China Can Fight a Trade War, but Its Real Test Is Growth Reform

This piece is part of a Council on Foreign Relations analysis series assessing the geopolitical effect of the Trump administration’s tariffs policy on select countries in the Asia-Pacific Economic Cooperation ahead of the trade bloc’s summit. Zongyuan Zoe Liu, the author, is Maurice R. Greenberg senior fellow for China studies at CFR.

So far, China remains the only major economy to have engaged directly in a tit-for-tat tariff war with the Donald Trump administration since the April 1 Liberation Day tariff. Judging by the most recent numbers, Chinese officials have reason to believe that Beijing is at least holding its ground, if not winning, this extended trade confrontation with Washington—and that the Trump administration overestimated its tariff leverage over China. 

As I argued in Foreign Affairs in April, China’s reaction to the Trump administration’s high-pressure tariff ultimatum reflects a carefully prepared retaliatory playbook. Since 2018, China has gained experience managing trade tensions with the United States, and it is now making use of hard-won lessons. It has moved methodically to diversify export markets, accelerating its drive for technology self-reliance; developed export control countermeasures against U.S. tech export restrictions; and worked to expand alternative financial systems and promote the broader use of the renminbi (RMB) and renminbi-based financial infrastructure. 

China has also gone on a diplomacy offensive, presenting itself on the global stage as a more stable, pro-free trade alternative to the United States. Among these efforts are tariff concessions and duty-free access to many lower-income partners—most notably a package of preferential and zero-tariff measures toward African states and other developing countries—as part of a broader effort to diversify export markets and blunt the concentrated risk of U.S. barriers.  

Chinese exporters find a way 

The Chinese economy has been quite resilient despite ongoing trade tension and persistent structural challenges, including weak household consumption and reduced private investment, weighing down growth. Headline GDP, the annualized rate of growth reported by the government, expanded by 5.3 percent in the first half of 2025, driven by strong industrial output and export surge that partly offset the drag from a sluggish property market and weak private investment. Continued tariff tension has not stopped China’s export engine, though they have changed its geography. Direct shipments to the United States have fallen for six consecutive months, declining 27 percent from a year earlier, yet overall exports grew by 8.3 percent annually, beating industry expectations, as Chinese firms redirected goods to other markets. 

As a result, direct export to the United States now accounts for barely 10 percent of China’s total goods exports, half their share in the 2000s (Figure 1). In contrast, countries in the Association of Southeast Asian Nations (ASEAN) trading bloc now account for nearly 20 percent of China’s total goods exports, almost double that of a decade ago (Figure 2). Much of the export shifts reflect trade rerouting or transshipment: Goods once bound for the United States now pass through third-country intermediaries whose domestic market cannot absorb the volume, such as countries in Southeast Asia (Figure 3). This adjustment underscores China’s growing insulation from U.S. direct tariffs but also the inefficiencies that accompany a more fragmented global trading system. 

Export diversification does not mean exporters are willing to give up the U.S. market. Quite the contrary; Chinese exporters have lowered prices to U.S. buyers to retain their American customers since the Liberation Day tariff (Figure 4). While trade fundamentals would say that consumers in importing countries absorb most tariff costs, data suggest a more complicated picture. By lowering prices, Chinese exporters accept thinner profit margins to preserve access to the world’s largest consumer market, which accounts for about 30 percent of global consumer spending. China, as the world’s largest goods exporter, simply cannot replace its U.S. buyers with an alternative. Instead, it will continue to reroute exports to the United States via third countries while expanding production overseas to maintain its market share. 

Harnessing China’s domestic policy

Export growth challenges have forced the Chinese government to implement measures to boost domestic consumption, curb duplicative investment, and reduce excess production capacity. Beijing has deployed an array of fiscal, monetary, and administrative policies that emphasize household consumption, social stability, and supply-side resilience. It has also implemented stimulus measures to address demographic challenges. 

Yet such tactical measures at home do not mean the government will willingly change its investment-driven growth model any time soon. As long as the Chinese Communist Party and top leadership prioritize security and focus on not yielding grounds in its strategic competition with the United States, they will prioritize allocating resources to strategic sectors rather than systematically strengthening social welfare support for households.

The People’s Bank of China’s (PBOC) currency and monetary policies have played a crucial role in helping the Chinese economy navigate this uncertain environment. The RMB has remained relatively stable despite global volatility, fluctuating modestly around the 7.2–7.3 range against the U.S. dollar through much of the first three quarters of 2025 (Figure 5). The PBOC has managed currency stability through a combination of daily fixing interventions, moral suasion on major state-owned banks, and selective foreign exchange reserve adjustments. A stronger-than-expected trade surplus and continued inflows into onshore bonds have helped anchor the currency, even as global rate differentials have narrowed.

The Federal Reserve’s recent rate cuts have eased some of the external pressure on the Chinese currency and capital flights. Lower U.S. interest rates reduce incentives for capital to leave China, giving the PBOC greater room to adjust domestic monetary conditions without risking depreciation. Moreover, a loosening U.S. monetary policy can support global liquidity and external demand, indirectly benefiting Chinese exports. 

The PBOC has complemented this environment by lowering reserve requirements, trimming key policy rates, and maintaining a targeted credit-easing stance—steps that preserve financial stability while providing enough liquidity to cushion the slowdown. Together, a steadier RMB and a more accommodating global backdrop have created modest tailwinds for China’s policy coordination. 

Reforming for growth is harder than fighting a trade war

The net effect through the end of 2025 is a Chinese economy that continues to grow materially faster than many peers but slower than its own past. China’s resilience has bought time for its leaders, yet the underlying imbalances remain unresolved. 

The longer policymakers delay meaningful structural reforms—particularly those needed to boost household income, rebuild private sector confidence, and reduce dependence on investment-led growth—the more those imbalances will weigh on the country’s long-term potential. Beijing may have learned to navigate a tariff war with the United States, but the true test lies in whether it can shift from a defensive posture to a sustainable new model of growth.

This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy.