Executive Summary

• The combination of a tariff war with China’s declining economy means significant challenges for President Xi.
• To provide economic stability and provide jobs for American workers, the US is raising tariffs at an unprecedented rate.
• President Trumps is combining McKinley’s tariffs with Teddy Roosevelt’s “Big Stick” approach.
• Other former “friends” must now decide either to enact reciprocal tariffs against the US, come to the bargaining table with concessions, or avoid the US market entirely.

China

The Chinese Economy is not well positioned to fend off the effects of a tariff war with the US…or anyone else for that matter.  China reported GDP numbers in excess of 9% in the years between 2004 and 2011.  After that, GDP slowly declined in most years, except for 2021 when the world bounced back from COVID impacts to economic growth.[1]  Nobody told real estate developers that the economy was slowly declining, however.  The boom in real estate from the previous decade was turning into a real estate bubble by 2016. Developers found ways to obscure how much debt they were holding, with help from bankers and lawyers. Buyers who suspected the property markets were overbuilt bought more anyway. Chinese and foreign investors seeking higher and higher returns inundated developers with funding.   Today, according to the Wall Street Journal, over 50 Chinese developers have defaulted on their international debt, and 500,000 people have lost their jobs. Some 20 million housing units across China sit vacant and unfinished, and an estimated $440 billion is needed to complete them.[2]  The loss of wealth in China is unprecedented:  the market has lost around $18 trillion of Chinese household wealth since 2021, according to an estimate by Barclays, eclipsing the losses suffered by Americans in the financial crash of 2008-09 and Japan in the 1990’s.[3]

In response to the decline, and after the National People’s Congress in March, China outlined an eight-point plan for fiscal stimulus, concurrent with an emerging trade war with the U.S. threatens China’s export-based economy. The plan’s objectives are to “vigorously stimulate consumption” and “comprehensively expand domestic demand,” according to state news agency Xinhua.  The list of actions includes promoting income growth at the top, followed by supporting consumption capacity, enhancing service consumption and upgrading major consumer goods. Further down the list are enhancing consumption quality and improving the consumption environment.[4] This is no small task.  Whereas the US is clearly more of a consumption-based economy, China is the world’s leader with over 32% share of the global manufacturing market.  By comparison, the US only has 15% of manufacturing but leads the world with 29% of global consumption.  In a simplistic sense, China makes the goods the US consumes.

Enter President Trump and his approach to tariffs.  As the new administration settles into their daily routine of increasing tariffs, it is becoming clear that much of the previous rational on why increasing tariffs is good policy is going to take a back seat to the real rationale.  Yes, punishing nations like Mexico and Canada (really?) for their lack of control of fentanyl coming into the US, and Mexico’s inability to control the influx of illegal migration into their northern neighbor have gained traction with many supporters.  Also, the debate on how much tariffs will contribute to the US Treasury’s reserves has yet to be resolved.  But key to the tariff issue for the President seems to be his desire to follow in the vein of President McKinley’s approach.  In short, the President appears to want to achieve national security not through overwhelming military capability but through economic strength.  In a real sense, making imports more expensive would, in theory, allow American manufacturing to resurge on a more competitive field of play.  McKinley was a true protectionist. Tariff policy was designed to shape consumer behavior. By taxing imported goods, McKinley wanted to guide consumers toward domestic suppliers, supporting American industries that could not otherwise compete globally (however anti-capitalistic this may seem) and also ensure stable domestic demand.

The world is different now than it was when McKinley became president in 1897.  Six years before the Wright Brothers first flight, America’s geography, borders with friends or weak neighbors combined with vast oceans, seemed adequate insulation from attack.  Internal strife following the 1893 depression seemed to be the larger threat.  The US was in the midst of the second industrial revolution, with mass production (e.g., the Model T) changing the face of America’s economy.  Making products in the US and keeping the growing population employed were vital for stability.[5]

Today in order to provide the same economic stability and provide jobs for American Workers, the US is raising tariffs at an unprecedented rate.  The fundamental question for China is, can they convert their manufacturing-based economy in time to consume the mass-produced goods no longer being sold to America?  Europe may offer a temporary shock absorber for many goods currently flowing to the US, but reshipping those goods to the US will not overcome the tariff challenge.

