China Expert Zongyuan Zoe Liu Exposes Beijing's Calculated Strategy Against Trump's Chaotic Trade War

Council on Foreign Relations fellow Zongyuan Zoe Liu reveals how China's methodical response to unpredictable US tariff policies reflects deeper strategic patience while both superpowers inflict economic damage on themselves.

Key Takeaways

• China's response to Trump tariffs has been "calculated and constrained" - retaliating while leaving room for escalation and negotiation
• Chinese society is psychologically prepared to "eat bitterness" after COVID lockdowns taught the one-child generation that things can get worse
• Trump's personalized diplomatic style conflicts with Chinese leadership preferences for technocratic distance and formal processes
• No winners exist in trade wars - US consumers pay higher prices while China faces unemployment from export-dependent small businesses
• China controls critical mineral supply chains but recognizes this advantage is temporary as alternatives develop globally
• De-dollarization efforts reflect geopolitical hedging against sanctions rather than purely economic motivations
• European Union caught between US tariffs and China dependence, seeking new partnerships in Central Asia and Southeast Asia
• Chinese officials prioritize domestic consumption over exports for first time, signaling fundamental economic model shift

China's Calculated Strategic Patience Versus American Chaos

Liu reveals how Beijing's methodical response to Trump's erratic trade policies reflects deeper strategic thinking rooted in generational experience and institutional patience that contrasts sharply with American political volatility.

• China's response strategy involves "calculated and constrained" retaliation that deliberately "leaves space for further escalation but also signals they are willing to negotiate" rather than pursuing maximum confrontation
• The recent Chinese government white paper on US-China trade relations concluded with sections emphasizing that "the US and China can resolve differences through negotiation through mutual respect" while subtly warning that continued disrespect closes communication channels
• Chinese leadership operates from generational experience of hardship: Xi Jinping's generation "was born in the 1960s or even earlier" and "lived through the cultural revolution and a lot of man-made disasters"
• This older generation developed willingness to "eat bitterness, make personal sacrifice to achieve or advance the grander strategy or grander goals designed by the party and the government"
• Contrast with the "one child generation" who "grew up in an ever more prosperous China" where "tomorrow will be better" until COVID lockdowns provided "the first time the one child generation experienced a major shock"
• Society-wide psychological preparation emerged as "this entire society realizing that things could get worse before they get better" creating resilience that "the Trump administration underestimated"
• Trump's preferred "theatrical show in terms of charisma dealing with foreign head of state in a very highly personalized style" conflicts with Chinese leadership preferences for institutional distance
• Historical precedent of betrayal influences Chinese calculations: after Trump's 2017 "very successful" China visit that "reached several agreements including a US-China bilateral investment fund," he "started trade war with China" immediately upon returning
• Current "sense of betrayal, sense of uncertainty" combines with Trump's tariff announcements showing "come and go, pause and restart" patterns that "expose a lot of uncertainties" Chinese leaders want to avoid

Liu's analysis demonstrates how China's institutional memory and strategic patience create advantages in sustained economic competition against more volatile American political cycles.

Economic Warfare Creates Only Losers in Superpower Conflict

Despite political rhetoric about winning trade wars, Liu's economic analysis reveals how tariff policies damage both American consumers and Chinese workers while failing to achieve stated strategic objectives.

• Fundamental economic reality contradicts political messaging: "there is not going to be winners from a trade war" because "imposing tariffs on Chinese import basically means American consumers every time I go to Target, go to Costco, what I'm going to buy is going to become more expensive"
• American manufacturing competitiveness suffers because "over 50% of America's import from China are manufactured inputs" making it impossible to "make America's export more competitive" when "you increase the cost of your inputs"
• Chinese export dependence creates massive domestic vulnerability despite reduced GDP percentage: "about 19% of Chinese GDP comes from export" with historical context showing this matches 2001 WTO entry levels
• Small and medium enterprises drive Chinese exports and employment: "the majority of Chinese export comes from small and medium-sized enterprises who employ or generate over 80% of employment inside China"
• Business vulnerability revealed through profit margins: "their profit margin as of last year was barely 5.1%" meaning "even a 10% tariff we are not going to be able to suck up the cost"
• Unemployment crisis looming from export disruption: Chinese youth unemployment reached "around 20%" before statistics methodology changed, "doubling the average of OECD countries"
• Domestic security prioritization reflects employment concerns: "the Chinese government spend more on domestic security than on national defense" demonstrating how "rising unemployment" threatens "domestic social stability"
• Historical overcapacity problems trace to 2008 stimulus: the "massive 4 trillion renminbi stimulus during the global financial crisis generated short-term benefit but also created long-term pain that China is struggling today"
• Belt and Road Initiative originally designed to export excess capacity: Xi Jinping "talked about the need of using international market to solve China's excess industrial capacity" from steel and concrete overinvestment
• Currency dynamics complicate trade balance: "potential weakening of the US dollar" might help export competitiveness "but weakening dollar means your import becomes more expensive"

Economic interdependence creates mutual damage that political leaders struggle to acknowledge while pursuing nationalist rhetoric.

