The United States Doesn’t Need to Fear China’s Economy

However, unlike most of President Donald Trump’s hapless trade war victims, Beijing punched back hard. It raised equivalent tariff barriers and leveraged China’s overwhelming dominance in the production of rare-earth minerals to choke off supply of these critical industrial inputs, threatening U.S. production of everything from autos to aircraft and weaponry. The United States then, in effect, cried uncle, backing down from its most severe tariff threats. This week, Washington limped into trade discussions with Beijing on May 14 seeking an extended reprieve on China’s rare-earth export controls and headline pledges to buy more U.S. agricultural goods and energy.

In return, the administration may have to give on dismantling some export controls on advanced technology or even diluting U.S. support to Taiwan. Privately, members of the U.S. administration may admit—perhaps in sotto voce—that, for now, China has economic escalation dominance.

If competition between the United States and China is the most consequential geoeconomic storyline of the 21st century, then this episode doesn’t bode well for Washington. As the economist Neil Shearing incisively argues in The Fractured Age, the global economy is inevitably, albeit gradually and unevenly, splitting into two blocs: one centered around the United States and another around China. You can see the beginnings of this fracturing in global trade and foreign direct investment patterns, which—as the International Monetary Fund has —increasingly flow between . And in this more competitive environment, economic warfare will be a central battlefront between the two blocs as both sides seek leverage over one another to pursue their own policy interests and push back against coercion.

Does China have the upper hand in this new, fractured world? The past year’s showdown would tell you yes, but the numbers tell a different story. In their thought-provoking analysis Command of Commerce, former U.S. Treasury Department official Ben A. Vagle and Dartmouth University Professor Stephen G. Brooks argue that the United States holds the high cards. The world’s most important, profitable, and sophisticated companies sit largely in the United States and the Western bloc, and China’s own export machine is dependent upon their investments. In a sudden all-out decoupling between China and the West, the short-run impact would hurt China’s economy between five to 11 times more than the United States, according to their research, and China would face worse long-term economic scarring.

Command of Commerce: America’s Enduring Economic Power Advantage Over China, Ben A. Vagle and Stephen G. Brooks, Oxford University Press, 296 pp., $29.99, April 2025

So then, why is the United States running scared of China? Part of the reason is that China has found the perfect asymmetric weapon in rare-earth restrictions that cost its economy little while inflicting major damage on U.S. industry. Washington’s most powerful economic weapons, such as financial sanctions, would impose meaningful costs to U.S. companies and consumers, even if they do disproportionate harm to Beijing.

Another reason is that the United States may inherently have a lower pain threshold than China or lack confidence due to a long history of (largely misplaced) hand-wringing about economic decline.

But a big reason is the way in which this administration has waged economic war with China: with unilateral tariffs, an especially ineffective tool, and alienating allies along the way rather than presenting a united front. The United States has more than enough leverage to push back against economic coercion and thwart Beijing from having a veto over U.S. policy, but the task would be much easier if it kept the Western world onside.

U.S. President Donald Trump tours the Coosa Steel Corporation factory in Rome, Georgia, on Feb. 19. Saul Loeb/AFP via Getty Images

Ask what’s behind this “slowbalization,” and commentators will provide a bundle of reasons, including increasing global conflict, rising populist tendencies, inequality, and the jolt of Trump’s second term.

But Shearing accurately points to the most potent source: U.S.-China tensions that are unwinding decades of global integration. “The era of hyper-globalization that defined the global economy in the early twenty-first century is therefore over,” he writes, adding that this is “partly because it failed to live up to unrealistic expectations … and partly because it became a convenient scapegoat for a new generation of populist politicians. But it’s mainly because China has emerged as a strategic rival to the US.”

How will this rivalry contort the global economy into the future? Shearing argues that the world will gradually fracture more firmly into a U.S.-led and a China-led bloc and that the U.S. bloc will include Europe, Japan, India, Mexico, and other Western-leaning countries, but that decoupling between the blocs will only cover strategic industries, putting about 15 percent of global trade at risk (a relatively mild amount of fracturing given Shearing’s sweeping title).

