The China that President-elect Donald Trump will face in 2025 is fundamentally different than the one he encountered when his first administration began in 2017, or even the one with which he negotiated a trade deal near the end of his term. Now, for the first time in more than four decades, China’s share of the world economy is shrinking—it peaked at just above 18 percent of global GDP in 2021 and stands at around 16 percent today.

China’s growth has slowed significantly since the property sector collapsed in 2021 and COVID-related restrictions impeded all types of economic activity in 2022. Domestic demand and household consumption made only a limited rebound after those restrictions were lifted at the end of 2022. Official Chinese GDP growth rates showed just a minor blip, but rising trade imbalances and falling domestic prices tell a grimmer story. China remains an investment-led economy: it is the world’s largest source of investment (around 28 percent) and gross manufacturing output (35 percent), but it represents only around 12 percent of global consumption. China’s domestic economy cannot generate nearly enough demand to absorb everything China produces. To create growth, therefore, Beijing has come to rely even more on exports of excess industrial output that cannot be absorbed in the domestic market. But China can only make further relative gains if other countries reduce their manufacturing investment or if Beijing expands its share of global exports.

This weakening economic outlook in China gives the United States new ways to constrain Beijing. Washington can leverage the influence of U.S. consumer and capital markets, offering its allies and partners a better alternative to being crowded out by Chinese exports. Given rising concerns about China’s dominance of global manufacturing supply chains, U.S. allies and partners may now be more likely than they were a few years ago to align their own policies, including tariffs and technology-related controls, with Washington’s as part of a broader “de-risking” strategy—an effort to reduce the exposure of Western economies to China.

If the incoming Trump administration is to manage such a strategy effectively, however, it will need to think hard about its tariff plans. Trump has floated tariffs as high as 60 percent on all Chinese imports and ten percent tariffs on goods from everywhere else. But applying high tariffs to all U.S. trading partners risks setting off a harmful chain reaction in Western economies, with rising costs, cratering demand, and a slowing of supply chain diversification. A better option would be to apply tariffs selectively to critical sectors in which Chinese exports threaten the competitiveness of Western industries, and to combine this with a proactive investment strategy to build and scale critical supply chains that exclude China. The United States and its partners have an opportunity to build on the current momentum to rewire the global trading system in line with their national security goals. No matter how Washington proceeds, economic disruption is inevitable, and China will surely retaliate. But the scope of the second Trump administration’s tariff strategy could determine just how painful the process will be.

FADING ATTRACTION

The Chinese economy today is hardly the juggernaut it was just a few years ago. Since the crisis in the country’s property sector in 2021, the floor space of annual new real estate construction has shrunk by 66 percent. This in turn has caused other segments of the economy, including steel, cement, furnishings, and home appliances, to suffer follow-on effects, including a significant decline in consumer spending. Local government investment in infrastructure, constrained by high debt levels, has slowed considerably in recent years, as well. The damage will be felt for years to come both within China and in countries that relied on strong Chinese demand to export their cars, commodities, and services. China itself relies far more on foreign markets to sell its manufactured goods than it did in the past, a dynamic that contributes to its current vulnerability to tariffs and other types of export restrictions.

China’s situation is likely even more dire than official GDP data suggest. Inconsistencies in reported economic statistics have always been an issue in China, as with other developing countries, but since 2022, it has become even more difficult to take Beijing’s claims at face value. China’s official data suggested that, during the period when COVID-19 lockdowns were enforced across the country, growth slowed by only two to three percentage points below pre-pandemic rates, reaching three percent in 2022 and rebounding strongly to just over five percent in 2023. But considering that Beijing has not instituted the reforms necessary to secure such a positive growth outlook, the more likely reality is that the Chinese economy contracted in 2022 and barely recovered in 2023.

Such a dramatic slowdown would explain why Beijing introduced more aggressive economic stimulus measures in late 2024, including interest rate cuts, trade-in subsidy programs to drive domestic consumption, new bonds to reduce the constraints of local government debt on investment, and promises of even more fiscal policy support next year. Chinese officialdom has also pivoted from insisting that nothing is wrong with domestic demand to assuring that it recognizes the seriousness of the shortfall, especially in household consumption. But shifting China’s economy away from investment-led growth will not happen quickly, and the support offered to households so far appears unlikely to raise incomes and drive more sustainable spending growth.

