There’s no need to fear China’s economy

Beijing can’t easily afford to escalate any economic struggle with Washington

HECTOR RETAMAL / AFP

A woman twirls a dragon streamer on the Bund promenade along the Huangpu River during sunrise in Shanghai on 14 April 2025, with the city's financial district seen in the background.

There’s no need to fear China’s economy

Theodore Bunzel

last update on 15 May 2026

The United States appears to be on the ropes in trade negotiations with China. After taking office, the Trump administration threw down the gauntlet with Beijing, briefly imposing 145% tariffs in April 2025 and more than doubling its effective tariff rate on China to around 40% for much of the past year. Washington’s theory was that depriving China of the US consumer would force Beijing to concede on market access and bring down the bilateral trade deficit. At one point, Treasury Secretary Scott Bessent crowed that China was “playing with a pair of twos” given its dependence on exports to the United States, which clocked in around $500bn in 2024.

However, unlike most of President Donald Trump’s hapless trade war victims, Beijing punched back hard. It raised equivalent tariff barriers and leveraged China’s overwhelming dominance in the production of rare-earth minerals to choke off the supply of these critical industrial inputs, threatening US production of everything from autos to aircraft and weaponry. The United States then, in effect, cried uncle, backing down from its most severe tariff threats. This week, Washington limped into trade discussions with Beijing on 14 May, seeking an extended reprieve on China’s rare-earth export controls and headline pledges to buy more US agricultural goods and energy.

In return, the administration may have to give on dismantling some export controls on advanced technology or even diluting US support to Taiwan. Privately, members of the US administration may admit—perhaps in sotto voce—that, for now, China has economic escalation dominance.

If competition between the United States and China is the most consequential geoeconomic storyline of the 21st century, then this episode doesn’t bode well for Washington. As the economist Neil Shearing incisively argues in The Fractured Age, the global economy is inevitably, albeit gradually and unevenly, splitting into two blocs: one centred around the United States and another around China. You can see the beginnings of this fracturing in global trade and foreign direct investment patterns, which—as the International Monetary Fund has—increasingly flow between geopolitically aligned countries. And in this more competitive environment, economic warfare will be a central battlefront between the two blocs as both sides seek leverage over one another to pursue their own policy interests and push back against coercion.

Does China have the upper hand in this new, fractured world? The past year’s showdown would tell you yes, but the numbers tell a different story. In their thought-provoking analysis, Command of Commerce, former US Treasury Department official Ben A. Vagle and Dartmouth University Professor Stephen G. Brooks argue that the United States holds the high cards. The world’s most important, profitable, and sophisticated companies sit largely in the United States, and the Western bloc, and China’s own export machine is dependent upon their investments. In a sudden, all-out decoupling between China and the West, the short-run impact would hurt China’s economy 5-11 times more than the United States, according to their research, and China would face worse long-term economic scarring.

Reuters — Miners are seen at the Bayan Obo mine containing rare earth minerals, in Inner Mongolia, China, on 16 July 2011.

So then, why is the United States running scared of China? Part of the reason is that China has found the perfect asymmetric weapon in rare-earth restrictions that cost its economy little while inflicting major damage on US industry. Washington’s most powerful economic weapons, such as financial sanctions, would impose meaningful costs to US companies and consumers, even if they do disproportionate harm to Beijing.

Another reason is that the United States may inherently have a lower pain threshold than China, or lack confidence, due to a long history of (largely misplaced) hand-wringing over economic decline.

But a big reason is the way in which this administration has waged economic war with China: with unilateral tariffs, an especially ineffective tool, and alienating allies along the way rather than presenting a united front. The United States has more than enough leverage to push back against economic coercion and thwart Beijing from having a veto over US policy, but the task would be much easier if it kept the Western world onside.

It’s a cliché that the era of hyperglobalisation is over. Since the Great Recession, trade has largely stalled as a percentage of global GDP, after exports had surged from 20% to 30% of global GDP between 1989 and 2010. Gross global capital flows have fallen from a peak of 20% of global GDP in 2007 to around 5% today, and multilateral institutions such as the World Trade Organisation, created to help set the rules of the road and facilitate open global commerce, are on life support.

Ask what’s behind this “slowbalisation,” and commentators will provide a bundle of reasons, including increasing global conflict, rising populist tendencies, inequality, and the jolt of Trump’s second term.

But Shearing accurately points to the most potent source: US-China tensions that are unwinding decades of global integration. “The era of hyper-globalisation that defined the global economy in the early 21st century is therefore over,” he writes, adding that this is “partly because it failed to live up to unrealistic expectations ... and partly because it became a convenient scapegoat for a new generation of populist politicians. But it’s mainly because China has emerged as a strategic rival to the US.”

