Trump is losing his trade war with China - badly, pt. 2

Why can't the U.S. outcompete China?

Jul 24, 2025

This is part two of a two-part series on how Trump’s trade war with China is faring. Part one, about how Trump’s flawed strategy thrust the U.S. into a weak position, can be read here.

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Part of what makes Trump’s ill-conceived trade war with China so frustrating and dangerous is that there are real issues concerning China that Washington, and the West more generally, need to deal with.

For simplicity’s sake, we can split these issues into two related categories - security and economics. In security terms, it’s clear that China is rapidly modernizing its military and preparing for the possibility of conflict with the United States.

I’m always skeptical of Western “experts” who don’t even read Chinese yet confidently predict that China is going to take X action by Y date. But I think it’s fair to strongly suspect that Xi Jinping or his successor is going to make a bid to conquer Taiwan at some point in the not too distant future. Washington will then be faced with the choice of whether to enter the war to defend Taiwan, or let it fall. And that choice is complicated by the fact that this is a war that the United States could easily lose.

Economics forms the second set of problems. Over the past few decades, the United States has begun to fall behind China in a range of manufacturing capacities and technological fields. In U.S. political debate, this is usually discussed as a problem of lost jobs and broken postindustrial communities - and this is indeed part of the problem. But what often gets under-emphasized is the extent to which this represents a huge national security problem.

Whether or not widgets get made in Ohio is an important political question, but it also bears on America’s preparedness for warfare. A flexible manufacturing base is important, because today’s widget factory can be turned into tomorrow’s military widget factory. During World War II, Detroit automakers contributed greatly to tank manufacturing. A war with China wouldn’t involve many tanks, but it would involve all sorts of other gadgets that the U.S. is just not currently equipped to make at scale.

The situation is even worse when you consider not just widgets but also advanced technologies. When people imagine China’s industrial might, they often think about the mass production of unremarkable consumer goods. That image is long out of date. Under Xi, China has transformed itself into a technological powerhouse which is increasingly dominating key sectors.

Take drones as an example. While the Pentagon has been busy developing lumbering, expensive UAVs like Predators and Reapers, a Chinese company - DJI - has emerged as the producer of 70% of the world’s commercial and hobbyist drones. These are the same drones that have had an outsized impact on modern warfare, enabling Ukraine to hold back the Russian onslaught and Mossad to take out Iran’s air defenses with no loss of Israeli life.

The United States makes virtually none of these drones, and its own military forces are not equipped to defend against them.

A sensible policy (so, not Trump’s)

In field after field - electric vehicles, batteries, drones, solar wafers, rare earths - the United States is far behind China. But if the country was serious, it could do something about it.

A serious strategy to contest China’s dominance of the technologies of tomorrow would have three components. Firstly, it would involve a massive investment in research and development in the United States itself. The federal government should be funding much more basic research, and it ought to be implementing an industrial policy which encourages private development. This requires long-term planning, not just assuming leaving things to the market is going to lead to a good outcome.

Secondly, the policy would mean working smartly with America’s allies. These allies are America’s greatest force multiplier - other rich, high-technology countries with defense industrial bases of their own. Rather than seeing Europe as an unwelcome drain on America’s resources, Washington ought to be encouraging shared research and defense planning in order to share the burden.

Thirdly, the U.S. would be taking smart moves to try to retard China’s own technological development. Sanctions and export controls would try to cut it off from Western technology and force it to duplicate effort. Beijing would certainly try to make up the difference with espionage, but why make it easy for them?

As you might have noticed, these three points are pretty much the opposite of what Trump is doing.

Nostalgia for… Biden?

Whatever else you might say about his presidency, the Biden White House fundamentally understood all of these points. I certainly wish they would have done a lot more, but working within the politics of the moment, they managed to make pretty good progress on all three fronts. The Inflation Reduction Act gave the United States an industrial policy, they started taking steps like AUKUS and increased cooperation with the EU to take advantage of America’s alliances, and they restricted China’s access to advanced technology.

Trump and the Republicans have undone each of these things in a way that demonstrates that they just don’t get what is happening here. The Big Beautiful Bill undid most of the IRA. The Trump regime has launched a trade war on almost all of America’s allies, and often sounds more aggressive towards Canada and Greenland than it does Beijing. And as I discussed in part one of this series, they’ve now seemingly put China’s access to advanced tech up for negotiation.

And I think the explanation for this comes down to three separate things.

The first is that Trump is stuck in the past. His idea of “the China threat” is that it “rips off” the United States by selling it cheap widgets. He’s a nearly 80 year old man still stuck in the world of car and steel manufacturing. His vision of success is that America will once again be host to millions of blue-collar factory jobs which no longer even exist in China, where they have been automated away. The world of silicon wavers and drones is not his, and he can’t grasp the momentous challenges it poses for the United States.

This is why his solution to every problem is tariffs, a blunt instrument which do nothing to develop strategic U.S. industries or seriously retard China’s rise. If you’re chasing the foolish dream of bringing widget factories back to the United States then, sure, widget tariffs make a sort of sense. If you’re trying to nurture the emergence of a world-leading drone company, they do nothing at all.

A second problem is that Trump, and the people around him, are more interested in making a quick buck than in solving these long-term, structural problems. Trump backed away from even his own harebrained scheme to reshore widget manufacturing through massive tariffs when it started to cause panic in the markets. If Xi Jinping picked up the phone tomorrow and offered a “deal” which allowed U.S. companies hassle-free access to the Chinese market and huge purchases of American-made widgets while doing nothing to change the overall trajectory of the tech race, Trump would leap at it. He thinks like a businessman, not a strategist.

The people that Trump gathers around him reinforce this point. One factor in the decision to allow China access to Nvidia H20 chips, which I discussed in part one, was reportedly pressure from Silicon Valley CEOs. And sure, if you’re a tech boss, it makes sense to be able to sell your products into China, because that way you make more money. The Chinese market is the largest in the world, and it’s precisely the allure of it which led previous American presidents down the path of accommodations with Beijing. But if you care about U.S. national security in the era ahead, it’s time to move beyond that allure.

This brings me to the third point, which I think is the most disturbing. And that’s that I’m not sure that Trump fundamentally does care about U.S. national security, and certainly not the security of the wider West. For him, the political is always personal - he wants to demonstrate his own dominance, be seen as a peer of the world’s other strongmen, and get some sort of big flashy deal that lets him declare victory. The idea that he has a responsibility to produce a long-term, strategic plan to safeguard his nation is alien to him.

Eight lost years

What all of this amounts to is eight lost years.

Both in his first term and his second term, Trump has caused his country to be consumed in ridiculous arguments and to pursue policies actively harmful to its long-term interests. And all the time, Beijing has been advancing its goals.

China is by no means invincible, and the “we think in months while they think in centuries” clichés are silly. China is a country with fallible leadership, some fairly large economic problems, and domestic politics of its own to contend with. It’s an authoritarian dictatorship - the type of country which the United States has always been able to out-innovate and out-compete in the past.

And the fact that it isn’t doing so today is not a sign of China’s infallibility, but just of how far the United States has fallen.

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