US Tariffs, China’s Economic Strains, and Beijing’s Taiwan Calculus
Dr. Anudeep Gujjeti
Beneath the headline Gross Domestic Product (GDP), China faces serious economic setbacks. Youth unemployment surged to record highs in 2023, exceeding 21% for 16–24 year-olds in June that year. The problem grew so acute that officials halted the release of youth joblessness data for months. A protracted housing market slump and debt-laden property sector have further dampened growth, home sales were reported 45 percent down at one point, eroding household wealth and consumer confidence. Indeed, a massive trade surplus (over $1 trillion in 2024) was a lone bright spot for the economy, making China highly vulnerable to external demand shocks. Beijing has promoted domestic consumption to rebalance the economy, but progress has been limited, underscoring why exports and access to foreign consumers remain critical for China’s economic health.
Compounding China’s worries is an intensified United States (US) tariff regime that directly targets Beijing’s export engine. In 2018-2019, the Trump administration imposed duties up to 25%, initiating a trade war. By early 2025, Washington had dramatically hiked tariffs even further. President Trump announced “reciprocal tariffs” of 32% on most Taiwanese goods and triple-digit tariffs on Chinese products, averaging 145%. These extraordinary measures, described as “eye-watering”, amount to a quasi-embargo on Chinese exports to the US. Beijing has retaliated with its own steep tariffs (as high as 125% on US goods) and curbs on critical exports like rare earth minerals; but the imbalance in US-China trade means China’s economy stands to lose far more from this decoupling.
Beijing’s response has been two-pronged. Economically, it is scrambling to stimulate domestic demand to offset export losses. Officials rolled out subsidy programs and consumption incentives, from discounted appliances to tax breaks, to spur spending. Politically, Beijing has adopted a defiant nationalist posture. State media and officials insist China will withstand the “unprecedented” trade war. This rhetoric reflects an effort by the Chinese Communist Party (CCP) to rally public opinion against foreign pressure and frame the economic struggle as part of a larger nationalist cause.
China’s economic downturn has significant domestic political implications for Xi Jinping’s government. For decades, CCP legitimacy rested on delivering rapid growth and improving living standards. Now, with the economy faltering, Beijing may lean more on nationalism and the promise of “national rejuvenation”, with Taiwan’s unification as its core, to maintain popular support. Indeed, analysts suggest Xi perceives a narrowing window of strategic opportunity, saying that “he is aware that China’s growth has peaked” and wants to achieve unification with Taiwan while China still has the power to do so. Mounting economic and social stresses (such as job scarcity and inequality) create pressure for the regime to find alternate sources of legitimacy and distraction. In other words, economic trouble could spur Beijing to act more aggressively on Taiwan, either to capitalize on current military strength or to rally a frustrated populace around a nationalist triumph.
However, nationalism cuts both ways. There are signs the Chinese public’s appetite for a risky Taiwan venture may be limited, especially amid economic hardship. When Chinese Foreign Minister Wang Yi in early 2024 lauded the “unwavering resolve” of 1.4 billion Chinese to reunify Taiwan, the online reaction was unexpectedly critical, with tens of thousands of netizens voicing “grievances, sarcasm, and defiance” about the costs of war.
Beyond economics, Beijing’s unification gambit is constrained by military realities, chiefly the US and its allies. Under the 1979 Taiwan Relations Act (TRA), the US is legally bound to provide Taiwan defensive arms and maintain the capacity to resist force against the island. Washington has approved large arms packages for Taipei and increased military cooperation, even as President Biden (and now President Trump) repeatedly affirm that the US “stands with” Taiwan. More importantly, US treaty allies in the region mean a Taiwan conflict could trigger a broader war, a frightening prospect for Chinese planners. Japan’s strategic community now openly states that a Taiwan contingency amounts to a ‘Japan contingency’ given Japan’s proximity and the threat a Chinese takeover of Taiwan would pose to Japanese security. Similarly, the Philippines, has granted the US access to additional military bases “amid mounting concern” over Taiwan Philippine President Ferdinand Marcos Jr. said plainly that these bases would be “useful if China attacked Taiwan”, underscoring Manila’s willingness to support US operations in a Taiwan scenario.
In US policy circles, an unusual discussion is unfolding about the costs and benefits of fighting for Taiwan. Notably, a March/April 2025 Foreign Affairs essay by Jennifer Kavanagh and Stephen Wertheim argues that the price of preserving Taiwan’s de facto independence may exceed what Americans can bear. The authors contend that a direct war with China would be devastating, in their words, “the cost of preserving Taiwan’s de facto independence is not worth a US-China war.” Instead, they urge Washington to fortify its allies and help Taiwan defend itself “from a distance,” so the US can avoid full military engagement. This perspective, that US vital interests can be protected without actually fighting over Taiwan, is controversial but gaining ground. It reflects worries about massive economic shocks, potential US casualties, and even nuclear escalation in a China conflict. On the other side, many US strategists insist that abandoning Taiwan would fatally undermine American credibility and empower an expansionist Beijing. Nevertheless, the mere existence of an “avoid war over Taiwan” camp could influence Beijing’s risk calculus. In this context it is imperative for scholars international relations and policy makers to take multiple factors into account while predicting what China is going to do with respect to Taiwan amid a tariff war.
Dr. Anudeep Gujjeti is Assistant Professor at the Center of Excellence for Geopolitics and International Studies, REVA University, Bengaluru.