China recently announced a 7.2% increase in defense spending along with significant increases in other investment areas.  The decades-long investments in military hardware have allowed Beijing to build up an arsenal of advanced missile systems, fighter jets, and maritime vessels.  Asserting a more dominant role in the world, and most importantly in the Taiwan Strait and South China Sea.  Premier Li recently said: “We will firmly advance the cause of China’s reunification and work with our fellow Chinese in Taiwan to realize the glorious cause of the rejuvenation of the Chinese nation.”[6]

Although the war of words continues (Beijing recently called the White House’s rationale “flimsy,” and it responded with retaliatory tariffs of 15% and then an additional 34% on certain products) it remains to be seen if China can continue to produce exportable goods cost effectively while the US attempts to remake it’s economy into a more manufacturing vice consumables based.  In the interim China is using other elements of power and last week announced export controls on rare earth metals needed to make high-tech products, the suspension of export licenses for 16 U.S. firms and the adding of 11 companies to an “unreliable entities list.”  Although China is not giving up on military expansion, President Xi clearly intends to make the economy more of a focus area as they try to navigate President Trumps combination of McKinley’s tariffs with Teddy Roosevelt’s “Big Stick” approach.  As companies currently spend as much as three times the amount of money on human talent than capital assets (with the exception of the energy industry)[7], the shift to manufacturing will necessitate a revision not only in capital spending but also in longer term strategies’ ROI if significant percentages of profit must be put into infrastructure.

Other Far East Nations’ Response to America’s Tariff policy

Suppliers to Apple, Nvidia and other major tech brands were left “stunned” after President Trump’s latest barrage of tariffs included some of the highest rates on Vietnam, Taiwan, Thailand and other Asian economies that have been key to America lowering its reliance on Chinese production.  Multiple suppliers told Nikkei Asia that the rates were far higher than expected and could force them to rethink investment strategies.  Beginning April 9, Vietnam will face tariffs of up to 46%, Thailand 36%, Taiwan 32% and India around 26% on all products shipped to the U.S.

Companies have few options.  “We will do nothing, as there is nothing we can do. We might as well produce more back in China instead of Vietnam and India, since everywhere is facing much higher tariffs now,” said a manager at a Google supplier. The manager added that there are many “hidden costs” to manufacturing in Southeast Asia, such as lower efficiency.[8]  In the White House, the feeling is that these nations are merely transit hubs for Chinese products.  According to officials prior to the President’s announcement, the reason why Cambodia sells anything to the US is because Cambodia is an important transshipment hub that Communist China uses to evade US tariffs.  Vietnam is viewed in the same light.  The White House said buildings in Vietnam may look like manufacturing facilities but are actually warehouses in which Chinese products are rebranded Vietnamese and sent to the U.S.[9]

Over the next months nations will decide either to enact reciprocal tariffs against the US or come to the bargaining table with concessions.  If the ultimate US goal is to bring manufacturing back to increase well paying jobs and provide more security through the economic element of power, then few agreements to lower key tariff rates are likely.

Conclusions

In the long-term profits will likely be reduced as companies try to navigate both the ever-changing tariff policy of the US as well as the impact on consumers.  SinoPac Inv. Service, an investment consulting company, believes that notebook computers and networking gear suppliers could be hit particularly hard as rising prices for end customers impact bottom lines. They expect broad profit erosions in 2025 if the tariffs are fully implemented.  The irony for many Asian nations is that they have played a key role in Washington’s “friendshoring” push, helping U.S. companies build supply chains away from China since 2018. But this shift has increased their trade deficits with America, leaving them vulnerable to Trump’s new approach to tariffs.

How much of this whipsaw companies can withstand will be more and more evident in the coming months as quarterly reports begin to catalogue the impacts of US policy.  Some nations have decided to avoid American markets entirely.

