Climate warming will cause more frequent drought events in arid regions with rain shortage, especially seasonal droughts, with strong impacts on tree transpiration. Tree transpiration responses to drought are further affected by competition among trees that can be quantified using Hegyi competition indice (HCI). However, how seasonal drought affects tree transpiration among conpetitive pressures remains poorly understood. In this study, the daily transpiration of twenty-four trees with different competition pressures was monitored using the thermal dissipation probe method from May to October from 2019 to 2021 in a larch plantation in the Liupan Mountains, Northwest China. Our results showed that the daily tree transpiration normalized for the mean daytime vapor pressure deficit (T_i–VPD, L·d⁻¹·kPa⁻¹) declined during drought, especially during summer drought. Seasonal drought weakened the tree competitive effects on T_i–VPD, with spring droughts reducing the difference of T_i–VPD in summer among different competition pressure levels, while summer droughts invalidate competitive effects, i.e., there was no significant difference (p < 0.05) of T_i–VPD in summer with different competition pressure levels. In addition, low competition (LC) showed a much greater T_i–VPD reduction than did moderate competition (MC) and heavy competition (HC) during periods of drought, suggesting that the T_i–VPD was more sensitive to seasonal drought under lower competitive pressure. The dominant factor contributing to the changes in tree transpiration was solar radiation in spring drought (2020) and soil relative extractable water in summer drought (2021). Besides, due to the seasonal drought, the water consumed by transpiration of the LC and MC groups was significantly smaller than that of the HC groups. These results demonstrate that crop tree management can be implemented to reduce water consumption by thinning trees which are under heavy competitive pressure (i.e., DBH < 18 cm) and can be used to enhance the drought resistance of reserved trees to seasonal drought to better achieve integrated forest-water management.