Trade: How does China benefit from the tariff dispute with the US, Mr. Gunter?

At the beginning of February, China's response to US tariffs was relatively mild, but the backlash is more severe this time. How do the US tariffs affect German and European companies in China?

Most European companies produce in China for the Chinese or regional market, not for the US. What's more affected are global supply chains: individual components often include US content and thus fall under the tariffs. The situation is more critical for European companies with production sites in the US that import parts from China, Mexico, or Canada – this is where the greater risks arise concerning the broader tariff situation.

What else is in China's toolbox and how much damage can Beijing do to the US?

While the current measures appear more determined, they still don't represent full escalation. Export controls — on rare earths, for example – can cause short-term disruption but are technically solvable, for instance, through subsidies or the construction of domestic refineries in the US. Instead, export controls are expanded and announced but not applied at scale. It only becomes truly problematic for the West if China fully deploys these measures at a more strategically advantageous moment. So far, China has deliberately held back many tools – also because countermeasures often end up hurting China itself, such as through job or investment losses.

And what about a devaluation of the renminbi?

A deliberate devaluation could offset the impact of the US tariffs, but it would worsen global trade imbalances. Countries with trade deficits with China – essentially almost all except around 20 – would respond very negatively. In addition, the US could simply introduce further tariff increases in response. So it would be a risky and likely ineffective step.

Since the start of the trade conflicts during Trump's first term in office, China has been pursuing a "dual circulation" strategy. What strengths can Beijing now play to?

China has mostly prepared on the supply side: it has reduced dependence on Western technology and increased domestic production. The demand side remains more difficult – specifically, finding a substitute for the American middle class as consumers. The domestic economy or the Global South can only partially compensate for that.

Can Belt and Road Initiative (BRI) countries serve as substitute markets?

Not sufficiently. While many of these countries have large populations, their middle classes lack the necessary purchasing power. Infrastructure projects — like railways or solar plants — are possible, but in terms of consumer goods like electric vehicles, the affordability simply isn't there, as seen, for example, in Indonesia.

What does this mean for Europe in the long term? Do we need to protect our markets or develop new strategies?

In the short term, Europe urgently needs to respond to China's growing export surplus — possibly with higher tariffs. In the long term, the EU should push forward free trade and investment agreements, even if they're not perfect. The longer we wait, the more China pulls ahead. Europe should also strategically open its own markets to imports from Southeast Asia, Latin America, and the Middle East in exchange for better access for European exports. And finally, more cooperation with the Global South would be sensible — many countries are already protecting themselves from Chinese overproduction, such as in steel, automobiles, or textiles.

Can you give a specific example?

Indonesia imports Chinese EVs but doesn't have its own auto industry to protect, but it has measures in place on imported Chinese textiles to protect its domestic industry. Meanwhile, the EU has measures on imported EVs from China but is happy to import cheap Chinese textiles. Some sort of 'matchmaking' could be possible, where the EU puts measures on Chinese textile exports to protect Indonesian textile exports, and in exchange, Indonesia puts in measures on Chinese EVs to protect EU automobile exports. These kinds of pragmatic solutions – messy as they may seem – could make sense in the current situation.

China has also filed a complaint with the World Trade Organization (WTO) against the US tariffs. Does this have any significance at all?

That's purely symbolic. Even if the WTO rules in China's favor, it would have little practical effect. But it helps China present itself internationally as rule-abiding – especially if other countries join in.

Jacob Gunter is Lead Analyst Economy at the Mercator Institute for China Studies (MERICS). He has studied and worked in China for ten years. Before joining MERICS, he served at the EU Chamber of Commerce in China as a Senior Policy and Communications Manager. His research focus includes China's political economy, industrial policy, innovation, self-reliance, decoupling, and how the EU can better economically compete with China in third markets.