Cost-benefit analysis of the current tough stance

1. Main costs

  1. Export faces shrinkage risk: Exports to the U.S. may decrease by 50-60% (about $300 billion); mainly affecting high-value-added products such as electronic equipment and new energy vehicles

  2. Increased employment pressure: Reduction of export-related jobs

  3. Short-term economic pain: Fiscal policy needed to buffer transformation shock

2. Potential benefits:

  1. Avoiding massive wealth transfer: A 125% tariff means a potential expenditure of $250 billion

  1. Forcing economic transformation: Promoting domestic circulation construction (the total retail sales of consumer goods reached 55 trillion in 2024)

  1. Self-sustaining supply chains: Reducing dependence on the U.S. market (the share of exports to the U.S. has decreased from 19% in 2018 to 13% in 2024)

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Historical experience and current decision-making context
During the trade war from 2018 to 2019, China responded by signing the Phase One trade agreement and committing to increase imports of U.S. goods by $200 billion. However, the actual effects showed:

  1. The U.S. still maintains tariffs of 7.5% to 25%

  2. Renminbi exchange rate under pressure, depreciating (6.5 to 7.3)

  3. Decline in international purchasing power indirectly subsidizes U.S. taxpayers


Three main pillars supporting this response strategy

  1. Breakthrough in energy security

  • New energy vehicle penetration rate exceeds 50%

  • Dependence on foreign oil decreases to 67% (down 5 percentage points from 2018)

  1. Progress in technological self-reliance

  • Self-sufficiency in semiconductors increased to 35% (less than 15% in 2018)

  • Major technological breakthroughs in Beidou Navigation, space station, etc.

  1. Optimization of market structure

  • ASEAN becomes the largest trading partner (accounting for 18.7%)

  • Trade volume along the Belt and Road increases by an average of 6.8% annually

Strategic considerations of policy choices

  1. Game theory perspective

  • Compromise may provoke more demands (the evolution of tariffs from 25% to 125%)

  • A tough stance establishes credible deterrence

  1. Long-term vs. short-term trade-offs

  • Short-term pain for structural industry upgrade

  • R&D investment intensity increased to 2.8% (exceeding the EU average)

  1. Reshaping the international landscape

  • Promoting regional cooperation mechanisms such as RCEP

  • Building a cross-border payment system for digital currency

Potential risks and challenges

  1. Acceleration of technological decoupling

  • Fields such as semiconductors may face stricter blockades

  1. Reconstruction of international division of labor

  • Pressure for some industries to relocate to Southeast Asia

  1. Difficulty of policy coordination

  • Balancing employment stabilization and transformation promotion

Conclusion:
The current tough stance reflects a fundamental shift in China's development strategy, essentially transitioning from an 'export-oriented' to a 'dual circulation' strategic model. While this choice brings short-term adjustment costs, it aligns with medium- to long-term development needs. The key to success lies in:

  1. Effectiveness of cultivating domestic demand market

  2. Speed of breakthroughs in technological innovation

  3. Maintaining international cooperation partners: Future attention must be paid to the coordination of industrial policies and macroeconomic policies, as well as seizing strategic opportunities during the reconstruction of the global economic order.

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