China has been hit hard by President Trump’s tariff list, which he unveiled yesterday in the White House rose garden.
As part of his ‘Liberation Day’, Trump imposed new 34 per cent tariffs on China. This seems to be in addition to the 20 per cent tariffs levied on the country by the US since January. And in addition to 11 per cent tariffs previously applied after Beijing was accused of violating international trade and harming US commerce.
That means the average tariff on imported goods from China possibly stands at 65 per cent.
Next month, things will get even worse for China when the ‘de minimis’ exemption will be phased out. This allowed packages with a value of $800 or less to be shipped to the US from China duty free, and was frequently used by companies like Shein and Temu.
The impact on China, which ran a $1 trillion trade surplus with the US in 2024, equivalent to over 5.5 per cent of GDP, could be very damaging.
Tariffs aside, China is pursuing an industrial policy whereby consumption and imports are repressed and exports, which grew four times as fast as world trade last year, have to be kept booming. Trump’s high tariffs on goods shipped to the United States will unquestionably hit American consumers and depress its domestic firms, perhaps causing a summer recession. But if China’s exports are reduced, its economy will also be in great difficulty.
China could do two, possibly three things to try and mitigate the hit of between 0.5-1.5 per cent to growth, while protecting jobs in the coastal provinces where the bulk of China’s exports come from.
First, the political, rather than economic, response is likely to be retaliation against the United States. Because China exports so much more to the US than it imports, tit-for-tat tariffs won’t have a huge effect, yet Beijing is likely to impose them anyway. It will also likely restrict the export of things like rare earth minerals, as well as targeting specific American firms. It may also restrict in some way the US export of services.
Second, China is likely to allow the Renminbi to fall, perhaps by as much as 10 per cent over the next few months. This would reduce the US import price, partially offsetting the tariffs.
Chinese firms will also look to move more of their production and investment outside China to avoid the highest tariffs. They have been doing this since the first Trump administration but it might be harder now that countries like Vietnam, Thailand and India are all being hit by tariffs as well.
Third, it is still possible, given these unfavourable circumstances, that Xi Jinping will try to meet with Trump to reach a trade deal. As part of a deal, Trump would lower tariffs on China and the two sides would agree to purchase more of one another’s goods. Trump might also want something else, such as Beijing’s approval for the sale of TikTok in the United States.
Such negotiations are possible – though it would be naive to think that they would fundamentally alter the trajectory of Sino-US relations or end the tension between these two adversaries. Keep an eye, for example, on China’s vehement opposition to the proposed sale of ports to the US, particularly in Panama to the US asset manager Blackrock.
It is possible that US tariff policies will drive countries to do more trade with China, but this is unlikely. China is not that interested in taking other countries’ imports, by and large. It is mostly driven to push its exports to nations that are raising their defences against low-priced Chinese goods. Key areas here are steel, and EVs which can’t be sold in China because of weak demand.
Regardless of China’s response, the fundamental problem remains: trade wars are contagious and no one wins them.
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