Japan, Europe can lead trade fight, leave China to contend alone

There could not be a bigger contrast between Beijing’s reaction to Donald Trump’s declaration of trade war and the reactions from China’s fellow major trading powers, Japan and the European Union.

China got its retaliation in early, matching Trump’s tariffs on Chinese goods with identical ones on American goods. The “decoupling” of the Chinese and US economies that has been talked about for years is now really happening.

However, Japan and the EU have chosen to suspend any retaliation until talks have taken place with Trump and his team. One might even say that Japan and the EU are hiding behind the Chinese retaliation, and reasoning that this removes the urgency for them to hit back, too. China is proving that the American bully can be resisted, reducing the need for others to add to that proof.

Nevertheless, one of the big questions now is of whether the Chinese, Japanese and European stances might soon converge. All three of these great trading powers say that they need to talk more to each other, and some of those conversations have already begun.

Both the European Union and the United Kingdom have plenty of security worries about China, not least the fact that it is supporting Russia in its war on Ukraine. Japan, too, is not going to sacrifice its security interests for trade. But it would be perfectly possible to keep trade and security separate.

European governments feel a deep sense of estrangement from Trump’s America. And Japan has every right to feel betrayed by Trump, too, given all the costly efforts it has been making to contribute more to defense and security in the Indo-Pacific, which the Trump administration claims is its top priority.

Before asking whether Japan and the European Union should or will collaborate with China on trade, however, we ought to ask first what interest China might have in collaboration.

In diplomatic terms, the Chinese leadership might feel happy if more countries, especially Western ones, are driven into its arms by American bullying. But China has an even bigger interest in demonstrating its own strength and resilience.

One of China’s biggest aspirations is to be seen as America’s equal, on all dimensions: military power, technology, geopolitical influence and of course economic power.

Some might think China wants to surpass the United States, and no doubt an ultimate dream might be to do so, but the Communist Party leadership has always exhibited a very realistic and pragmatic approach. For the time being, to be the equal of the world’s greatest superpower is ambition enough.

What Trump has done is to provide China with a great chance to prove its strength. To fight a real war with a nuclear-armed superpower would be hugely destructive and potentially catastrophic.

To fight a trade war with the world’s largest economy is, by contrast, much less risky. And when your opponent is someone like Trump, who changes his policy daily and shows little understanding of economics, trade or finance, there is good reason to believe that you can emerge triumphant.

In truth, nobody wins from a trade war, as any battle of import tariffs and export bans imposes heavy costs on both sides. What China can aim for, however, is a political victory, even if the price of it is economic pain. And most likely the leadership in Beijing will currently be thinking that China will be more able to withstand that economic pain than America will.

Trump seems to believe that because China’s exports of goods and services to the US in 2024 totalled $462.5 billion while America’s exports to China totalled $199.2 billion, China must have more to lose.

But this gets things the wrong way round, especially given Trump’s simultaneous trade war against the rest of the world. Trump’s huge tariffs mean that America is losing cheap access to many goods that it needs and wants, and is making alternative sources for those goods more expensive at the same time.

China will just have lost sales in America, a loss it can adjust to both by finding other markets and by using fiscal policy to stimulate greater demand domestically.

The fact that just a few days after imposing tariffs of 145% on imports from China Trump suddenly exempted smartphones and many other electronic goods from most of these taxes served to prove this point. No doubt lobbying from Apple will have helped, but also Trump seemed to realize what should have been obvious: that high prices for goods that are hard to find substitutes for will hit consumers hard and immediately.

China has another powerful weapon, too. At the end of 2024 Chinese entities held $759 billion of US Treasury bonds, the second largest foreign holding after Japan.

Just by selling those gradually, probably alongside other countries that now see American assets as risky, China can push up US borrowing costs, which will be especially painful for a federal government holding $36 trillion in public debt. And the threat of a rapid sale, even if kept implicit rather than explicit, will send Wall Street billionaires rushing to persuade Trump to back down.

The Chinese economy does need exports, as well as relying on imports of many key commodities. But it has made itself more self-sufficient in recent years. And although social stability cannot always be relied upon even in authoritarian China, when the cause of pain is an American-initiated trade war it should be easy to rally public support.

What this means is that what China needs from Japan, the EU and others to win this trade war is quite limited, at least in the short term. The main need will be to avoid any diversion of Chinese goods from America causing further trade conflict: so a form of monitoring and trade management measures will need to be negotiated with these other major markets. The longer-term need will be for all countries to agree on rules and institutions to keep trade open without American participation.

The multilateral arrangements for such negotiations already exist in the form of

• the European Union,
• in Asia the Comprehensive and Progressive Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership,
• in Latin America Mercosur and
• the African Continental Free Trade Area.

For these groups to work together to build a free-trading world in response to American self-exclusion will not need to imply any dangerous alignment with China.

Rather than allowing China to lead this process, a better approach would be for it to be led by a country like Japan, just as during the first Trump presidency Japan worked alongside Australia to re-design the CPTPP.

The emerging playbook is clear: talk to Trump, even offering symbolic goodies such as investment in gas infrastructure, but never do so at the sacrifice either of open trade or of economic and energy security.

Some ideas are too valuable to give up. And – as the late Shinzo Abe showed over CPTPP – there are other ways to protect those ideas, even in the face of American hostility.

Formerly editor-in-chief of The Economist, Bill Emmott is currently chairman of the Japan Society of the UK, the International Institute for Strategic Studies and the International Trade Institute.

This article is the English original of a Jidai no Kaze (Winds of Our Times) column published in Japanese and English by Mainichi Shimbun. It is republished with permission.