After U.S. President Donald Trump first declared high tariffs on China on April 2, a spiraling cycle of retaliatory tariffs has effectively stopped trade—for now—between the two nations.
No matter how this game of chicken ends, it would be wise for China to prepare for a long, bumpy road ahead. There will be future shock-and-awe actions emanating from the Trump administration, even if the two sides find their way to a trade armistice this time around. The United States is increasingly likely to go into recession and drag the rest of the world into it. The infrastructure of the global trading system, on which China and other successful developing countries have relied, has been fractured and damaged, probably beyond repair. All these developments presage a strong headwind for an economy that relies heavily on exports.
Mao Ning, a spokesperson for China’s Ministry of Foreign Affairs, resorted to Maoist rhetoric of an entrenched struggle with the United States as a way to fight the trade war. That may be a compelling negotiating tactic, but going back to the Mao Zedong era would be disastrous for China. That era is known for its poverty, economic stagnation, and large-scale famines.
The right strategy is cultivating, unleashing, and tapping into the potential of China’s domestic market. China has a sizable GDP, the second-largest in the world, but its own consumption is only around 39 percent of GDP, much lower than that of many of the major economies in the world, such as the United States (68 percent), Japan (56 percent), India (60 percent), South Korea (49 percent), and Germany (50 percent).
As a continental economy with a built degree of self-sufficiency, there is something really unnatural about China being in the same league as an energy-producing country such as Saudi Arabia (40 percent) or a small city-state such as Singapore (31 percent).This low household consumption, coupled with the formidable production capacity it has built, creates a structural dependency on markets outside China, which has left the country vulnerable not only to Trump’s tariff war but to the rising global backlash against Chinese overcapacity.
The Chinese government has long wanted to boost domestic consumption, but its measures, such as providing consumption coupons, have been piecemeal and inadequate. What is required is a fundamental reorientation of government priorities, shifting away from the supply side of the economy to its demand side and a rebalancing of economic management toward markets and the private sector away from China’s dirigiste development model. In particular, Beijing needs to reverse the policy priorities it has embraced in response to the trade war initiated by the first Trump administration—a single-minded pivot to technology and advanced manufacturing at the expense of employment generation, social protection, and rural reforms.
Using textual analytical tools such as content salience analysis (CSA), we can discern the patterns of government policy priorities. (CSA scores and compares topics according to the attention each receives in government documents based on length, specificity, placement, and rhetorical force.) China’s most comprehensive economic policy statement is its annual report on the implementation of the National Economic and Social Development Plan, issued by the National Development and Reform Commission (NDRC)—a rough Chinese counterpart to the National Economic Council and Council of Economic Advisers in the U.S. system, though far more central to the government system and powerful in its ability to actually enact change.
The findings are striking. Topics on the supply side of the economy, such as science and technology, industrial upgrading, and infrastructure, consistently rank highest in the NDRC reports. Topics more closely related to the demand side, such as personal income and living standards, employment, social security, and changes to the hukou residence permit system—reforms that would grant rural Chinese similar entitlements to welfare, schooling, and health care as urban Chinese—consistently rank among the bottom in government priorities.
The single biggest anti-consumption factor is the hukou system. Under that system, some 700 million to 800 million rural Chinese, in the words of two demographers, “are treated as inferior second-class citizens deprived of the right to settle in cities and to most of the basic welfare and government-provided services enjoyed by urban residents, ranging from small benefits like being able to buy a city bus pass, to much more important matters such as enrolling their children in public schools in cities where their parents work.”
Apart from its egregious social inequities, the hukou system reduces the income growth of rural Chinese while raising their savings rate as a precautionary insurance against their future liabilities and contingencies. Former Chinese Finance Minister Lou Jiwei has estimated that removing the hukou system would lift rural Chinese consumption by 30 percent, larger than anything the Chinese government has proposed to boost consumption and more than enough to offset against the severest of the trade shocks. Abolishing the hukou system is, by far, the most effective and the most direct way to lift Chinese consumption and would go a long way toward shielding China from external trade tensions. Yet the Chinese government has discussed more than actually implemented meaningful and substantive hukou reforms. In the NDRC reports, the hukou reform routinely ranks the lowest among the major topics.