In a surprise development, Canada’s new prime minister, Mark Carney, spoke with Australian Prime Minister Anthony Albanese recently and has decided to buy the Australian made Jindalee Operational Radar Network (JORN). If finalized, Australia would post its largest defense sale in history, at a value estimated at more than $6 billion CAN ($4 billion USD).  The United States and Australia had been in talks about a new over the horizon network, but Canada now appears to have leapt over America’s head, according to the Australian Broadcasting Corporation (ABC).  In remarks, Albanese pointed to the importance of Australia diversifying its trade relationships. While he didn’t mention the tariffs President Trump has ordered on Australia, there has been increasing discussion here about the solidity of the alliance and the relationship between the US and Australia.[10]

[1] See:  https://www.macrotrends.net/global-metrics/countries/chn/china/gdp-gross-domestic-product

[2] See:  https://www.wsj.com/real-estate/china-real-estate-bubble-bust-35a2b7db?mod=article_inline

[3] See:  https://privatebank.barclays.com/insights/2024/november/outlook-2025/is-china-having-its-big-bazooka-moment/

[4] See:  https://asia.nikkei.com/Economy/China-launches-action-plan-to-spur-consumption-lock-in-retailupswing?utm_campaign=GL_china_up_close&utm_medium=email&utm_source=NA_newsletter&utm_content=article_link&del_type=9&pub_date=20250320233000&seq_num=9&si=[%user_id%]

[5] Based on:  https://www.foreignaffairs.com/united-states/misunderstanding-mckinley?s=EDZZZ005ZX&utm_medium=newsletters&utm_source=fatoday&utm_campaign=A%20Better%20Way%20to%20Defend%20America&utm_content=20250314&utm_term=EDZZZ005ZX

[6] See:  https://foreignpolicy.com/2025/03/05/china-defense-spending-military-budget-us-trump-taiwan/

[7] See:  https://www.mckinsey.com/featured-insights/sustainable-inclusive-growth/charts/talent-should-take-center-stage?cid=other-eml-chr-mip-mck&hlkid=761a277dda9c4dd6810cf94b69812e04&hctky=14470315&hdpid=9dcfbccb-49ff-43c1-9f94-5feebcbedfe9

[8] See:  https://asia.nikkei.com/Spotlight/Supply-Chain/Trump-tariffs-upend-out-of-China-plans-for-Apple-Nvidiasuppliers2?utm_campaign=GL_asia_daily&utm_medium=email&utm_source=NA_newsletter&utm_content=article_link

[9] See:  https://asia.nikkei.com/Economy/Trade-war/Trump-reveals-reciprocal-tariffs-34-on-China-24-on-Japan2?utm_campaign=GL_one_time&utm_medium=email&utm_source=NA_newsletter&utm_content=article_link&del_type=3&pub_date=20250405093000&seq_num=13&si=d8b19459-0039-4f2b-b797-b278dc4ee32c

[10] See:  https://breakingdefense.com/2025/03/australia-canada-announce-4b-over-horizon-radar-agreement/?utm_medium=email&utm_source=rasa_io&utm_campaign=newsletter

About Michael Snodgrass

Michael Snodgrass retired from the U.S. Air Force as a Major General in 2011. He is currently the President of SG Strategic Solutions LLC.

He has extensive command and leadership experience in the U.S. Air Force and joint world, as well as a wide range of disciplines, including defense and aerospace, technology development, government acquisitions and requirements, foreign military sales and leadership coaching.

He consults with the government, defense industry and other businesses on a wide range of topics. In 2019 he became an adjunct contract professor supporting the U.S. Air Force on strategy and policy development.

From 2014 to 2016 he was Vice President, International Business Development at Raytheon Corp. Prior to that he was Director of U.S. Air Force and Federal Aviation Administration programs at Engility Corp.

General Snodgrass joined Burdeshaw and Associates in 2012 and is a Senior Consultant for numerous clients in the defense and aerospace sectors. Prior to his retirement, he was U.S. Air Force Assistant Deputy Under Secretary for International Affairs; responsible for formulating and executing USAF Policy, Strategy and Programs for Building Partnerships and integrating Air Force policy with international partner goals, totaling over $40 billion total program value.

From 2007 to 2010 he served as the first Chief of Staff, U.S. Africa Command. There, he was responsible for the construction of the country’s newest Unified Geographic Command.

He has commanded at the squadron, group and wing levels and has lived in/visited over 50 nations while in uniform. He has over 3500 flight hours in various aircraft including the F-16, F-15, F-4, C-130 and HH-60, as well as over 100 combat missions in Operation Desert Storm.

In addition, General Snodgrass teaches leadership and management courses. In his spare time, he provides leadership coaching and training to the U.S. Air Force ROTC unit at Florida State University.