Trump's Diplomatic Incompetence Destroys Alliance Building

Liu identifies critical strategic errors in Trump's approach that undermine the coalition-building necessary for effective China containment while strengthening Beijing's relative position.

• Alliance damage through indiscriminate tariffs: "the administration just spent the past two weeks, the past two months devastating America's alliance" by "escalating tariffs with neighbors like Mexico and Canada as well as against the Europeans"
• Strategic logic contradiction: "if the goal of tariff is to stop the influx of cheap Chinese manufactured goods to protect domestic industry, then the United States cannot do it alone" requiring coordinated alliance action
• Credibility destruction accelerates: "confidence in America is something that takes years, decades to build, but once damaged is very hard to recover" especially regarding "the Trump administration's credibility"
• Communication infrastructure lacking: despite some contacts like Treasury Secretary Scott Bessent's call with Chinese counterpart He Lifeng, "the new administration still needs to put in place all the deputy assistant secretaries or assistant secretaries"
• Personnel deployment challenges: "it's hard to think about who would be the right person to negotiate on behalf of President Trump" given incomplete staffing and "interesting mix of people who have different positions on China"
• Style mismatch in leadership approaches: Trump's "preference to be personally engaged in such negotiation" conflicts with Xi Jinping who "keeps a comfortable distance or even aloofness" as "caring leader guiding strategic direction, not engaged in day-to-day negotiations"
• Institutional versus personal diplomacy: Chinese leadership prefers technocratic processes while Trump favors "theatrical" personal summitry that created previous betrayal experiences
• Coalition fracturing benefits China: as the US alienates allies, China can pursue bilateral relationships with individual European countries like Spain while building new partnerships in Central Asia
• Regional cooperation emerging: "right before liberation day announced by President Trump, the economic and trade ministers of China, Japan and Korea got together in Seoul" to discuss "how to navigate through rising protectionism"

Trump's preference for dramatic personal diplomacy undermines the systematic alliance-building necessary for effective strategic competition with China.

Critical Minerals Weaponization Reveals Supply Chain Vulnerabilities

China's control over critical mineral processing creates short-term leverage while spurring long-term diversification efforts that will ultimately reduce Beijing's strategic advantages.

• Supply chain dominance extends beyond mining: "China has dominance in the supply chain not just in terms of overseas access to mining but also and perhaps more importantly in the refining and processing capacity"
• Broad material coverage: Chinese control spans "lithium, copper, cobalt, you know a whole range of other stuff" essential for "energy transition, clean tech and semiconductor or electronics in general"
• Rare earth limitations noted: "rare earth is neither rare nor pricey" with "US import of rare earth from China is less than 0.1% of US China trade" and "a lot of companies have established stockpiling mechanisms"
• Weaponization timing strategic: China shows "more willing to use this tool than before" because global recognition of Chinese dominance drives diversification efforts that will "eventually diminish" their advantage
• Alternative development accelerating: "technological advancement allowing for alternatives, allowing for more recycling" plus "companies and governments just build their own supply chain"
• International partnership responses: Biden administration "started to build critical material partnerships" while Japan defines "supply chain of critical materials as essential part of economic security"
• Compliance dilemma creation: China uses "anti-foreign sanction law" meaning "for any entities who are in compliance with foreign rules that are restricting doing business with Chinese entities that is illegal in China"
• Market choice forcing: foreign companies must choose between "compliance with China such that you can have access to the massive 1.4 billion Chinese consumers or compliance with the US which is 320 million people but they are richer"
• Export control expansion: China can add "American companies or foreign companies to the unreliable entity list" and use "domestic legal and regulatory framework to create compliance dilemmas"
• Short-term disruption capability: Chinese restrictions create "volatilities in market" and make it "very hard and difficult for China's trading partners to find alternatives" in immediate term

China's critical mineral leverage represents a temporary strategic advantage that diminishes as targeted countries develop alternative supply chains and processing capabilities.

De-dollarization Reflects Geopolitical Hedging, Not Economic Revolution

Liu distinguishes between gradual currency diversification trends and unrealistic expectations of dollar dethroning, emphasizing how current de-dollarization efforts stem from sanctions fears rather than economic efficiency.

