As US President Donald Trump and Chinese President Xi Jinping prepare for their next engagement as leaders of the world’s two great powers, both come armed with more leverage.

Trump has threatened to slap at least 60% tariffs on Chinese goods, with additional tariffs punishing Beijing for not doing enough to curb the flow of chemicals used to produce fentanyl, a drug devastating American communities. Beijing has restricted exports of rare earth minerals critical for semiconductors and other advanced technologies. This move is not only a reaction to the Joe Biden administration’s export controls on sensitive technology; it sends a clear message: China is now more capable than ever of implementing countermeasures that target US supply chain vulnerabilities.

Trump’s pre-office threats of new tariffs on China should be viewed more as positioning for future trade negotiations than as a fait accompli. A tit-for-tat trade war with China would dampen the stock market and US gross domestic product growth – two metrics Trump is particularly sensitive to and reluctant to admit performed relatively well under the Biden administration. For the Trump administration, sweeping tariffs risk stoking inflationary pressures and alienating American consumers.

Chinese policy-makers and companies will not count their export fortune on tariff negotiations. The government is likely to retaliate while preparing for a tough negotiation, whereas firms will continue finding ways to export. Chaotic American political theatre and Washington’s hostility towards the Communist Party of China could convince Xi and some of his advisers that a declining US wants to economically and militarily contain a rising China and that China should double down on pursuing self-reliance.

China is seeking status and recognition

Regardless of who is in the White House, Xi’s China has one clear demand: it seeks status and recognition as a peer power to the US, not a subordinate, and resists coercion from Washington as a matter of principle. Beijing is now better equipped with tools to hit back.

Over the past five years, the Chinese government has established robust administrative, legislative and regulatory frameworks that can provide legal grounds for the government and corporations to implement countermeasures against foreign economic coercions. For example, Chinese authorities have released a new anti-foreign sanctions law, a new export control law, an unreliable entity list, an anti-espionage law and foreign relations law, among others. All these measures can legitimise China’s retaliation against foreign restrictive actions.

In an escalatory trade war scenario during the second Trump administration, China is likely to be more willing than last time to retaliate by restricting mineral exports. This is because its edge in critical mineral supply chains will weaken as the US and its allies and partners develop their own critical minerals supply chains, develop alternative materials and enhance recycling.

Trump tariffs would raise prices paid by American consumers and reduce direct US-China trade partially by redirecting flows via intermediary countries. However, the tariffs will not stop Chinese exporters from seeking markets overseas for higher profits. In China, domestic profit margins across industries – from solar panels, electric vehicles and batteries to retail goods – are razor-thin thanks to fierce competition among producers of homogenous products due to years of massive capacity investment.

Moreover, Chinese companies have been setting up production facilities or assembling plants in countries that have bilateral or free trade agreements with the US, such as Mexico, Morocco and Vietnam, to diversify their supply chains and mitigate the impact of tariffs. Chinese firms and entrepreneurs are resilient.

Real challenge for China lies at home

For Xi, the return of Trump to the White House and his threat of steep tariffs is not the most significant challenge to his goal of achieving national rejuvenation. If Beijing can leverage rising tariffs to push domestic reform and increase household consumption, it can sustain balanced growth despite short-term pains. Even so, Beijing’s consumption-promotion measures will not sacrifice investment in strategic sectors.

Xi remains convinced that achieving a higher degree of self-reliance and technological advancement can heal economic woes, defend against foreign containment, shake off the ‘Century of Humiliation’ and enshrine him as a paramount leader in the party’s pantheon.

The real challenge for Chinese policy-makers lies at home. While they have experience designing and implementing industrial policies, they struggle to mobilise Chinese consumers to spend to drive growth. Without fixing public pessimism about the economy, direct household cash handouts are unlikely to spur household spending over saving. Beijing’s biggest challenge is restoring policy credibility and market confidence.