REUTERS/Evan Vucci — Chinese President Xi Jinping guides US President Donald Trump during a visit to the Zhongnanhai Garden in Beijing, China, on 15 May 2026.

How will this rivalry contort the global economy into the future? Shearing argues that the world will gradually fracture more firmly into a US-led and a China-led bloc and that the US bloc will include Europe, Japan, India, Mexico, and other Western-leaning countries, but that decoupling between the blocs will only cover strategic industries, putting about 15% of global trade at risk (a relatively mild amount of fracturing given Shearing’s sweeping title).

During the Biden administration, when the book was likely written, this seemed the most plausible path. The United States was successfully pushing Europe, hesitantly but inexorably, toward joining its China-related restrictions; India was aligning more closely with the United States; and President Joe Biden’s national security advisor, Jake Sullivan, argued that US restrictions on China should constitute a “small yard, high fence.”

If China strikes hard on rare earths, the United States could conceivably push back with biting financial sanctions

But history has a funny way of upending assumptions. The Trump administration has taken a wrecking ball to Sullivan's fence by hiking China tariffs on everything from toys to electronics, leading to a 20% drop in Chinese exports to the United States in 2025 and making broader decoupling appear increasingly plausible. The economic alliance with Europe is now in question after a bruising trans-Atlantic trade war and fights over Greenland and Iran as Brussels seeks more "strategic autonomy" and to reduce its own technological dependencies on the United States.

Another two and a half years of Trump, and perhaps another Trump-aligned Republican administration in 2029, may lead to a deeper and more permanent rupture between the United States and Europe, even if the trans-Atlantic economic relationship remains the two sides' most important.

This would be a shame. For in one of the most enlightening exercises in his book, Shearing adds up the full weight of a US-led bloc that includes Europe and the rest of the Western world and pits it against China's. The result is a blowout. The US bloc's GDP is more than 2.5 times that of the China bloc, and China accounts for a full two-thirds of its team's economic output.

AFP — A container ship sails off the port of Qingdao, eastern China, on 12 May 2026.

Perhaps as crucially, the US bloc contains much more economic diversity—commodity exporters and importers, developing and developed countries—which provides an additional source of strength. This diversity allows the United States to create a parallel economic ecosystem, whereas the China bloc remains overwhelmingly dependent upon Beijing and exports of both commodities and manufacturing to the West.

And, as Shearing argues, China's $10tn—and growing—stock of external assets means that it will remain vulnerable to US financial sanctions, no matter how hard it tries to diversify away from the dollar.

Vagle and Brooks develop this powerful insight further in Command of Commerce. Conventional economic analysis, they argue, wildly overestimates China's capabilities and leverage in its struggle with the United States for economic supremacy.

To make the case, they first take aim at calculating China's true GDP. It's well understood that China's reported GDP numbers are inflated—it hits its official targets with marksman-like precision each year—yet most international economic analyses still use them as gospel. The Rhodium Group, a stellar economic research firm, has used bottom-up analysis of commercial and official data to estimate that China's true GDP growth in 2025 was between 2.5% and 3%, compared to the reported 5.2%.

Brooks and Vagle point to satellite imagery of nighttime luminosity, which has been shown to accurately correlate with economic output, to argue that China's GDP is overstated by nearly one-third. This would place it at 52% of US GDP in 2022 (using nominal exchange rates, not purchasing power parity) rather than the 72% calculated using official statistics. To put this in perspective, that's less than the Soviet Union's peak GDP of 58% relative to the United States GDP in 1975. So much for claims that China is leaving the United States in the dust.

But their persuasive analysis goes many steps further. The authors calculate that the share of global profits in nearly every sector is dominated by Western companies. While it's true that Chinese industrial policy encourages ferocious competition that structurally reduces profit margins, the results are nonetheless striking. Brooks and Vagle find that US and allied firms generate 38% and 35% of global profits, respectively, compared to China and Hong Kong's combined 16%.

AFP — A man tests a Huawei smartphone at the Mobile World Congress (MWC) in Shanghai on June 28, 2023.

In high-tech industries, that number is even more disproportionate: the United States accounts for 55% and the United States and allies for 83.8%, while China's share is 6.1%. And the same goes for value add in high technology. While China represents 29% of the world's overall manufacturing value add compared to the United States' 16% and allies' 33%, its value add in high technology is 18% compared to the United States' 29% and allies' 37%.

Value add and profits matter because they demonstrate that Western companies, rather than Chinese companies, provide much of the irreplaceable economic value, even to China's major export industries such as electronics. In fact, Vagle and Brooks note that while China generates 31% of global technology hardware value add, its firms generate just 13% of world sales in this sector—meaning that the bulk of China's value add in the production of everything from laptops to phones comes from foreign companies operating in China largely for export.

