Since the first Donald Trump administration, the United States has waged a trade war against China. This protectionist stance has also seen the US targeting other trading partners, citing needs to reduce its trade deficit, reshore manufacturing industry, and improve employment. However, official data indicates these justifications have proven unfounded and untenable, as the US trade deficit in goods and services increased from $566 billion in 2017 to $918.4 billion in 2024, and manufacturing industry employment, after reaching 12.98 million in 2022, declined to 12.8 million. Furthermore, sweeping tariff hikes have disrupted global supply chains and caused greater uncertainties for the world economy.

Tariff hikes and the trade war are part of a broader deglobalization movement, which influenced political outcomes such as President Trump's election in 2016. The persistence of such protectionist agendas indicates they are not short-lived, particularly when globalization dividends are perceived as unfairly distributed. As long as these dividends are not fairly shared, populist politicians may continue to use tools like trade wars to externalize internal tensions in their countries. Over the past few decades, US investors, multinational corporations, and high-income groups reaped enormous benefits from globalization, while gains for low-income groups and the middle class were minimal, with US middle-class income growing by merely 0.5 percent from 1990 to 2023, despite the US economy maintaining a 2 to 2.5 percent annualized growth during that period. This widening wealth gap has fueled political polarization in the US and provided fertile soil for deglobalization sentiment.

The US-China trade war and broader US-China tensions were inevitable, stemming not only from the unfair distribution of globalization dividends but also from the rise of emerging economies challenging existing hegemonies. In particular, the US has developed strong strategic anxiety regarding China's emergence as a leading economic power and a technological rival. The US perceives China as a strategic challenger, and regardless of which party is in power, the bipartisan goal is to slow or even stop China's growth. This structural rivalry is likely to persist for decades.

Currently, the US-China trade war has reached a stalemate. While high-level interactions and economic dialogues continue, the US government is signaling a tough stance. Recently, the US treasury secretary threatened that the US will impose a trade embargo if China does not concede to US demands. Meanwhile, the US has tightened export controls, including halting supplies of key parts for the C919 aircraft, restricting sales of chip design software, and even threatening to revoke a significant number of Chinese students' visas. The risks of decoupling and supply chain disruptions are consequently lurking over the global economy.

For China, the impacts from the trade war, potential decoupling, and supply chain disruption may be felt in two primary ways. On the supply side, they create obstacles to imports of high-tech equipment and capital goods, posing challenges to industrial upgrading. On the demand side, they exert pressure on China's exports of consumer goods. To alleviate these impacts, China is focusing on continuing to increase its R&D investment and improve its innovation system, alongside making every effort to boost domestic demand.

A foremost task for China is to further develop the system for internal inventions and innovations. This involves optimizing the allocation of R&D resources, improving research and development efficiency, and facilitating the commercialization and application of R&D outputs through market and institutional reforms. China's R&D expenditure exceeded 3.07 trillion yuan ($426 billion) in 2022, increased by 8.4 percent to 3.34 trillion yuan in 2023, and saw a further rise of 8.3 percent to 3.61 trillion yuan in 2024. This demonstrates that any attempts to contain China's technological advance will likely fail and have instead further spurred China's innovation awareness and vitality.

At the same time, it is crucial for China to boost domestic demand. The country's producer price index has remained in negative territory in recent years, falling by 3.0 percent in 2023 and another 2.2 percent in 2024. The consumer price index also dropped from 2.9 percent in 2019 to just 0.2 percent in 2024, showing signs of deflation. The root cause for falling prices lies in persistently low household consumption, which accounts for only one-third of GDP, far below the international norm. To address this, China should aim for a structural shift from investment to consumption by gradually lowering the ratio of investment in GDP from over 40 percent to 25-30 percent. This can be achieved by reducing support for industries facing overcapacity and cutting inefficient government investments, which in turn will help bring down interest rates and further drive the savings rate downward.

Second, concrete measures must be taken to raise the share of household income in GDP from below 50 percent to at least 60 percent. One way to achieve this is through tax reforms, such as introducing a more equitable goods and services tax, raising the threshold of personal income tax, and lowering personal income tax rates. In addition, government transfer payments must be significantly expanded to channel more public revenue, including State-owned enterprise profits, toward low-income groups through targeted consumption subsidies and direct cash transfers.

Third, improving the social security system will help reduce people's concerns about future risks and is essential to enhance consumer confidence and capacity. China's social security expenditure as a percentage of GDP is significantly lower than that of Organization for Economic Cooperation and Development (OECD) countries. It is recommended to increase this share by 3 to 5 percentage points, focusing on narrowing the urban-rural gap in the levels of social protections, particularly in aged pensions.

Finally, improving income distribution among individuals and households is critical to expand consumption. By ensuring that low-income groups grow their incomes faster than their wealthier counterparts, the overall marginal propensity to consume can be increased, thereby lifting domestic consumption and reducing the demand-supply imbalance. The US-China trade war is an epitome of the challenges arising from the broader reshaping of globalization. Yet, it also serves as a catalyst for China to accelerate its economic restructuring. The key to addressing these challenges lies in building a more balanced, equitable, and sustainable model of economic growth.