In the game of chicken between the US and China, round one goes to Beijing

Business Mayor

25-05-2025

There are a number of possible conclusions to draw from the recent tariff climbdown between the US and China but one stands out.
The resolute position of Beijing, its willingness to 'fight to the end' and stomach a big hit to growth, if necessary, was undoubtedly underestimated by Washington. The escalating tariff war between the world's two superpowers had threatened to destroy $582 billion of US-China trade, a potential economic calamity for the Asian powerhouse but Beijing didn't blink.
It even backed up its retaliatory position by fixing the exchange rate of the renminbi with the dollar, signalling to the US side it would depreciate its currency to offset Trump's tariffs.
In the end, it was Trump's team that was seeking talks, contrary to his brag that countries were 'kissing my ass' to negotiate their way out of tariffs.
It is not over by any means. Tensions are ratcheting up again and significant tariffs still apply but round one of this giant game of chicken goes to the Chinese.
In a recent research note to investors, Deutsche Bank linked China's uniquely tough stance to the Opium Wars fought between Britain and China almost 200 years ago. That percipitated what China describes as its 'Century of Humiliation' when it was forced to cede control of large tracts of territory, including Hong Kong, to coercive Western powers and which culminated in a brutal Japanese invasion in 1937.
Similar to today's confrontation, the Opium Wars (the first one involving Britain and China was fought between 1839 and 1842) were driven by trade imbalances.
'While Chinese goods like silk, tea and porcelain were in high demand in Britain, China bought few British goods in return,' Deutsche Bank noted. 'As the drain of silver became too much, Britain sought to make China accept opium in exchange, and ultimately overcame China's resistance to this trade by fighting the Opium Wars.'
Britain had been smuggling opium (made from the sap of poppy plants) from their Indian colonies into China against the wishes of Chinese rulers, who were alarmed by the widespread use of the drug and its negative impacts on the country's economy and social fabric.
By the end of the 19th century, it is estimated that nearly 10 per cent of China's population was addicted to opium.
Instead of targeting users, China targeted the pushers (Britain), first writing an open letter to Queen Victoria, then taking matters into their own hands by seizing shipments.
That latter act escalated tensions and ultimately led to a military confrontation which Britain, largely because of its technological and military might, won. British steam-powered gun boats played an important role.
The wars resulted, from China's perspective, in a series of humiliating treaties, each expanding the size of Britain's Hong Kong territory. These treaties were then followed by a 99-year lease in 1898 that allowed Britain to control even more land – a lease that ran out in 1997, the year Hong Kong was ceded back to Beijing.
'This memory likely informs China's approach to external pressure today and its willingness to stand up to economic coercion,' Deutsche Bank said.
But is also makes clear that China's situation in terms of economic and military power could not be more different today.
'China now has the world's largest navy, with 200 times the shipbuilding capacity of the US, and is at the forefront of industrial innovation across sectors from telecom hardware to EVs,' it said.
'The fact that China retaliated strongly to US tariffs and made no publicly known concessions to effect the reduction, highlights that we are in very different times,' it said.
It is easy to see the stand-off and the seeming climbdown by the US in the context of China thinking in centuries versus the US's short-termism. Or the chess-related cliché, attributed to former US secretary of state Henry Kissinger, that China thinks in terms of strategic encirclement while the US tries to checkmate opponents.
There's also a stereotypical view that dictatorships are better at long-term planning because they don't have to worry about the next election. But autocratic leaders can be swept away on a sudden tide as the collapse of the Soviet Union showed.
More recently, Yevgeny Prigozhin's unimpeded march on Moscow in 2023 cast Russian president Vladimir Putin's seemingly ironclad hold on power in a very different light. The Wagner militia leader was subsequently killed in a plane explosion which most see as a Kremlin-inspired revenge attack.
Great-power dynamics are complex.
Trump's cosying up to Putin and his absurd attempt to blame Kyiv for Russia's invasion can be viewed as an attempt to pull Russia away from China.
Russia and China are uneasy bedfellows not least because the USSR tried to exert control over Beijing and China's border regions during the Cold War, a friction that former US president Richard Nixon cleverly exploited to decouple China from the USSR in the 1970s.
Current US policy is now being referred to as a 'reverse Nixon', decoupling Russia from China. But as Deutsche Bank makes clear, China is now big enough to stand on its own against the US.