Three rounds of US trade wars have dramatically penalized world economies, particularly the United States. While China cannot avoid the tariff impact, the economy is currently on track for recovery.

After the government’s stimulus measures started in September and intensified in November, their impact has kicked in. At the time, such signs were shot down by the US Council for Foreign Relations ranting on “Who killed the Chinese economy?” They were seconded by editors pledging “there is no end in sight to [China’s] problems.”

In reality, the rally in Chinese stocks since the start of the year led investors to predict that mainland shares will outperform their American peers. In March, CNBC reported quoting analysts, “valuations in China look attractive while concerns are growing about the state of the U.S. economy.”

Recently, these worries are escalating as a result of the US trade wars. In just three months, the bullish US markets have been undermined by the bullyish White House.

Structural momentum

In the fourth quarter of 2024, China’s economic growth accelerated from 4.6% to 5.4% with annualized 5.0% last year. Before the US tariff wars, China’s economy showed increasing signs of stabilization. Hence, too, the International Monetary Fund’s (IMF) upgrade of China’s GDP growth.

In February, Chinese President Xi Jinping fostered new confidence in economic prospects by speaking at a high-level private sector symposium with China’s tech leaders.  In the Government’s Work Report, Premier Li Qiang outlined growth targets, economic stability measures, and structural reforms raising investor, business and consumer confidence. These supportive measures are to be reinforced by moderately loose monetary policy.

Despite substantial external headwinds, the government set a 5% GDP growth target for 2025, signaling confidence in the economy’s resilience to offset the tariff wars. Concurrently, the fiscal deficit-to-GDP ratio was raised to 4% as policy authorities set a 2% consumer price index (CPI) inflation target.

Here’s the bottom line: The expansion of domestic demand is no longer just a cyclical effort. It is not simply a tool to respond to business cycles. It reflects the structural transformation of the Chinese economy away from exports and investment toward greater consumption and innovation.

Raising spending power

Last year, consumer spending contributed nearly 45% to China’s economic growth, surpassing investment and exports. The objective is to raise spending power by increasing earnings and reducing financial burdens. Hence, the aim to create 12 million new jobs and keep unemployment at 5.5%. Such goals are vital to the recovery of consumption that’s premised on solid wage development and steadying property market. These initiatives have been coupled with special initiatives to boost consumption.

These efforts are on track. In the first quarter of the year, China’s economy grew by 5.4%. Remarkably, the signs of progress were broad. Industrial production growth climbed to 6.5% year-to-year, fueled by both external and domestic demand. Export growth accelerated to 5.8%, almost 2.5 times, largely due to exporters frontloading shipments prior to the tariff penalties.

State-sector spending continued to drive fixed asset investment growth, particularly in automobiles and equipment. In property markets, contraction continued to narrow, with developers pushing for the completion of unfinished homes. The improvement of liquidity conditions suggests Chinese households are more willing to spend, while companies are increasingly investing.

China’s broad push of “effective demand” is not just classic Keynesianism, however. There is another side to the story.

Toward cutting-edge innovation

Technological innovation and emerging industries are critical to sustain rising demand. This is why China is increasingly pushing for rapid progress in “new quality productive forces”, especially artificial intelligence (AI).

For some time, Chinese government has fostered “industries of the future”, including embodied AI, 6G, quantum technology and biomanufacturing. The dramatic rise of DeepSeek without US-style billions of dollars in subsidies reflects the rapidly-changing new realities. In 2024, TikTok, CapCut and TEMU were already among the top-10 most popular apps worldwide.

These efforts remain on track, too. In the first quarter, technology progress prevailed with electric vehicles and 3D-printing equipment each soaring to 45% year-on-year, followed by industrial robotics.

In the past few quarters, the gains of the Chinese economy suggest that a virtuous circle of disruptive innovation and effective demand, with the government as the catalytic force, could be in the making. And that’s precisely what the Trump tariffs hope to undermine. The US administration’s record-high 145% tariffs on all Chinese imports seek to disrupt, undermine and reverse the recovery of China’s economy.

Self-destructive tariff wars

The first round of the Trump tariffs involved mainly Canada, Mexico and China. From an economic standpoint, it was misguided and unwarranted: dumb.

The second round proved dumber. It began with “reciprocal tariffs”, which are unilateral, flawed as stated and mistakenly calculated. It inflated the tariff impact by up to a factor of four, as shown by American Enterprise Institute.

The ongoing third round couples these self-destructive policies with new retaliatory tariffs that have more in common with economic blackmail than international cooperation.

According to new data by the IMF, US tariffs could downgrade US growth by a whopping third to 1.8%, with a 40% probability of a recession. Europe’s largest economies and Japan will suffer even more, with growth almost halved. Global growth could plunge to 2.8%, which would penalize particularly the most vulnerable economies in the Global South.

Last week, both U.S. Treasury Secretary Scott Bessent and President Trump blinked in the trade war the White House started. But as the US has driven itself to the isolationist’s lonely corner in the international community, no rhetoric can offset the multi-trillion-dollar damage done to the world’s major trading economies and global economic prospects. That and the dramatic loss of credibility is the true achievement of President Trump’s first 100 days.

And yet, the Trump administration has been flirting with a possible fourth round, planning to use tariff negotiations to pressure U.S. partners to limit their dealings with China.

Such a scenario would no longer be just dumb. It could prove lethal to the ailing world economy.

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (US), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net

A shorter version of the commentary was published by China Daily on April 28, 2025