The Chinese system is well organized to pour resources to invest in things rather than in its people. An example is employment. In 2023, China’s youth unemployment hit 20.4 percent, the highest level since the government started publishing such data. An unofficial estimate puts the figure above 46 percent. After the COVID-19 pandemic devastated the Chinese economy and with more than 10 million college graduates entering the workforce yearly, one would think that the government would go out of its way to prioritize job creation and employment generation.
But there’s no indication of that in the NDRC reports. In 2024 and 2025, topics related to employment ranked only seventh among 10 major topics discussed in the NDRC reports. In fact, as China’s employment challenges grew, the NDRC reports reduced attention to the issue. Prior to 2018, employment usually came up among the top five topics.
Also, the NDRC views employment more as a result of economic growth, framing growth as promoting jobs, whereas promoting jobs is framed as a social issue. The implied causation runs from growth to jobs rather than the other way around. This distinction is crucial. Employment is an input to the economy on the supply side, but it is also a source of people’s income on the demand side.
In the Chinese context, it is far easier for local governments to grow GDP—one of the measures that officials’ success is judged by—through capital-intensive investments rather than through income growth that comes from employment promotion. The government controls the financial system, land allocation, and investment approvals, whereas to generate broad-based employment requires mass flourishing of small and medium enterprises and a more freewheeling business environment. This priority on growth generating employment is the root of the ingrained investment bias in the Chinese economy and its resultant overcapacity.
Since 2018, the policy priorities of the Chinese government have shifted further away from the demand side of the economy. In 2013, when Xi Jinping became president, employment and income and living standards were ranked second and third, with GDP growth ranked first in the CSA analysis of that year’s NDRC report. During his first term, Xi famously enacted a program of “common prosperity” that placed a greater emphasis on the tangible welfare of ordinary people. The NDRC reports between 2013 and 2017 broadly reflected this people-centric approach.
And Xi scored some notable successes. Household consumption, as a percentage of GDP, steadily rose, from 35 percent in 2012 to 38.5 percent in 2017 before peaking at 39 percent in 2019. He also increased transfer incomes to rural Chinese, and income inequality, measured by the Gini index, shrank. He cracked down on food safety problems and air pollution, two problematic areas that garnered widespread dissatisfaction from the Chinese public.
In 2018, the policy priorities sharply pivoted toward industrial upgrading and science and technology. In that year’s NDRC report, employment dropped to fifth place, income and living standards to ninth place, and hukou reforms—which would improve the welfare of rural hukou holders, many of whom actually live in urban areas but have not been granted the corresponding hukou—ranked at the bottom of government priorities. In the last three years, science and technology and industrial upgrading climbed to first and second in the NDRC reports, crowding out demand-side topics.
There are complex reasons behind this shift. Xi often sounded the alarm over what he called China’s “chokepoints”—its dependency on key foreign technologies. In 2018, Science and Technology Daily, a state-run newspaper, published a list of 35 technologies for which China depended heavily on imports, such as advanced semiconductors, high-end electronic components, and specialized steel alloys. That concern about chokepoints was greatly accentuated during the first Trump and the Biden administrations, when the United States curtailed exports of certain technologies to China. This likely prompted Xi to pivot to a technology-centered agenda, with a renewed focus on advancements in AI, alternative energy, and other cutting-edge fields.
But that change has arguably made China more vulnerable to the vicissitudes of the global economy. The economic and financial payoffs of technology are not always guaranteed, and if they do occur, they occur in the future. But technologies and advanced manufacturing are costly, requiring investments and government support and competing with the immediate needs of the Chinese people for broad-based job opportunities beyond the high-tech sector, social protection, and income support. The strategy may have boosted China’s technological self-sufficiency, but it was achieved at a cost to the demand side.
Since 2018, China has fought an economic war with the United States on two fronts—technology and trade. Time will tell whether China has succeeded in paring itself off from dependency on foreign technologies, but on the trade front, the best defense against the incoming adverse global environment is for the Chinese government to put people ahead of things. Beijing should prioritize the demand side of the economy through employment promotion and enhancing pensions and, above all, introduce reforms that would materially improve the well-being of the biggest bloc of its consumers—rural Chinese. This would be good for the Chinese people, and it would go some way toward alleviating tensions with the West.
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