Chinese president Xi Jinping has the upper hand this time around now that he knows Trump’s tariff threats are bluster.

So much for President Donald Trump’s first-term assertion that trade wars were “good and easy to win.” Far from quickly winning the trade war with China that he initiated in 2018, the tariff match did not conclude until 2020. Now, after flaring up earlier this year, commercial conflict is reaching a boiling point yet again. Worse yet, Trump now seems to be caught on the back foot after grossly underestimating China’s willingness and ability to wage this war to their advantage.

Earlier this month, ahead of a scheduled meeting between President Trump and President Xi Jinping at the sidelines of the October 31 APEC Summit in South Korea, China substantially tightened its controls on exports of rare earth elements and magnets. 

In response, last week, Trump announced that, effective November 1, the United States will impose a 100 percent tariff on Chinese goods, in addition to existing tariffs. If those tariffs were to take effect, they would raise the import tariff level to around 130 percent, inviting further Chinese retaliation. If carried out, this would lead to a virtual cessation of US trade with China, incurring significant economic costs for both countries.

Trump’s reaction to the Chinese rare earth export restrictions is an effective acknowledgment of China’s dominant position in this area and the significant importance of these items to the US industry. China currently controls 60–70 percent of the world’s rare earth production and over 85 percent of its processing capacity. The US Department of Defense considers many rare earth elements to be “critical minerals” for national security. It recognizes that Chinese export restrictions on these rare earths could be particularly disruptive for defense production, electric vehicle manufacturing, consumer electronics production, and renewable energy deployment.

Aside from having underestimated China’s willingness to play its rare earth card, Trump also seems to have underestimated China’s willingness to endure economic pain and its unwillingness to tolerate political humiliation. Trump’s calculation seems to have been that the Chinese economy could ill afford to have its main export market closed, particularly at a time when it was in the middle of a major property market bust. He seemed to reason that if he exerted enough economic pressure, China would be forced to come to the table and make economic concessions.

One thing that Trump has overlooked is that China’s Communist Party has the means to withstand economic hardship in a way that any US administration does not. China’s ability to “eat bitterness” was evidenced during Mao’s economically disastrous Great Leap Forward as well as during the Cultural Revolution. Additionally, Trump seems to have underestimated President Xi’s lack of tolerance for being perceived to be bullied by the West. After China’s “century of humiliation,” no Chinese leader can be seen to be buckling to Western economic pressure.

For his part, it cannot have escaped President Xi’s notice how quickly Trump buckles under financial market pressure. This was in evidence in April this year when the stock and bond markets’ meltdown in response to Trump’s “Liberation Day” tariff announcements forced Trump to walk back those tariff increases after barely a week. In turn, that gave rise to Wall Street’s “TACO” moniker, which joked that when it came to import tariffs, you could always count on Trump “always chickening out” from carrying through with his threats.

President Xi must also know that the legality of Trump justifying his tariff increases on the basis of a national emergency is being questioned by the courts. Indeed, on November 5, the Supreme Court will start oral hearings to determine whether it should uphold the Federal Court of Appeals’ rejection of Trump’s national emergency justification for his tariff policy.

All of this likely signals a period of considerable US financial market uncertainty. It seems unlikely that President Xi will be the first to blink for reasons of national pride and insulation from market pressure. Meanwhile, it seems likely that it will take a considerable downdraft in the US stock market to get Trump to roll back his 100 percent Chinese import tariff.