• Scale perspective essential: "US dollar dominance declined from 80% to about 55% in international transactions but 55% is still more than half" while "renminbi gained from slightly over 2% to around between 4 and 5%"
• Russia trade distortion: "the jump over the past year is mostly because of China Russia trade" rather than broader structural shifts in currency preferences
• Baseline distinction crucial: "de-dollarization is different from dethroning the US dollar" with current trends representing "dilution" rather than replacement of dollar centrality
• Geopolitical motivation shift: unlike previous periods focused on "economic reasons," current de-dollarization includes "stronger geopolitical flavor to reduce vulnerabilities to sanctions"
• Economic logic for diversification: legitimate reasons include reducing "currency instability, exchange rate risk and transaction costs" given China's role as "largest trading partner for over 120 countries"
• Chinese vulnerability exposure: with "over 3 trillion foreign exchange reserves" mostly "invested in dollar assets," any "volatility in the dollar market or US treasury market inflicts pain" on China
• Political strength concerns: Chinese leaders view foreign reserves as "not just economic strength but also political strength" that could "potentially become weakness in geopolitical tension"
• Natural gas opportunity: unlike oil's global market where "US dollar is the dominant pricing currency," natural gas markets are "very much separated" creating opportunities for renminbi settlement in Asia
• CBDC integration efforts: Chinese officials promote "central bank digital currencies" and expand "central bank swap lines" to provide "liquidity support or trade facilitations using renminbi"
• Sanction hedging primary: current efforts reflect "hedging against foreign sanctions" after observing "west sanctions against Russian entities" and "seizure of Russian foreign assets"

Currency diversification represents gradual erosion of dollar dominance rather than imminent collapse, driven more by geopolitical risk management than economic efficiency gains.

European Strategic Positioning Between Competing Superpowers

European responses to US-China tensions reveal fragmented approaches as individual nations pursue bilateral relationships while EU institutions seek alternative partnerships beyond traditional great power alignment.

• Preparedness asymmetry evident: "compared with China who has been in de facto trade tension with the United States since 2018, Europeans are not prepared" and "perhaps even blindsided by the rapid ramp up of tariff against Europe"
• EU-level diversification strategies: "European Union started the very first EU and Central Asia summit" seeking "other markets, other partners that can provide much needed energy security" and "export markets for major European industrial economies"
• Individual nation approaches: "Spanish officials have been going to China building relatively good relationship" while "Chinese officials meet with Spanish officials" to discuss "their view on US tariffs"
• Germany's complex position: faces "very difficult shape economically" but "boost of investment in defense spending probably is going to provide opportunity to revitalize domestic industrial base"
• Auto sector cooperation: "Germany and China especially in the auto sector, connections are still very strong" with German companies "willing to allow Chinese investment but set up joint ventures for technology transfer"
• Technology transfer strategy: Germans accept "Chinese investment" and "joint ventures so that Chinese can transfer technologies to Germans to boost up their own domestic industrial capacity"
• Pragmatic industrial approach: "legitimate argument and logistic approach to revitalize European industrial base by leveraging China's massive investment in the sector"
• Southeast Asia outreach: European Union "reaching out to Southeast Asia" as part of broader strategy to reduce dependence on both US and Chinese markets
• Coherence challenges: Spanish-Chinese bilateral engagement while Germany pursues technology partnerships reveals "less coherent part of EU" coordination
• Defense spending opportunity: increased military budgets create potential for "German to revitalize its domestic industrial base" independent of US-China dynamics

European responses demonstrate pragmatic adaptation to superpower competition through diversified partnerships rather than exclusive alignment with either Washington or Beijing.

China-Middle East Energy Partnership Reshapes Global Financial Architecture

China's deepening relationships with Gulf states extend beyond traditional oil trade to encompass renewable energy cooperation and currency settlement experiments that challenge petrodollar recycling systems.

• Energy dependence foundation: "China's import of crude oil is about 70% of its overall energy consumption and the majority comes from Middle East and Africa" establishing baseline relationship
• Renewable energy reciprocity: Gulf countries represent "potentially huge customers or partners of Chinese solar panels or even nuclear power plants" as "global energy is going through transformation"
• Financial system evolution: current "petrodollar recycling system" involves oil exporters "recycling their dollars by investing in dollar denominated assets or purchasing US weapons" creating dependency
• Currency settlement promotion: Xi Jinping "specifically talked about the use of renminbi in international commodities trading" during Gulf visits, emphasizing "central bank digital currencies"
• Natural gas opportunity: unlike oil's global pricing, "natural gas market around the world is very much separated" with "no natural gas trading hub yet" in Asia
• Strategic currency positioning: "if China were able to make the renminbi the preferred or leading currency to settle natural gas trading in Asia, that is a big step forward"
• Central bank cooperation: People's Bank of China maintains "conversations with trading partners in Gulf area asking countries to expand central bank swap lines" for "liquidity support"
• Security presence limitations: while Chinese companies demand protection from "regional instabilities or terrorist attacks," direct "PLA involvement" faces appetite and reception constraints
• Private security solutions: Chinese government "allows companies to use private security providers" rather than military presence to protect overseas investments
• Investment protection needs: Chinese entities in Africa and Middle East "fall victim to regional instabilities" creating demand for security arrangements beyond US guarantees

Energy interdependence between China and Gulf states creates opportunities for financial architecture changes while highlighting limits of Chinese military projection capabilities.

Zongyuan Zoe Liu's analysis reveals how China's calculated strategic patience contrasts with American policy volatility, creating advantages for Beijing despite economic costs from trade conflict. Her insights demonstrate that both superpowers inflict damage on themselves while struggling to build effective coalitions, leaving middle powers like Europe seeking independent paths in an increasingly fragmented global order.