It would be painful and expensive for Western firms to relocate their supply chains to other developing countries with less efficient manufacturing ecosystems. But for China, the exit of Western supply chains would mean a long-run crippling of its export industry.

What about the more sophisticated Chinese companies, such as BYD and Huawei, or China's clean energy champions, such as CATL? Fuelled by state subsidies, China is rapidly climbing up the value chain in many strategic industries, and it does have world-beating firms and products in areas such as electric vehicles and batteries.

But these still represent only a small piece of its overall economy—the authors note that about 60% of China's value-added manufacturing remains in low-technology areas such as metals, plastics, and toys. And even clean energy products such as solar energy systems aren't especially sophisticated and could be replicated—albeit at a higher cost—in other countries.

AFP — Workers produce stuffed toys that will be exported at a factory in Lianyungang in China's eastern Jiangsu province on 7 July 2022.

Vagle and Brooks helpfully model out the profundity of these insights. Across six different scenarios simulating sharp decoupling between the West and China over Taiwan, China takes a short-term GDP hit 4.7 to 11.1 times larger than the United States, with Chinese losses ranging from 15.4% to 50.8% compared to the United States' 2.8% to 7.6%. Make no mistake, decoupling would be extremely painful for both sides—a short-run loss of some 5% of the US GDP is no joke—but China has much more to lose than the United States if both sides went to the mattresses.

The authors raise two cautionary, and ominously prescient, caveats. If the United States were to decouple alone from China, without its allies, its short-run GDP loss would be more even, at 70% of China's. They also note China's dominance in the production of critical minerals such as rare earths as an area of leverage. But here, Vagle and Brooks are perhaps overly sanguine. They correctly argue that rare earths are a low-value and comparatively small ($6bn) industry that could plausibly be reconstructed outside of China, and that stockpiling these minerals is an effective mitigant.

But they downplay the length of time that it would take to reorient supply—most mines take at least a decade to begin production—and the uniquely effective dimension of this choke point. China can cut off exports to the United States at little cost to itself while imposing massive harm on the United States in the short run as supplies run out for industrial assembly lines.

Yet this is exactly the experiment that the Trump administration ran in 2025. It antagonised allies as it waged a comprehensive trade war with China, triggering the latter's asymmetric rare-earth weapon before the West had time to reconstruct an alternative supply chain outside of China or stockpile sufficiently. And unilateral tariffs proved to be a weak tool that China brushed off easily as it redirected exports to other markets and printed a record $1.2tn trade surplus.

AFP — A ship is loaded with natural gas-powered buses, bound for Mexico, at the port in Yantai, in China's eastern Shandong province, on 6 February 2026.

In an economic contest in which the balance of power rests quite clearly with the United States and its partners, Washington chose a maximally suboptimal strategy of going it alone when it wasn't prepared, with predictable results. But the United States has a chance to adapt from its mistakes, rather than overlearning them in despair. If the United States and China are entering into a long-run rivalry, economic leverage will be a critical tool to push back against Chinese actions that the West deems incompatible with its interests.

And, conversely, maintaining economic deterrence will allow the West to pursue policies it deems in its own interests—like putting up trade barriers to thwart Chinese overcapacity—without fear that China reprisals will force it to back down. As Vagle and Brooks rightly point out, the United States does have more cards to play against China should strategic or economic tensions lead to an escalatory tit-for-tat. If China strikes hard on rare earths, the United States could conceivably push back with biting financial sanctions, or cutoffs in the flow of the critical technologies or investments that fuel China's export machine.

Doing so would self-inflict short-term economic pain. But if the United States is serious about restoring economic deterrence and preventing Chinese economic coercion from dictating US policy, then it needs to be willing to incur some cost in the counterpunch, perhaps compensating consumers or companies in such an exchange to ease the pain.

The US should form an economic security alliance with its Western partners to come to each other's aid under any Chinese economic coercion

Working with allies is also paramount. Whether in a short-term exchange or in fortifying the US bloc over the long run in a fracturing global economy, allies give the United States insuperable economic weight. The biggest challenge for the West is in coordination. To truly leverage the scale of its advantage, Washington should form an economic security alliance with its Western partners in which they pledge to come to each other's aid under any Chinese economic coercion and jointly plan countermoves, export controls, and even mutual economic assistance. The West pursued just such a coordinated sanctions policy to great effect in the run-up to Russia's full-scale invasion of Ukraine.

Future administrations should take heed. If the United States is willing to push back hard with its partners onside and withstand some corporate and economic blowback, it does, in fact, have economic escalation dominance over China—as long as Washington doesn't squander its advantage by fracturing its own alliances in the meantime.

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