Assuming Donald Trump is serious about a 130% tariff on China, the US trade war has officially shifted into mutually-assured destruction mode.
Though markets are taking it badly, the US president’s latest gambit to impose a 100% tariff on top of the existing 30% seems wildly unlikely to be imposed as threatened on November 1.
Such a trade embargo between the world’s two biggest economies would undoubtedly tip the global economy into a major recession. The cessation of commerce between two economies with a combined output of US$45 trillion could be a near-extinction-level event for many trade-reliant countries.
What’s most interesting here isn’t Trump’s 130% tax threat. It’s why the leader of the largest economy felt the need to make it at all. The stated catalyst – a response to China’s latest limit imposed on the exports of critical minerals – may work for some. But there’s little doubt Trump has been itching to make trade wars great again as his Asia tariff deals go awry.
Recently, South Korea made it clear it’s not paying the $350 billion “signing bonus” Trump demanded. Japan might soon install a prime minister keen for a “renegotiation” of the US-Japan deal, including the $550 billion cash payment Trump has been expecting to arrive any day now.
The European Union, meanwhile, is making it clear that the $1.35 trillion that Trump is expecting in return for a 15% tariff rate is a non-starter. European Commission President Ursula von der Leyen argues that the expected $750 billion in US energy purchases and $600 billion in fresh European investment in the US are more aspirational than binding. And that EU officials have no power to tell private companies where to invest.
Trump, in other words, is irked that deals he viewed as already in the bank are unraveling in real time. That has him doubling down on striking a US-China “grand bargain” pact. After the last several months of tariff chaos, rising inflation and turbulent market activity, the only way Trump could convince his base that it was all worth it is by bringing China to heel.
Yet many think this is just another #TACO – Trump Always Chickens Out – moment meant to get Xi’s attention. Though only time will tell whether Trump is serious or bluffing, “we lean toward the latter interpretation and expect the ultimate resolution will be an extension of the current tariff pause,” argue Goldman Sachs analysts.
Dilin Wu, a strategist at Pepperstone, adds that “if it’s a negotiating ploy, the current pullback may prove a buy-the-dip opportunity. But if tariffs take effect, a fresh wave of volatility and global risk repricing could follow.”
The trouble is, Chinese leader Xi Jinping knows Trump is all talk and he’s using that knowledge as leverage for whatever trade talks might happen in the weeks and months ahead.
Since October 10, when Trump unleashed his newest tariff tantrum, he’s hinted that this month’s much-awaited summit with Xi might not happen. Trump claims it’s pointless to meet Xi in Seoul during the October 31-November 1 Asia Pacific Economic Cooperation summit.
Again, though, Trump needs a big, beautiful China deal more than Xi’s Communist Party.
One reason: Team Xi spent the years since Trump 1.0 pivoting away from US trade. Today, Southeast Asia is China’s top trading partner, followed by the EU. The US is now third, limiting the immediate sting of Trump’s tariffs. In fact, as of mid-2025, the Federal Reserve showed that the US now imports considerably more from Global South nations, excluding China, than from Asia’s biggest economy.
Also, the latest trade data may explain why Team Xi seems to think time is on Beijing’s side. Even though exports to the US plunged 27%, marking the sixth month of double-digit declines, global shipments rose 8.3% in September year on year. It’s a reminder that rumors of the death of China’s export engine remain greatly exaggerated.
Michelle Lam, economist at Societe Generale, notes that this continued performance “has likely emboldened China” to take a tougher position in negotiations with Trump.
Citigroup economist Yu Xiangrong says that “we cannot underestimate the competitiveness and resilience of China’s export sector. Affordable yet high-quality Chinese exports see continuous innovation and upgrades, which enable them to remain attractive in the international market. As Chinese enterprises expand overseas, China’s industrial chains are extending outward, driving exports of intermediate goods and capital goods.”
Still, a renewed trade war is the last thing the global economy needs as countries everywhere stagger toward 2026.
“That was clearly not something traders wanted to hear,” says Steve Sosnick, chief strategist at Interactive Brokers. “We’d become quite accustomed to relatively quiescent markets with an upward bias, so it was quite shocking to see stocks in a quick freefall.”
