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So many people forget Chinese history. Let’s not forget Japan defeated China and occupied vast portions of the Chinese mainland, and without the help from the US, they would be speaking Japanese today! Then a broken and war-torn China rebuilt and became a world leader in manufacturing and distribution— all within 80 years!

The dragon must not be underestimated. Beijing faces a sobering reality in the escalating U.S.-China trade conflict: it cannot win a full-blown trade war, but the US may also be dealing with an enraged dragon!

However, that doesn’t mean China is powerless. This is far from the case. While China's structural weaknesses in its economy and political system limit its ability to prevail in a protracted trade conflict, it possesses tools, particularly financial ones, that could inflict serious pain on the U.S. economy as it descends.

At first glance, China appears well-equipped for economic combat. With a population accustomed to “eating bitterness,” which means enduring hardship,’ a centralized government, and extensive control over state levers, it might seem capable of withstanding prolonged economic stress. But that impression rests on an outdated view of modern China.

Today’s China is no longer the impoverished, resilient agrarian state of decades past. It is now a middle-income country where the middle class has rising expectations. The legitimacy of the Chinese Communist Party hinges not on revolutionary zeal or hardship but on its ability to continue delivering economic growth and improving living standards. Economic stagnation or recession undermines that social contract, and the government knows it.

China’s once-vaunted centralized decision-making is also more bureaucratic than efficient. Xi Jinping may sit at the top, but decisions bubble up through layers of cautious, consensus-seeking officials.

Meanwhile, the U.S. has paradoxically become more agile in tariff policy due to a strong executive branch and weak congressional oversight. Under a president like Donald Trump, trade policy can quickly change with a single tweet, a capability Beijing's complex bureaucracy struggles to match.

China has responded to U.S. tariff hikes with its own, most recently jacking rates up to a staggering 125% in retaliation. But such astronomical tariffs risk cutting off trade altogether, a move that would devastate both economies. American consumers would face higher prices, and Chinese exporters would see plummeting demand.

China also has a track record of retaliating in other ways: restricting foreign firms’ access, slowing regulatory approvals, launching antitrust investigations, and curbing cultural imports like Hollywood films.

However, these actions carry collateral damage. Foreign direct investment, already shaken since the pandemic, could collapse further, stripping China of critical capital and innovation.

Rare earth minerals are another potential pressure point. But these materials often reach U.S. firms as parts of global supply chains, not as raw materials. Aggressive export restrictions would push other countries to develop their own supply chains or subsidize competitors, undermining one of China’s biggest strategic advantages.

Beijing's financial holdings, among its arsenal of tools, may be the most potent and dangerous. As of March 2025, China’s foreign exchange reserves totaled $3.24 trillion, including over $760 billion in U.S. Treasury bonds. If Beijing decided to dump these assets, the immediate effect would be to flood the market, drive up U.S. interest rates, and potentially spark chaos in global bond markets.

But this weapon is double-edged. A sudden sale of U.S. Treasuries could lead to a decline in the value of the dollar and an increase in the value of the yuan, which is precisely the opposite of China's desired outcome. A stronger yuan would make Chinese exports even pricier and less competitive. It would also signal to global markets that China is panicking, triggering capital flight and further destabilizing its economy.

Still, if China wanted to inflict maximum economic pain on the U.S., especially during an election year or a fragile recovery, it could use this tactic to spook financial markets. Even the threat of selling off Treasuries can cause volatility and pressure Washington to de-escalate.

There’s another subtle but significant front in this economic war: evasion. The U.S. imposing tariffs of at least 125% on nearly all Chinese goods provides Chinese exporters with significant incentives to reroute their products through third countries. This kind of transshipment weakens the effectiveness of the tariffs and cuts into the revenue the Trump administration lawmakers are counting on to fund their policy initiatives.

Moreover, it places an enormous burden on U.S. customs enforcement and risks undermining the entire tariff strategy by creating black markets and alternative supply routes that evade regulatory oversight.

Both sides are acutely aware that a full-scale economic war is not beneficial to anyone. Chinese officials persist in emphasizing their readiness to engage in negotiations, while Trump, ever the manipulator, has reverted to praising Chinese leadership, referring to Xi Jinping as a "proud man" in an attempt to maintain open channels of communication.

Beneath the diplomatic façade, there is a stark reality: China cannot achieve traditional victory in this war. It is too exposed, too dependent on exports, and too reliant on continued economic growth to stomach a long-term conflict.

Final Word: The trade war will end when both parties become reasonably unhappy but willing to live with the pain; at that point, both will declare victory!