In the past few years, China has expanded its exports to new markets, particularly in Southeast Asia—a move that ostensibly makes it less vulnerable to tariffs or trade restrictions imposed by any single country, including the United States. But a good deal of China’s diversification is superficial: its goods are simply shipped through third countries before reaching the same U.S. and European consumers as before. Washington is wise to this tariff evasion method, and its efforts to stop it could include blunter restrictions, such as import bans on specific products, in the years ahead. To prepare for such U.S. measures—and to seek more promising markets than they find at home—Chinese firms are investing abroad, building factories in third countries such as Mexico and Vietnam so that they can export to the United States without being subject to tariffs. It is far from certain, however, that this workaround will remain viable as U.S. trade restrictions evolve further. And, adding to Beijing’s problems, many foreign-invested firms within China, which currently produce 30 percent of the country’s exports, are planning to shift production overseas in response to the weakness of China’s domestic demand.

Washington has also made gains on Beijing in the race for technological leadership in key industries. The United States has been building up its domestic capacity in advanced technologies since the 2022 passage of the CHIPS Act and the Inflation Reduction Act, while also taking more aggressive steps to reduce China’s access to U.S. technologies via export and investment controls. When Trump was last in office, his administration introduced whack-a-mole policies targeting Chinese telecom companies and sent mixed signals regarding provisions for U.S. firms’ access to Chinese markets in the Phase One trade agreement it signed with Beijing in early 2020. Multinational companies interpreted the inconsistency as evidence that a full decoupling of U.S. and Chinese technology supply chains was highly unlikely. Now, after multiple rounds of detailed export controls, restrictions on information and communications technology supply chains, and additional limits on outbound investment under both the Trump and the Biden administrations, as well as sweeping U.S. enforcement of these rules, those firms are recalculating—and directing their investment away from China.

A BUMPY TRANSITION

This shift is just one facet of the world’s reaction to China’s trade policies. Many countries today do not need to be cajoled by Trump’s negotiators to align with U.S. de-risking initiatives; China’s economic slowdown and rising national security concerns about reliance on Chinese-centric supply chains provide incentive enough. China’s growth strategy is inherently confrontational and zero sum: China is not adding to global demand but rather competing more aggressively in overseas markets. Advanced manufacturing countries whose industries are threatened by cheap Chinese goods and countries in the global South that are fighting to move up the value chain all have clear reasons to restrict Chinese exports. This shared interest simply did not exist during Trump’s first term.

China’s economic slowdown has not just made its market less attractive to trading partners and international investors. It also gives other countries, particularly developed European economies, more reason to align with the United States on tariffs and other controls on Chinese exports because, if they don’t, U.S. tariffs on Chinese exports will cause spillovers of those exports into their own markets. Some G-7 countries are already considering tariffs and preemptive safeguards to avoid such import surges from China.

Even as these trends compel them to readjust supply chains away from China, however, the United States and its partners must contend with a global economy that is increasingly imbalanced. As the economist Brad Setser has argued, the G-7 and other developed economies now collectively run a trade deficit, whereas China, Russia, and many commodity-dependent countries run trade surpluses. This makes a U.S.-led de-risking strategy a challenging prospect. The United States and its partners will need to build the manufacturing capacity that will make it possible to reduce imports from their geopolitical rivals.

Attempts by G-7 countries to force a rapid shift in this macroeconomic structure by sharply cutting imports of goods will be highly disruptive. In the near term, these measures will affect standards of living across developed economies in politically consequential ways. Substantial tariffs on Chinese goods will make them less competitive in U.S. markets and, in the absence of alternative suppliers for those goods, raise the prices of everyday products for U.S. consumers and of intermediate components for U.S. manufacturers. The American public will either pay higher prices, driving up inflation, or simply reduce household consumption.

Scale matters here. If the Trump administration were to adopt a maximalist strategy of universally high tariffs, the resulting large-scale reduction in U.S. domestic demand would probably produce recessions in G-7 economies. New manufacturing ventures would become less attractive to investors, making it more difficult for these same countries to de-risk their supply chains and serve developed markets. Relatively moderate tariffs, such as the additional ten percent levies on Chinese goods that Trump proposed more recently, would still be costly but would generate smaller disruptions. Even better would be tariffs that are designed specifically to advance a strategy to restructure global supply chains, rather than starting with a tariff plan and adjusting the strategy to fit it. With any tariff increases there would be a rocky adjustment period as prices rose and supplies became strained, but those problems would subside as alternative suppliers to replace Chinese products eventually emerge.