Wedbush analyst Dan Ives adds that “after a relatively calm few months and improving relations between the US and China, this step-up in tensions has created a white-knuckle moment for the markets, with tech stocks under major pressure today.” That’s why, notes Ross Mayfield, an investment strategist at Baird, Trump’s move “definitely caught markets off guard.”
Trump, of course, has been blaming Asia for most US economic challenges since at least the 1980s. Back then, it was Japan. On television and radio talk shows, Trump rarely missed a chance to rail about how Japan had “sucked the blood” out of American households. This was around the time of the 1985 “Plaza Accord,” a deal that sent the yen sharply higher versus the dollar. It’s no doubt something Trump hopes to repeat with China.
Trump once owned the iconic New York Plaza Hotel, where the seeds of Japan’s 1990s deflation nightmare were planted. Now, he’s angling to engineer a sharply stronger yuan at his Mar-a-Lago Florida lair with China, which is now Trump’s stand-in for Japan and Asia more broadly.
China won’t agree to that, of course. The reason the yuan isn’t fully convertible is that Xi’s party wants control over exchange rate levels. That makes a deal to boost the yuan’s value to placate Trump a non-starter. Chinese officials spent years studying how Japan’s agreement 40 years ago to sharply hike the yen against the dollar paved the way for its lost decades.
As analyst Ben Norton, editor of Geopolitical Economy Report, recalls, “the Plaza Accord devastated Japan’s economy by significantly overvaluing the yen, which hurt the competitiveness of Japanese exports — thereby helping US technology companies that previously had trouble competing with their Japanese counterparts. It also fueled Japan’s gargantuan asset price bubble, which popped in the early 1990s, leading to a ‘lost decade’ of economic stagnation.”
Trump, Norton explains, would like to impose his economic and political conditions on the world, but many countries are likely to reject this.
US allies and vassals may agree to a hypothetical “Mar-a-Lago Accord.” “But China, which is the world’s largest economy when its GDP is measured at purchasing power parity, has refused to give in to Trump’s economic blackmail,” Norton notes. “Chinese economists and policymakers have carefully studied the destructive effects that the Plaza Accord had on Japan, and it is extremely unlikely that they would repeat the same mistake.”
Odds are, the US and China will agree to some trade compromise. But it will be more of a face-saving truce than a remaking of a $582 billion trade relationship.
“For Washington to shape the US-China relationship to its advantage, it must engage Beijing from a position of strength,” says Patricia Kim, an analyst at the Brookings Institution, a Washington-based think tank. “That means investing in its own economic resilience, military capabilities, technological leadership and global alliances.”
At the same time, Kim notes, the US “should sustain measured economic and diplomatic ties with China—not as a concession, but for its own benefit. Without such engagement, America’s ability to influence Beijing diminishes, leaving military confrontation as the only remaining tool of leverage—an outcome that is both dangerous and unrealistic.”
Admittedly, “the approach isn’t new,” Kim concludes. “It’s how US-China relations have been managed for decades. It’s never easy and often unsatisfying. But at the end of the day, it delivers better results than either extreme—naive appeasement or outright hostility and disengagement.”
The problem for Trump is that Xi has his number. What’s more, the most powerful Chinese leader since Mao Zedong knows how desperate Trump is for a deal with China, any deal at all. Given the extreme pain a 130% tariff would cause — including likely sky-high US inflation — Trump needs a deal with Beijing to save face with Republicans and his MAGA base.
Odds are, any deal that gets done will be cosmetic, doing little, if anything, to alter trade dynamics between the Group of Two. Hollow deals are a strong suit for Trump anyway. The 2018 deal with Japan didn’t alter their trade dynamics.
What matters to Trump is that he can claim to his supporters that he’s saving the day against pesky, free-trading Asian nations. That was certainly the dynamic during the Trump 1.0 years from 2017-2021.
Going-through-the-motions trade talks are more likely than any epochal realignments of trade frameworks. China knows this, and so does the rest of the Asian establishment. So, why wouldn’t Xi take his time and get the better of an increasingly desperate and ineffectual Trump White House?
Follow William Pesek on X at @WilliamPesek
