I still remember watching the first US China trade war unfold back in 2018. At the time, like many market watchers, I thought it would be a short-term spat kit for tat tariffs, a negotiated truth, and back to business. But I was wrong. What happened wasn’t just a temporary disruption. It really exposed the deep structural weakness of China’s economy. Weaknesses that have only grown worse today. And now as a new trade war is brewing. Yes, I don’t think the temporary choose from the Geneva agreement last months will last. I’ll tell you exactly why China is going to lose again. And this time the consequences may be far more severe.
First, let’s do a flashback of how the first trade war exposed China’s fragility. In 2018, when the Trump administration slapped tariffs on 370 billion US dollars worth of Chinese goods, Beijing retaliated with tariffs of its own. On the surface, it looked like an even fight, but underneath, China was far more vulnerable. I remember visiting a major Chinese port city during the thick of the first trade war.
Local factory owners were panicking. Many of them weren’t even worried about tariffs. They were terrified their foreign buyers were leaving them all together forever. You know, one furniture exporter told me, “If the US buyer shifts to Via 9 or Indonesia, they will never come back. All cost advantage is gone.” And that’s exactly what happened. The trade war accelerated the shift of global supply chains out of China. Vietnami, India, Malaysia also rising foreign investment as companies look to diversify away from the China risk.
In a short term, China valored the stone through massive domestic stimulus, but in a process, they racked up even more local government debt and pumped unsustainable credit into the system. Now, fast forward to today, and many people don’t realize this. China’s economy is more dependent on exports now than it was before uh the first trade war. Why? Because domestic demand is crashing. Consumer confidence has plummeted. Real estate which once drove around 30% of GDP is in a huge crisis.
Youth unemployment is skyhigh. The middle classes is in full consumption downgrade mode. Spending less, saving more, afraid of the future. In this environment, exports became China’s last growth engine. In fact, China’s trade surplus hit record highs in the past two years. Not because the Chinese economy is strong, but because it’s weak. Weak domestic demand forced Chinese foreign to sell abroad to survive. Take the electric vehicle maker BYD as an example. Because the domestic Chinese demand is so weak and insufficient to absorb all the electric vehicles subsidized by the Chinese government.
To move the inventory, they have to engage in unethical dumping and sell their cars in the overseas market. In other words, China is now more hooked on exports than ever. And that makes it far more vulnerable to a renewed trade war. The first trade war hurt, but at that time, China could rely on its still growing uh domestic market to cushion the blow. But today, in 2025, not anymore.
I recently spoke with a friend who runs a uh consumer brand in Shanghai and he told me bluntly like forget growth, we’re just trying to survive. Uh the middle class consumer is gone. I mean they are scared. Uh and the numbers back him up. Retail sales are weak. Youth unemployment is eroding future spending power. Property market collapse has crushed household wealth. Without a strong domestic market, China has no fallback if export demand slows due to trade war pressures. And with the US and EU both moving toward drisking and selective decoupling, that slowdown is already beginning.
Perhaps the most dangerous factor of all is unemployment. In 2018, China still had a robust labor market. Now the situation is dire. Uh youth unemployment has been so bad that the government is so embarrassed. Uh it stopped publishing the data and millions of migrant workers have lost construction jobs as real estate imploded. uh white collar job growth is stagnant uh even shrinking and manufacturing jobs which re rely on exports are the next domino.
If another trade war uh hits thousands of factories could shut down, millions more could be out of work and this time the government toolkit is limited. The stimulus is already exhausted. How much extra debt can local government rack up to stimulate the growth? People are angry and distrustful of government statistics and promises and the potential for social instability is very real. Also, one of the biggest reasons I believe China will lose this trade war comes down to leadership. In yesterday’s video, I laid out 25 of Xiinping’s worst mistakes that brought the Chinese economy to its knees.
Back in 2018, pragmatists like in the Chinese system like Premier Leo Chang who passed away still had some influence. They understood that fighting the US directly was dangerous. Today under Xi Jinping uh the leadership is far more ideological. She is obsessed with struggle narratives and convinced that uh China must become self-reliant even though key technologies like advanced semiconductors remain out of reach.
So instead of focusing on stabilizing the domestic economy, she’s pouring money into military spending, propaganda, and statedriven industrial policy while neglecting the consumer economy. This is a strategic blunder. You can’t win a trade war when your own people are losing faith in the future. So what is the endgame? Uh here’s what I see happening as the West tightens the screws on Chinese uh exports and ramps up uh tariffs on EVs and other Chinese goods, China’s export machine will slow and with domestic demand too weak to pick up the slack, factory closures and unemployment will rise dramatically.
Local governments already bankrupt will be unable to respond. So social tensions will rise and capital flight will accelerate. She’s regime will double down on propaganda and repression. But underlying the economic the underlying economic forces will not change. Uh this is not a formula for victory in a in a trade war. It’s a formula for long grinding decline. The first trade war exposed China’s fragility.
This time the fragility is far worse and the leadership is even less willing to adjust course. Uh I don’t say this as wishful thinking. I say this as someone who has watched firsthand how this story unfold uh in China’s ports, factories, and cities. China may still posture as strong on a global stage, but behind the scenes, the foundation is is cracking. And in the next round of the trade war, those cracks will become so visible, you know, they’ll become impossible to hide.
