US-China Trade War: Mutual Misjudgments Trigger Early Showdown

The United States-China trade war, destined to reshape the dynamics between the two nations and the global order, has erupted prematurely due to mutual miscalculations. This conflict, potentially escalating into an all-out confrontation, could lead to dire economic consequences. Some economists predict that China's economy might face a "brittle failure," a catastrophic collapse as early as this year, 2025.

America's Misjudgment of China's Strength

On the one hand, the United States has overestimated China's economic and military prowess.

China's advancements appear formidable on the surface. Annually, China launches more naval vessels than the total existing fleets of all European nations combined. The People's Liberation Army continually upgrades its equipment, with a standard army brigade's firepower surpassing that of the US military. China's space program is thriving, with lunar missions and Mars exploration underway. In renewable energy, breakthroughs in photovoltaics and electric vehicles create an impression of relentless progress.

Additionally, China's financial diplomacy in Africa and Latin America, offering substantial aid to secure international support, bolsters its global influence. These indicators suggest an indomitable Chinese economy.

A notable example of this misjudgment is Elon Musk's recent endorsement of an analysis by Grok, which estimated China's 2025 GDP at $35.29 trillion in purchasing power parity terms. That would be 1.23 times larger than America and 1.60 times the European Union.

Musk's comment, "This comes as a surprise to most people," reflects a belief in China's economic dominance. However, this view has sparked debate. Critics, including American investor Kyle Bass, argue that such figures rely on manipulated data from the Chinese Communist Party (CCP).

When sharing his post, I noted, "I was surprised that Elon Musk has not seen through the CCP's data manipulation games yet. What Grok can get is mostly fake numbers about the Chinese economy released by the CCP or other 'experts' who use the CCP's numbers to do their studies." This highlights a broader tendency among some US observers to overestimate China's economic resilience.

China's Misjudgment of US Resolve

Conversely, the CCP has underestimated the Trump administration's determination to alter the status quo. Therefore, it has misread the broader geopolitical landscape.

Following Donald Trump's April 2 announcement of reciprocal tariffs on nearly all countries, the CCP believed it could rally other nations dissatisfied with US tariffs to form an anti-American alliance, positioning itself as the leader of this coalition.

However, Trump swiftly suspended tariffs on other countries, targeting only China with high duties.

This left the CCP in an awkward position, unable to retract its hardline stance and forced to escalate in response to US measures. The CCP's miscalculation has isolated it diplomatically and intensified the trade conflict.

The Inevitability of the Showdown

The US-China confrontation was likely inevitable, with mutual misjudgments merely hastening its onset.

For the US, an early conflict may prove advantageous, but for the CCP, it could be catastrophic. The premature escalation has exposed vulnerabilities in China's economy, raising the specter of a systemic collapse triggered by the intensifying trade war.

Why China's Economy Faces a Potential Collapse

Surging Government Debt

China's economic fragility is evident in its soaring government debt.

Data on national and local government bond issuance, excluding urban investment bonds and other hidden debts, show a steady rise since 2018.

By the first quarter of 2025, monthly bond issuance reached 2.0994 trillion RMB ($288.733 billion USD), a 13.8% increase from 2024's average and a 227% surge since 2018.

This reliance on debt has become the primary means of sustaining government operations.

Alarmingly, over 70 local bonds issued this quarter, totaling more than 400 billion RMB ($55 billion), carried interest rates 0.2% to 0.5% above market benchmarks, with additional higher issuance and management fees inflating interest rates by about 1%.

This desperation for funds, even in the relatively liquid first quarter, underscores the acute financial strain on local governments.

Declining Fiscal Revenue

Official fiscal revenue data, considered more reliable than GDP figures due to lower incentives for falsification, reveal a troubling trend.

China's fiscal revenue comprises public budget revenue (taxes and non-tax income) and government fund revenue, primarily from land sales.

Land sales accounted for over 90% of local governments' fund revenue before 2021. Now, however, they have declined to about 80% as the property market falters.

Fiscal revenue growth slowed until 2021, then plummeted 6.3% in 2022 due to stringent COVID lockdowns. A modest 2.1% rebound in 2023 followed the end of Zero-COVID policies, but 2024 saw a 2% decline, worsening to 2.6% in the first quarter. This downward trajectory signals deepening economic stagnation.

Rising Fiscal Expenditure and Deficits

Fiscal expenditure, briefly reduced by 1% in 2021 amid calls for austerity, has since resumed its upward climb, reaching a 5.6% increase in the first quarter of this year. The fiscal deficit has ballooned from $0.12 trillion in 2014 to $1.46 trillion in 2024, a tenfold increase, with the deficit-to-revenue ratio soaring from 4.5% to 37.0%.

In the first quarter, the deficit reached $0.32 trillion, a 41% jump from the year 2024's $0.23 trillion.

Projections suggest a full-year deficit of 14 trillion RMB ($1.93 trillion), with a deficit ratio of 45%.

If the trade war further erodes revenue, the deficit could hit 17 trillion RMB ($2.34 trillion). That level, economists warn, would guarantee economic "brittle fracture," destabilizing China's financial and monetary systems.

China's Economic Reality

A Glimpse of Decline

A video from Shenzhen, one of China's economic powerhouses, captures the stark reality: a massive 100-million-square-meter mall, once bustling, now stands deserted. This contrasts sharply with footage from a decade ago showing throngs of shoppers.

Employment Status of 2025 Graduates of Yunnan University (Statistics as of March 24, 2025)

Similarly, employment data from Yunnan University's 2025 graduate cohort paints a grim picture. Across 29 colleges, the highest employment rate is 53%, the lowest a mere 3.8%, averaging just 21%. Nearly 80% of graduates remain jobless, reflecting a dire labor market.

Social and Economic Strain

Decades of a property bubble have left Chinese households with an average net debt of 200,000 RMB ($27,500), depleting savings and consumption capacity. The top 2% of red families control 82% of wealth, creating extreme inequality.

Without a robust social welfare system, ordinary citizens lack medical or pension support, as resources favor the 90 million public sector workers.

China's export-dependent economy, with 40% of industrial output reliant on exports — 16% directly or indirectly to the US — faces collapse if US markets close.

Notably, business with the US yields the highest profit margins. It generates approximately 50% gross profit for industrial enterprises, far surpassing margins from other markets. The loss of this lucrative trade would devastate Chinese industry.

CCP's Inadequate Response

The CCP's strategy has been to enforce strict social control, but it lacks the capacity for effective mobilization. Planned for a post-collapse "suppression mode" to maintain power, the CCP was unprepared for the trade war's early onset.

Its response — slogans and a 12,000-word white paper blaming the US for COVID — appears futile.

Meanwhile, the US has escalated, with the CIA releasing Chinese-language videos on May 1 to recruit CCP officials as informants, signaling readiness for total confrontation.

The Looming Catastrophe

If China's economy experiences a "brittle fracture", a cascade of bankruptcies, unemployment, and debt defaults will follow, eroding social stability and governance. Even unlimited money printing could not avert this outcome.

The only uncertainty is whether China can swiftly restore order after an economic collapse or face prolonged chaos. That would exact a toll far beyond temporary hardship — a fate that, as former Vice President Wang Qishan once suggested, could reduce the nation to "eating grass."

Author: Jennifer Zeng