. Several major American financial institutions and automotive companies announced expanded investments in China during this period, creating influential advocates for trade normalization within the United States.
Diversification of Export Markets
Chinese trade officials executed a coordinated strategy to reduce dependence on the American market by expanding exports to alternative destinations. The Belt and Road Initiative served as a platform for establishing new trade relationships across Asia, Africa, and Europe. During the first year of the trade war, Chinese exports to Belt and Road countries increased by 21%, partially offsetting losses in the American market.
Regional trade agreements received accelerated attention, with China playing a leading role in finalizing the Regional Comprehensive Economic Partnership (RCEP), which created the world’s largest trading bloc. These diplomatic initiatives expanded market access for Chinese products while reducing the leverage that American tariffs could exert on the Chinese economy.
Shifting Trade Flows
By mid-2019, the United States had fallen from China’s largest trading partner to its third largest, behind the European Union and ASEAN countries. Chinese exports to Southeast Asia rose by 14% in the first year of the trade war, while exports to the United States declined by 12%. This diversification reduced China’s vulnerability to American economic pressure and established alternative channels for both imports and exports.
Leveraging Agricultural Imports
China’s position as the world’s largest agricultural importer provided significant leverage in trade negotiations. Chinese buyers halted purchases of American agricultural products and replaced them with imports from Brazil, Argentina, and Russia. American farm exports to China fell by over 50% in 2018, creating intense pressure from the agricultural sector on the American administration.
The targeted nature of China’s agricultural tariffs maximized political impact by affecting key electoral states. Soybean farmers in Iowa, Missouri, and Ohio faced particularly severe losses as Chinese buyers canceled orders and established new supply relationships with Brazilian producers. These economic impacts translated into political pressure that complicated the American negotiating position.
The Diplomatic Front
Chinese diplomats worked to isolate the United States internationally on trade issues, portraying American tariffs as unilateral actions that undermined the global trading system. China positioned itself as a defender of the multilateral system, filing complaints through the World Trade Organization and building coalitions with European and Asian nations that opposed protectionist measures.
This diplomatic offensive succeeded in preventing the formation of a united front against Chinese trade practices. While some American allies shared concerns about specific Chinese policies, few supported the tariff-based approach, creating space for China to maintain existing practices while making modest concessions on market access.
Looking Beyond the First Round
China’s early advantages in the trade war did not guarantee long-term success, as American policy evolved toward more comprehensive restrictions focused on technology rather than trade balances. However, the adaptations made during this first round permanently altered global supply chains and accelerated China’s existing plans for technological self-sufficiency.
The strategic foresight demonstrated in China’s response to the first round of tariffs revealed a significant asymmetry in preparation between the two sides. While American policymakers conceived of tariffs primarily as negotiating leverage for a quick resolution, Chinese officials prepared for a prolonged economic confrontation that would fundamentally reshape their development model. This difference in time horizons and preparation proved decisive in determining which side would better weather the initial phase of economic conflict.
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.
