“This isn’t just a trade war—it’s a stress test for two very different systems: one democratic and open but politically fractured, the other authoritarian and cohesive but brittle under pressure.”As the US-China tariff war intensifies, the battlefield is no longer just economics, it’s psychological and political. This conflict has morphed into a test of which society can better endure internal strain: American consumers facing inflation or the Chinese populace grappling with rising unemployment. At stake is not only economic leverage but political stability.
Kevin Rudd, former Australian PM
For the United States, the burden of tariffs manifests through price hikes. With steep duties imposed on Chinese imports, consumers are now paying more for essentials like electronics, furniture, and household goods. This inflation comes at a precarious moment when American households are already strained by high borrowing costs and stagnant real wage growth. The central question is, can U.S. consumers continue to absorb this financial pressure?
Yet the economic question cannot be separated from the political one. The US is entering an election cycle where domestic polarization is at a breaking point. President Trump’s tariff escalation is as much a political statement as an economic tactic. Meanwhile, the Democrat opposition appears prepared to adopt a scorched-earth approach to stop him, willing to amplify each and every economic grievance or weaponize policy fallout to undermine the administration. Liberal judges dropped all pretense of non-partisanship to frustrate the Executive at every turn with judicial overreach never seen before in their history; media continues with lies to try to normalise massive public discontent when all indications are the majority of the public are happy with the Trump admin delivering on campaign promises; anti-Trump globalists and dark money pouring into NGOs to fund leftists groups organise paid-protests to present a façade of full scale national social discontent; and Democrat lawmakers publicly calling out for violence to stop Trump. In this environment, inflation isn’t just a burden, it’s a political powder keg which the Left will gladly ignite.
The pain of inflation always works against the incumbent admin. In the 2024 campaign, Conservatives milked the economic pain dry to bury the Democrats for the inflation during the Biden admin. The Democrats now turn the tables on the current admin. Trump is well aware the tariff will bring short term hardship before his vision of reshoring manufacturing can turn the country around. Retail prices will inevitably rise and Democrats will capitalise on this to instigate a groundswell of anger into a national social uprising. But unlike the Chinese, Trump has a mountain of cash to ride this out. The tariffs are bringing in hundreds of billions of dollars which can fund financial aid packages for both industry and the public. In Trump tariff 1.0, China banned US grains and American farmers were hit hard. Tariff dollars went to subsidising the farmers. This time, the admin is considering doing away with federal income taxes.
For US, it is a question of whether the admin has sufficient tariff revenue to provide subsidies or cut taxes to ride over the increased cost of living and disruptions in the supply chain in the short term to prevent Democrats from doing political damage.
In contrast, China faces a different kind of vulnerability. Although inflation is more contained, economic distress is mounting, particularly through rising unemployment, especially among the youths. Each year 12 million Chinese graduates join the workforce. China faces a perfect storm of unemployment pressure from 3 directions. Firstly, the lockdowns during the pandemic caused many business closures and severely stressed the manufacturing sector from which they have still not fully recovered. Secondly, many sectors in manufacturing have been under pressure from over production. For example, China's steel industry has collapsed due to over production. Thirdly, the relocation of US companies out of China, together with massive numbers of their supply chain.
The fact is China's exuberant growth had already began petering off by 2010 when it's economy matured. It faced the same eventual problems of all developed countries -- rising wage levels. China's competitiveness driven by cheap labour faced challenges from Vietnam and India. It took the familiar course of action by pushing for productivity and going into higher value tech industries. Many factories have already shuttered even before Trump's tariffs and more so were tottering on bankruptcy and unable to pay wages for months.
China’s middle class is squeezed by a deflating property market, shrinking private sector opportunities, and weakening consumer confidence. The real estate sector had been in the doldrums for decades due to over-building and excessive debt. The Evergrande Group's insolvency publicised in 2021 marked the official collapse of the property market. China has never been a real open economy. It is still tightly controlled by central planning which has allowed very little opportunity for the working class to grow wealth. The only path was property investment. As a result, for the last several decades, a growing middle class had poured all savings into property, buying their first, second or third condominiums. This led to a property boom and over-building. Too many condominiums but no tenants. With developers going burst, the middle class are caught with mortgage debts, no assets, no tenants. With all savings sunk into properties and jobs terminated, the cries are getting more desperate by the day.
Since the pandemic, the CCP has tried to revive the economy with several rounds of financial stimulus. All these failed due to the overhang of US$44 trillion domestic debt by local government units, banks, and real estate developers, coupled with weak consumer and business confidence. China is not facing cyclical issues, but a deep structural problem - rising wages, weakening export model, and inability to booster domestic consumption.