RISK MANAGEMENT

Despite its economic problems, Beijing has considerable ability to thwart U.S.-led efforts to reorient the global economy away from China. Under most circumstances, China’s rapidly rising trade surplus would cause its currency to appreciate, weakening the competitiveness of its exports over time. But it is actually more likely that China’s currency will depreciate over the next few years, the result of a combination of factors including the rapid expansion of China’s financial system and domestic money supply since the 2008 financial crisis and the relative decline of Chinese interest rates compared with those in the United States, which have produced persistent capital outflows from China. All this means Beijing can still choose to make Chinese exports even cheaper by simply reducing the interventions its central bank regularly makes to prop up the renminbi.

As the prices of Chinese goods fall, it will become less attractive to the United States and its partners to invest in new manufacturing supply chains to replace Chinese sources. Beijing has already shown it is prepared to use currency intervention to retaliate against U.S. tariffs and protect Chinese manufacturers: as of this writing, the renminbi has depreciated more than two percent since the U.S. election. It is dangerous for China to allow the renminbi to depreciate too quickly, because doing so could drive even more capital outflows, but there is no doubt that Beijing can use the currency as a tool to retaliate against tariffs in the short term.

China will also try to use U.S. partners’ frustration with potential Trump administration policies to unravel the network of allies the Biden administration has nurtured. These countries are preparing for Trump’s return, drawing lessons from what worked and what irked in his first term, and may choose to adopt more forceful measures against China to appeal to the incoming administration. But Beijing will counter with offers of investment pledges, technology partnerships in areas in which Chinese firms lead (such as electric vehicles), tax incentives, tariff reductions, visa exemptions, relief from export controls, and other carrots. If this does not work, Beijing may resort to sticks, retaliating against U.S. and allied trade barriers with expanded export controls of its own. It could, for instance, restrict the export of critical inputs for clean technologies and semiconductor manufacturing (as China is already doing with export controls on gallium, germanium, graphite, and antimony), which could effectively hamper U.S. and allied production in critical sectors. Beijing could also apply punitive, countrywide export controls to products with minimal Chinese content, such as by banning the export of all Chinese-processed graphite to the U.S. market, where it is used in battery manufacturing.

Even if Beijing is selective in issuing threats and imposing restrictions, taking action against some U.S. partners but not others, the same chill will be running through capitals across the world, from Brussels to New Delhi. Governments not just in the West but across the world will have to ask whether their countries’ dependence on China for critical inputs is sustainable or whether it poses an unacceptable threat to their national security. If the answer is the latter, it will be easier for the United States to convene a global coalition to de-risk manufacturing supply chains from China. Such efforts are already underway in the defense industrial sector through initiatives such as the Pentagon-led Partnership for Indo-Pacific Industrial Resilience, which aims to foster cooperation on defense acquisition. Beijing has a playbook for retaliating against Trump’s policies but not for managing the consequences of the steps U.S. partners may take in response.

THE LONG VIEW

Ultimately, economic trends are working in favor of U.S. efforts to limit global supply chains’ dependence on China. Beijing may still be able to increase the market share of its exports for another year or two, but even if China reaches this objective, widespread international opposition to its trade practices will follow. These discontented countries are among those Washington needs on its side in order to effectively diversify global supply chains, as the economics of new investment work only if there is sufficient demand in critical industries to make the necessary outlays worthwhile.

And even as securing policy alignment with partner countries on tariffs and other trade restrictions gets easier, this cannot be the end of the United States’ strategy. Imposing high tariffs and rewiring supply chains away from China are inherently disruptive. Even though Beijing is in a far weaker position than in the past, it can still retaliate. To manage the inevitable costs of a de-risking strategy, Washington should opt for relatively moderate tariffs and be prepared to quickly expand its own and its partners’ investment in the industries that will take the place of Chinese firms in global supply chains. How the restructuring of the global economy pans out will depend on how committed the Trump administration will be to the long-term goals of building a more secure manufacturing base and arranging more sustainable patterns of global trade. Creating a broader base of demand in this way will be more effective than trying to imitate China’s approach of claiming a larger share of a shrinking pie.