Xi Jinping can outlast the US in a trade war.

That’s not to say he wants to. But he could. Because as a dictator, Xi can compel his people to suffer in silence under threat of imprisonment or something worse.

Again, I’m not suggesting that’s something he’s especially interested in doing, and it certainly isn’t ideal. But Xi’s effectively revised China’s implicit social contract over the last five or so years.

It used to be the case that the citizenry acquiesced to one-party rule and limits on civil liberties in exchange for steady quality-of-life improvements all underpinned by an unspoken MAD doctrine. The public said this to the Party: If we revolt in large numbers, we can overthrow you, but we realize you’ll kill most of us along the way, so you’ll better our lives and we’ll stay quiescent, because the alternative’s mutually assured destruction.

Under Xi, that arrangement’s not as reciprocal. There are asterisks and caveats on the Party’s obligations, but none on the public’s. The Party says this to the people: We’ll endeavor, whenever possible, to provide for the common economic good, but in the event other priorities take precedence, you have no recourse to any sort of protest, and you shouldn’t push your luck because the only destruction that’s assured in that scenario is yours.

In late 2022, when Chinese were increasingly prone to street demonstrations, we learned that Xi actually doesn’t want to “go there.” He doesn’t want the spectacle of shot or beaten protesters and rather than risk that, he lifted COVID containment protocols. And therein lies a vulnerability Donald Trump could exploit if he chose.

Xi put himself in a tough spot when he disregarded the impact on consumer sentiment from the rolling crackdowns associated with the Party’s efforts to curb various sorts of excesses, from monopoly power in big Chinese tech to gaming addiction among China’s youth to what Xi famously called “hedonism” among China’s business class.

When coupled with legacy drag from the property bust and the COVID lockdowns, Chinese households succumbed to a kind of low-level melancholy — not outright depression, exactly, but the kind of malaise that consistently saps consumer spending and undercuts demand for credit.

The figure above’s a stark reminder: Growth in the outstanding stock of yuan loans (i.e., loans to the real economy in China) is just half what it was less than five years ago.

All of that made China’s economy increasingly dependent on exports at a time when Xi’s subtle bellicosity on foreign affairs (and if you’re Xi, subtle and bellicose aren’t mutually exclusive) inflamed tensions with the country’s trade partners, including and especially the US.

Thus was born a self-fulfilling prophecy: Lackluster domestic demand when not paired with slower factory output resulted in overcapacity, that overcapacity was dumped onto global markets at the expense of other countries’ domestic industries, which further inflamed trade tensions until barriers were erected and then… what? What do you do when your economy’s dependent on exports and your trade partners, sick of being exploited, start putting up barriers?

That’s where we are now, which is to say where Xi is now. On Monday, Beijing said consumer prices fell again in China last month. The figures, reported alongside trade data for May, showed headline CPI slipped 0.1% YoY. It was the fourth consecutive decline.

As the figure shows, producer prices fell 3.3%, the largest drop since the summer of 2023 and the 32nd straight decline. (And yes, that’s accurate: China’s spent nearly two and a half years mired in PPI deflation.)

Those numbers underscore the notion that Beijing has very little to show for its efforts to revive domestic demand. They need big-ticket fiscal stimulus, and while the Party stepped up on that front beginning in September, it still feels too piecemeal and too “fits and starts” to have any hope of short-circuiting what’s now widely understood to be a balance sheet recession.

Trump could make the situation a lot worse for Xi if Americans were willing to sustain a trade embargo on China. In that scenario, the onus for meeting the Party’s growth goal would fall to the Chinese consumer who, as noted, isn’t in great spirits.

If prices keep falling in China, consumers will have another excuse not to spend when they’re already inclined to retrench. If it’s going to be cheaper later, why buy it now?

Of course, companies have to make payroll and meet other financial obligations. They need to sell “it” today, not tomorrow, so they’ll generally resort to price cuts, and so will their competitors. But that only worsens the deflation impulse, further disincentivizing consumption.

Readers new to the world of macro often ask why deflation’s bad. That’s why. Price formation’s self-fulfilling in both directions. Once inflation gets cookin,’ it’s hard to stop. The same’s true of deflation. Once an economy freezes over, it can take decades to thaw.

I doubt Trump understands all of that, but he does seem to have some vague conception of the extent to which the Chinese populace is restive. Or as restive as a populace can be when being restive risks being disappeared by the government. Late last month, for example, Trump said he had reason to believe Xi was facing “civil unrest.”

I don’t buy that, but the fact that he said it suggests Trump’s aware that a trade embargo which shifts the burden of the Party’s growth target to the moribund Chinese consumer could, in theory, put the Party in a bind. They’d need to roll out kitchen sink-style fiscal measures or risk a sharp growth deceleration and more questions about the leadership’s capacity to steward the economy. Xi doesn’t need any more such questions.

Do note: The current CCP leadership is the last to be comprised of officials whose formative years overlapped the Cultural Revolution. If you’re 40 in China now, your youth was spent in a far different reality and one, I should note, which was more open than the current domestic political environment in China.

That’s not to suggest a conspiracy of forty-something apparatchiks have designs on tossing their parents out of the Politburo, but a lot of them know — even as they surely don’t say it — that Xi’s proudly anachronistic style is societally detrimental.

It’s far-fetched, but not impossible, that a determined US could turn the economic screws enough on China to foment the sort of domestic disaffection that’d force Xi to crack down. Crackdowns come at considerable risk even when you’re an all-powerful despot.

Fortunately for Xi, American consumers are addicted to cheap Chinese goods and as such have no appetite for sustaining triple-digit tariffs on China. Trump knows that too, and he’s plainly not inclined to force the issue.

After all, US consumers aren’t in the best of moods either, and while they’ll complain about China stealing the factory job they wouldn’t work even if it were available to them, they’d sooner eat a broccoli crown than watch NASCAR on a flatscreen that’s any smaller than 60 inches.

Plus, Trump fancies himself an autocrat. A kindred spirit of Xi’s. When he intimates, as he did on May 30, that he doesn’t want to see the current Party leadership imperiled politically, I believe him.