Behind the scenes, the Chinese Communist Party is far from monolithic. President Xi Jinping, having consolidated significant power, now faces internal friction. The old guard, consisting of princelings and entrenched economic elites within the Party, are increasingly diverging in vision and influence. Some favor more liberal reforms to rescue economic momentum; others demand ideological purity and state control, yet other factions want to move away from a dominant individual to a group leadership of party elders. It is becoming clear Xi has lost considerable power with many of his hand-picked apparatchiks being sidelined and purged, especially military commanders loyal to him. These palace intrigues, though less visible, may prove just as destabilizing as open political opposition in a democracy.
"When there is not enough to eat, people will eat bark and root."There have been calls by the leadership to embrace tough times, an exhortation to bare the hardships as in the days of the past. The old Communist mindset exists in the CCP. Once under pressure, they revert to old communist survival doctrines. Exert more control, smash dissent, take the "China has thousand years history' long term stand, shut down unfavourable news, political propagandists take over. In recent history there were the 1989 Tiananmen Square massacre, Falun Gong suppression, and the Hongkong protests, all violently taken down. However, these were not nation-wide protests, easily put down violently. This time, the undercurrent for dissent arising from angry and frustrated property investors, workers with unpaid wage claims, and massive unemployment, is taking on a national scale. It has the potential to break into uncontrollable instability spilling into outright revolution for complete political reform.
Mao Tse Tung
Tough times breed tough folks. Today's Chinese never marched in the thousand miles trek. As Lee Kuan Yew once said of the new generation Chinese - "The Chinese people today are not going to allow a repeat of the Cultural Revolution or the days of Mao's total control. They have tasted success and comfort."
What makes this tariff standoff unique is that both sides are now fighting battles not just with each other, but within their own borders. For the U.S., it’s a question of whether its deeply divided political system can absorb economic pressure without imploding into dysfunction. For China, it’s whether a tightly controlled system can continue to mask or contain internal divisions amid deepening economic strain.
It's still early days, but Q1 economic data provides hints on the status quo of the two warring states.
US:
US saw a contraction by 0.3% in GDP which is the first quarterly decline since 2022. Trump haters gloated at the failure of his tariff policy. The goons do not understand the contraction was due to 2 factors -- (1) Imports surged by 41.3% annualized, as businesses front-loaded goods ahead of impending tariffs. Increase in imports drags down and distorts GDP numbers. (2) Government spending declined in line with the admin's objective of cutting expenditure.
Contributing to GDP growth were (1) consumer spending grew by 1.8%, possibly due to rising prices; (2) Private investments increased by 22%, notably in computer equipment, possibly due to AI-related demand and pre-tariff stockpiling.
US inflation eases amid trade policy shifts. The CPI in March rose by 2.4% year-over-year, but is a reduction from 2.8% in February. Core inflation (excluding food and energy) increased by 2.8% over the same period, marking a the smallest 12-month rise since March 2021.
Clearly the expected cost of tariffs has no impact yet. It's a healthy report for the US.
China:
The target annual growth is 5% but has been revised down to 3.5% in view of tariffs. In Q1 the year-on-year GDP was 5.4%. This was achieved on the back of increased exports due to export surge driven by buyers trying to beat the tariff. Exports jumped by 13.5% in March as shippers expedited shipments.
China's CPI turned negative in March 2025 registering at -0.1% year-over-year, down from 0.5% in January. With inflation contracting into negative territory, China is now having deflation, which is not a good sign. Deflation means the general price level of goods and services is falling over time. This signals weak demand, a lack of consumer and business confidence. The situation gets worse because consumers will delay spending, causing further price level decreases. Debt becomes more burdensome and downward pressure on wages is the norm as employers cut or freeze hiring.
Deflation is not good news for China. It leads to a downward spiral of the economy. The signs are all there - weak consumer confidence, falling domestic demand, and lingering structural issues like over capacity and property market distress.
Conclusion:
The outcome of this war won’t be decided by who blinks first at the negotiating table, but by which society proves more resilient under stress. The United States bets that its consumers can stomach inflation longer than China can maintain social stability with joblessness on the rise. China, meanwhile, is gambling that its managed state apparatus can outlast the volatility of American democracy.
But resilience has its limits. For the U.S., prolonged inflation risks both economic slowdown and political upheaval. For China, the erosion of growth and confidence could catalyze deeper fractures within the Party itself. In the end, this is not merely a trade war—it’s a test of which political and economic system cracks first under pressure.
In the final analysis, my money is on US. However chaotic democracy is, American system has shown time and again they can ride out their political strife. The US will accumulate a hoard of tariff revenue which is a buffer to subsidise consumers and business to tie over financial challenges of short term rising prices. More importantly, Trump's the tariff policy has the objective of reshoring manufacturing, there is a game plan. China, on the other hand, has President Xi facing palace intrigues. Chinese history has shown time and again, dynasties get destroyed by such games of thrones. Rising discontent by unemployed youths, angry middle income investors cheated by property developers, and unpaid employees, are headed for nation wide dissent as solutions are not in sight. China is in deflation in Q1 and has no financial means to stimulate domestic consumption to turn the economy around.
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