The Seeds of Confrontation: How China Gained the Upper Hand
The Structural Advantages China Cultivated
When President Trump fired the first shot of the trade war in January 2018 by imposing tariffs on solar panels and washing machines, China’s leadership was prepared. For decades, Beijing had developed structural advantages in its economic relationship with the United States that positioned it to weather trade disruptions. The Chinese government maintained strict capital controls, subsidized strategic industries, and implemented industrial policies designed to strengthen domestic manufacturers while limiting foreign competition in its home market.
China’s export-driven growth model built massive foreign exchange reserves exceeding $3 trillion by 2018, providing a substantial buffer against economic pressure. These reserves allowed China to stabilize its currency during trade tensions and continue financing strategic initiatives despite American countermeasures. Meanwhile, the Federal Reserve estimated that U.S. foreign exchange reserves stood at just $126 billion when the trade conflict began – less than 5% of China’s holdings.
Supply Chain Dominance as Economic Leverage
The most significant Chinese advantage came from its position in global supply chains. By 2018, China had become the primary manufacturer of components for countless American products, creating dependencies that proved difficult to unwind quickly. When the U.S. Trade Representative’s office expanded tariffs to cover $250 billion in Chinese imports by September 2018, American companies discovered that shifting production to Vietnam, Mexico, or domestic facilities required years – not months – to implement.
This supply chain reality forced many U.S. manufacturers to absorb tariff costs rather than immediately source components elsewhere. A 2019 Federal Reserve study found that nearly 85% of the tariff burden was passed to American businesses and consumers through higher prices, not to Chinese exporters as intended. Electronics, furniture, and machinery sectors experienced the most significant price increases, with American consumers paying an estimated $38 billion in additional costs during the first year of tariffs.
The Case of Pharmaceutical Supply Chains
The pharmaceutical industry illustrated China’s supply chain advantage most clearly. China produced 80% of the active pharmaceutical ingredients used in U.S. medications by 2018, including antibiotics, blood pressure medications, and pain relievers. This concentration meant that expanding tariffs to cover medical supplies would directly increase healthcare costs for American patients. The FDA warned that supply disruptions could create drug shortages affecting millions of Americans, effectively removing an entire category of goods from tariff consideration.
Beijing’s Targeted Response Strategy
While Washington applied broad tariffs across multiple sectors, Beijing responded with precisely targeted counterstrikes aimed at maximum political impact. Chinese tariffs focused on agricultural products from Republican-leaning states, particularly soybeans from Midwestern states that supported President Trump in 2016. U.S. soybean exports to China collapsed by 75% in 2018, falling from $12.2 billion to approximately $3.1 billion.
The agricultural sector impact was immediate. Soybean prices fell nearly 20%, forcing the administration to implement a $12 billion farm aid package in July 2018, followed by an additional $16 billion in May 2019. These subsidies represented an unplanned federal expenditure that partially offset tariff revenue, while Chinese soybean purchases simply shifted to Brazil and Argentina, creating new trade patterns that persisted even after a Phase One trade agreement was reached.
Monetary Policy Flexibility
China’s state-controlled financial system provided another advantage when tensions escalated. The People’s Bank of China allowed the yuan to depreciate from 6.3 to the dollar in April 2018 to over 7.0 by August 2019, effectively neutralizing much of the tariff impact. This 11% currency devaluation made Chinese exports more competitive globally, partially offsetting the tariff effects and maintaining export volumes to markets outside the United States.
The U.S. Treasury Department designated China a currency manipulator in August 2019, but this largely symbolic move came with no practical enforcement mechanisms. American monetary authorities had limited tools to counter the devaluation, as the Federal Reserve operated independently with a domestic mandate focused on inflation and employment, not exchange rates. This monetary policy divergence meant China could deploy currency adjustments as a trade weapon while the U.S. could not effectively respond in kind.
Divergent Political Timelines
The different political systems in both countries created asymmetric pressure horizons. The Trump administration faced election cycles every two years, with midterm elections in November 2018 and a presidential election in 2020. Chinese President Xi Jinping, having consolidated power and removed term limits in March 2018, faced no comparable electoral pressure. This disparity in political timelines meant American negotiators worked against tighter deadlines and more immediate political consequences.