During the Biden administration, when the book was likely written, this seemed the most plausible path. The United States was successfully pushing Europe, hesitantly but inexorably, toward joining its China-related restrictions; India was aligning more closely with the United States; and President Joe Biden’s national security advisor, Jake Sullivan, argued that U.S. restrictions on China should constitute a “small yard, high fence.”

But history has a funny way of upending assumptions. The Trump administration has taken a wrecking ball to Sullivan’s fence by hiking China tariffs on everything from toys to electronics, leading to a 20 percent drop in Chinese exports to the United States in 2025 and making broader decoupling appear increasingly plausible. The economic alliance with Europe is now in question after a bruising trans-Atlantic trade war and fights over Greenland and Iran as Brussels seeks more “strategic autonomy” and to reduce its own technological dependencies on the United States.

A ship is loaded with natural gas-powered buses, bound for Mexico, at the port in Yantai, in China’s eastern Shandong province, on Feb. 6.AFP via Getty Images

Another two and a half years of Trump, and perhaps another Trump-aligned Republican administration in 2029, may lead to a deeper and more permanent rupture between the United States and Europe, even if the trans-Atlantic economic relationship remains the two sides’ most important.

This would be a shame. For in one of the most enlightening exercises in his book, Shearing adds up the full weight of a U.S.-led bloc that includes Europe and the rest of the Western world and pits it against China’s. The result is a blowout. The U.S. bloc’s GDP is more than 2.5 times that of the China bloc, and China accounts for a full two-thirds of its team’s economic output.

Perhaps as crucially, the U.S. bloc contains much more economic diversity—commodity exporters and importers, developing and developed countries—which provides an additional source of strength. This diversity allows the United States to create a parallel economic ecosystem, whereas the China bloc remains overwhelmingly dependent upon Beijing and exports of both commodities and manufacturing to the West. And, as Shearing argues, China’s $10 trillion—and growing—stock of external assets means that it will remain vulnerable to U.S. financial sanctions, no matter how hard it tries to diversify away from the dollar.

Vagle and Brooks develop this powerful insight further in Command of Commerce. Conventional economic analysis, they argue, wildly overestimates China’s capabilities and leverage in its struggle with the United States for economic supremacy.

To make the case, they first take aim at calculating China’s true GDP. It’s well understood that China’s reported GDP numbers are inflated—it hits its official targets with marksman-like precision each year—yet most international economic analyses still use them as gospel. The Rhodium Group, a stellar economic research firm, has used bottoms-up analysis of commercial and official data to estimate that China’s true GDP growth in 2025 was between 2.5 percent and 3 percent, compared to the reported 5.2 percent.

Brooks and Vagle point to satellite imagery of nighttime luminosity, which has been shown to accurately correlate with economic output, to argue that China’s GDP is overstated by nearly one-third. This would place it at 52 percent of U.S. GDP in 2022 (using nominal exchange rates, not purchasing power parity) rather than the 72 percent calculated using official statistics. To put this in perspective, that’s less than the Soviet Union’s peak GDP of 58 percent relative to the United States GDP in 1975. So much for claims that China is leaving the United States in the dust.

But their persuasive analysis goes many steps further. The authors calculate that the share of global profits in nearly every sector is dominated by Western companies. While it’s true that Chinese industrial policy encourages ferocious competition that structurally reduces profit margins, the results are nonetheless striking. Brooks and Vagle find that U.S. and allied firms generate 38 percent and 35 percent of global profits, respectively, compared to China and Hong Kong’s combined 16 percent. In high technology industries, that number is even more disproportionate: The share is 55 percent for the United States and 83.8 percent combined with allies, while China’s share is 6.1 percent. And the same goes for value add in high technology. While China represents 29 percent of the world’s overall manufacturing value add compared to the United States’ 16 percent and allies’ 33 percent, its value add in high technology is 18 percent compared to the United States’ 29 percent and allies’ 37 percent.

Value add and profits matter because they demonstrate that Western companies, rather than Chinese companies, provide much of the irreplaceable economic value, even to China’s major export industries such as electronics. In fact, Vagle and Brooks note that while China generates 31 percent of global technology hardware value add, its firms generate just 13 percent of world sales in this sector—meaning that the bulk of China’s value add in the production of everything from laptops to phones comes from foreign companies operating in China largely for export.

