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Donald Trump postponed his threat to tax all imports from Mexico and Canada this week, citing action by those countries against migration and drug smuggling; but it was telling that tariffs on China went ahead.
When it comes to the US’s neighbours, Trump’s Treasury secretary, the hedge fund manager Scott Bessent, made clear in a Fox News interview that tariffs are essentially a negotiating tool – partly aimed at achieving non-economic goals.
But Trump’s beef with China is a much more longstanding and more widely shared one, that can be traced back to the deep imbalances between the two economic superpowers.
“The grievances with China are far more genuine than grievances with Mexico, or with Canada,” says Neil Shearing, the chief economist at the consultancy Capital Economics, who is now writing a book about the clash between the rival economies.
So it should not have been a surprise that Trump pressed ahead with promised 10% tariffs on China, which rapidly hit back with levies on a range of US goods.
Concerns about China’s economic power are far from new in the US. Joe Biden did not repeal the tariffs imposed on Chinese goods by his predecessor; and indeed erected new barriers in the form of restrictions on exports of important technologies such as semiconductors. (Ironically it appears to be the difficulty in getting hold of the most sophisticated chips, that has partly driven China’s development of the cut-price AI-powered chatbot, DeepSeek).
When China was integrated into the global trading system, joining the World Trade Organization (WTO) back in 2001, it was meant to bind the populous communist state into a rules-based international system.
The more closely aligned Beijing became with the global economy, the theory went, the less likely geopolitical tensions would erupt. The real optimists even hoped that over time, China might be guided away from communism.
Almost a quarter of a century later, western economies remain scarred by the failures of the global financial crisis and the US manufacturing sector has been hollowed out.
That has happened for many reasons, but Trump lays much of the blame with Beijing’s policies, which have included protecting domestic industries and keeping its currency – the yuan – cheap enough to continue generating extraordinary export-led growth.
China’s trade surplus in 2024 hit a record $1tn (£810bn), with exports up 10% over the year. It ran a hefty $295bn trade surplus with the US in 2024 – although that was well below the record $418bn in 2018.
American consumers have benefited in the form of a flood of cheap goods – not least those manufactured in China on behalf of US companies. But Trump sees the US’s wide trade deficit with China as evidence of Beijing cheating. He wants to close the gap – by bringing jobs and investment home.
As Jim Reid of Deutsche Bank points out, the US produces 15% of the world’s manufactured goods and accounts for almost 30% of global consumption. China produces a whopping 32% of manufactured goods, and makes up just 12% of global consumption.
Economic theory tends to suggest that as economies develop, they specialise in making and exporting the products where they have particular strengths, and diversify into a more service-based model of growth, as a growing middle class consumes more. But for China, that has not happened.
“China’s economic development in recent years, instead of moving it towards a consumer-oriented economy, has moved in the direction of a more advanced manufacturing economy,” Reid says.
He adds: “This may now have gone too far. Access to cheaper goods is no longer a good ‘trade’ for the US, given the loss of economic security over production supply chains and technologies to a competing power.”
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The solution, the Trump administration firmly believes, is for the US to produce more at home. As Bessent put it this week: “Tariffs are a means to an end, and I think that end is bringing the manufacturing base back to the US.”
So while what Trump appears to want from Mexico and Canada is a series of ill-defined political actions, he has a clear goal in his interaction with China, and that involves closing the trade gap.
Given Trump’s history it will be no surprise that he is likely to seek a deal with Beijing, but Bessent has also played up the possibility of a grand bargain – perhaps along the lines of the Plaza accord, named after the New York hotel in which it was struck in 1985 between a string of countries including the US, Germany, Japan and indeed the UK.
That historic agreement included a decision to allow the dollar to depreciate against other major currencies, in an attempt to narrow the US current account deficit – a measure that includes borrowing from foreign creditors, as well as the trade balance.
While it is less visible, the US imbalance with China includes Beijing’s vast holdings of US treasuries – effectively, loans to the US government – which were worth $770bn at the end of 2024, second only to Japan, a geopolitical ally of Washington.
Bessent has appeared to back billionaire Elon Musk’s extraordinary onslaught on US government departments, via his role as head of the “department of government efficiency (Doge)”, because the treasury secretary appears to see a much smaller shortfall on the public finances, lessening the government’s dependence on overseas creditors and helping to bring down interest rates, as a key part of the Trump rebalancing project.
As a starting point in dealing with Beijing, Trump has asked officials to examine China’s compliance with the “phase one” trade deal he struck with China in his first term, which came into effect in 2020. This included commitments to ramp up purchases of US goods and services.
John Glen, the chief economist at the Chartered Institute of Procurement and Supply (Cips), suggests a grand bargain could also include a promise to cap exports – which he warns against.
“We did it in the mid-1980s Plaza accord, when the Japanese agreed to voluntarily restrict the amount of cars they exported into the US and the UK. If you’re going to restrain trade that’s just about the worst way you’re going to do it. All it does is it means they make more money on every car they export.”
There is a superficial logic to the idea of a grand bargain (some have suggested a “Mar-a-Lago Accord”), however. China has previously suggested it would like to boost domestic demand to make its economy less export-dependent.
China’s vice-premier, Ding Xuexiang, said at the World Economic Forum in Davos, Switzerland, last month: “We don’t seek [a] trade surplus. We want to import more competitive, quality products and services to promote balanced trade.”
Yet China watchers point out that Beijing saw the Plaza accord as a disaster for Japan, contributing to the subsequent asset bubble, so it is unlikely to want to emulate such a sweeping agreement.
Instead, Beijing is more likely to sign up to a symbolic deal in which it pledges more spending and investment in the US, but the deep divide between the two sides remains. “As important as Trump is, the forces driving this fracturing of the relationship between the US and China are just bigger than one person,” Shearing says.