When economic pain from tariffs began affecting American businesses, political pressure mounted for resolution. A University of Chicago survey found that by late 2019, 67% of American manufacturing firms reported negative impacts from the tariffs, while 38% had delayed or canceled capital investments due to trade uncertainty. These economic indicators created growing calls from business groups and legislators for a settlement, pressure that Chinese leadership did not face to the same degree.
Strategic Patience and Information Control
China deployed strategic patience throughout the conflict. State media characterized the trade dispute as a long-term struggle against foreign pressure, invoking historical narratives of resistance against external forces. Censorship tools suppressed domestic criticism, while government subsidies targeted affected industries. When pork prices rose due to African swine fever outbreak and U.S. agricultural tariffs, Beijing released strategic reserves and increased imports from Europe and South America, demonstrating its ability to manage consumer impacts.
The Chinese government’s control over information flows prevented the formation of organized domestic opposition to its trade policies. State media maintained consistent messaging about American « bullying » while highlighting Chinese economic resilience. This narrative control allowed Beijing to maintain its negotiating position despite economic pressure that might have forced policy changes in a more open political system.
Leveraging American Corporate Interests
China strategically exploited the divided interests of American stakeholders. While some U.S. industries supported tariffs to gain protection from Chinese competition, many others dependent on the Chinese market became advocates for compromise. Boeing, with 25% of its commercial aircraft deliveries going to China, faced threats of order cancellations. Wall Street banks, having just gained greater access to Chinese financial markets, lobbied against escalation. These corporate interests created divided pressures on American policymakers.
By selectively punishing and rewarding American companies operating in China, Beijing created business constituencies that advocated for trade peace. Companies that publicly supported the U.S. position faced regulatory hurdles and delayed approvals, while those maintaining positive relations received expedited treatment. This approach effectively recruited American corporate interests to advance Chinese negotiating goals within the U.S. political system.
The Technology Confrontation
Technology transfer became a central battleground, revealing another Chinese advantage. While American negotiators demanded an end to forced technology transfers and intellectual property theft, Chinese firms had already acquired substantial technological capabilities. By 2018, Chinese companies filed more patent applications than American, European, Japanese, and South Korean applicants combined, registering over 1.5 million applications annually.
This technology advancement meant China had less need for foreign intellectual property in strategic sectors than during previous decades. Huawei had developed world-leading 5G technology, COMAC was progressing on commercial aircraft development, and Chinese artificial intelligence firms were advancing rapidly. The timing of American demands for intellectual property protection came after significant technology acquisition had already occurred, reducing the leverage this issue provided.
Regional Integration as a Buffer
China’s regional economic integration provided partial insulation from trade pressures. The 2018 upgrade of the China-ASEAN Free Trade Agreement expanded a trading bloc that reduced dependence on American markets. Chinese trade with ASEAN nations grew 14% in 2018 and 15% in 2019, creating alternative export destinations as U.S. tariffs took effect. Exports to Belt and Road Initiative countries increased by 10.8% in 2019, outpacing overall export growth of 0.5%.
This regional integration allowed Chinese manufacturers to redirect exports, develop new markets, and maintain production volumes despite American tariffs. Factory activity that might otherwise have dropped substantially was sustained through these alternative channels, limiting unemployment and maintaining economic stability during the trade conflict.
Implications for Future Trade Relations
China’s early edge in the trade confrontation established patterns that continued to shape negotiations even after the Phase One agreement of January 2020. The structural advantages China maintained – from supply chain dominance to political stability – meant that even when agreements were reached, they occurred primarily on terms that accommodated Chinese interests. American negotiators secured purchase commitments and limited procedural reforms, but core issues of industrial policy, state subsidies, and technology development remained largely unaddressed.
The economic data revealed the results: despite two years of trade conflict, the U.S. trade deficit with China remained $344 billion in 2019, down only modestly from $419 billion in 2018 before rebounding during the pandemic. Meanwhile, Chinese GDP growth continued at 6.1% in 2019, slowing only moderately from 6.7% in 2018, while Chinese technological development in strategic sectors continued unabated. These outcomes demonstrated that despite aggressive American trade measures, China’s early advantages provided resilience that shaped the ultimate resolution of the first round of economic confrontation.
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.