It would be painful and expensive for Western firms to relocate their supply chains to other developing countries with less efficient manufacturing ecosystems. But for China, the exit of Western supply chains would mean a long-run crippling of its export industry.

What about the more sophisticated Chinese companies such as BYD and Huawei, or China’s clean energy champions such as CATL? Fueled by state subsidies, China is rapidly climbing up the value chain in many strategic industries, and it does have world-beating firms and products in areas such as electric vehicles and batteries.

But these still represent only a small piece of its overall economy—the authors note that about 60 percent of China’s value-added manufacturing remains in low-technology areas such as metals, plastics, and toys. And even clean energy products such as solar energy systems aren’t especially sophisticated and could be replicated—albeit at a higher cost—in other countries.

Vagle and Brooks helpfully model out the profundity of these insights. Across six different scenarios simulating sharp decoupling between the West and China over Tawain, China takes a short-term GDP hit 4.7 to 11.1 times larger than the United States, with Chinese losses ranging from 15.4 percent to 50.8 percent compared to the United States’ 2.8 percent to 7.6 percent. Make no mistake, decoupling would be extremely painful for both sides—a short-run loss of some 5 percent of the U.S. GDP is no joke—but China has much more to lose than the United States if both sides went to the mattresses.

The authors raise two cautionary, and ominously prescient, caveats. If the United States were to decouple alone from China, without its allies, its short-run GDP loss would be more even, at 70 percent of China’s. They also note China’s dominance in the production of critical minerals such as rare earths as an area of leverage. But here, Vagle and Brooks are perhaps overly sanguine. They correctly argue that rare earths are a low-value and comparatively small ($6 billion) industry that could plausibly be reconstructed outside of China, and that stockpiling these minerals is an effective mitigant.

But they downplay the length of time that it would take to reorient supply—most mines take at least a decade to begin production—and the uniquely effective dimension of this choke point. China can cut off exports to the United States at little cost to itself while imposing massive harm on the United States in the short run as supplies run out for industrial assembly lines.

Trump and Chinese President Xi Jinping walk to a room for a bilateral meeting in Busan, South Korea, on Oct. 30, 2025.Andrew Harnik/Getty Images

But the United States has a chance to adapt from its mistakes, rather than overlearning them in despair. If the United States and China are entering into long-run rivalry, economic leverage will be a critical tool to push back against Chinese actions the West deems incompatible to its interests. And, conversely, maintaining economic deterrence will allow the West to pursue policies it deems in its own interests—like putting up trade barriers to thwart Chinese overcapacity—without fear that China reprisals will force it to back down. As Vagle and Brooks rightly point out, the United States does have more cards to play against China should strategic or economic tensions lead to an escalatory tit-for-tat. If China strikes hard on rare earths, the United States could conceivably push back with biting financial sanctions, or cutoffs in the flow of the critical technologies or investments that fuel China’s export machine.

Doing so would self-inflict short-term economic pain. But if the United States is serious about restoring economic deterrence and preventing Chinese economic coercion from dictating U.S. policy, then it needs to be willing to incur some cost in the counterpunch, perhaps compensating consumers or companies in such an exchange to ease the pain.

Working with allies is also paramount. Whether in a short-term exchange or in fortifying the U.S. bloc over the long run in a fracturing global economy, allies give the United States insuperable economic weight. The biggest challenge for the West is in coordination. To truly leverage the scale of its advantage, Washington should form an economic security alliance with its Western partners in which they pledge to come to each other’s aid under any Chinese economic coercion and jointly plan countermoves, export controls, and even mutual economic assistance. The West pursued just such a coordinated sanctions policy to great effect in the run-up to Russia’s full-scale invasion of Ukraine.

Future administrations should take heed. If the United States is willing to push back hard with its partners onside and withstand some corporate and economic blowback, it does, in fact, have economic escalation dominance over China—as long as Washington doesn’t squander its advantage by fracturing its own alliances in the meantime.