Donald Trump’s return to the White House, from next year, presents China with fresh challenges — especially in the wake of a persistent real estate crisis, weak internal demand and growing imbalances related to production overcapacity, as well as an ageing population and high levels of indebtedness, which will continue to weigh on China’s economic dynamism on a short- to medium-term horizon.
Although the latest indicators showed some signs of stabilisation in activity (e.g., industrial production, retail sales), the downwards evolution of prices in China continues to reinforce the weakness of household consumption and the deflationary risks that limit the economic prospects of the Asian power. This disinflationary environment, amidst a high debt burden, continues to signal consumers cautious purchasing decisions, and their low level of confidence in the face of current and future socioeconomic and financial conditions, including the loss of patrimonial wealth derived from a real estate crisis that has already lasted three years, while the youth unemployment rate currently stands at 18.8%.
This combination of cyclical and structural challenges, which are weighing on China’s growth prospects, are likely to be exacerbated from the impact of the ‘Make America Great Again’ philosophy. Although the specifics of any policies that Trump will enact on China are still unknown, it is very likely that they will include the imposition of higher tariffs. Over the past few years, China has managed to continually amplify its external position — with its trade surplus having reached a historical record $940 billion — despite increasing trade and geopolitical tensions. The likely upcoming rise in tariffs will therefore be aimed at reducing this trade imbalance, while preventing China from pushing ahead towards technological leadership in new strategic areas such as AI, robotization or semiconductors.
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In recent years, China has supported its economic growth through its external sector, expanding its export base to 170 countries and boosting the weight of higher value-added exports, such as advanced railway, IT or robotics, in line with the Made in China 2025 plan. However, strategic competition between China and developed markets has intensified, with the United States and its allies’ implementing measures aimed at preserving their industrial bases. Indeed, data shows that, even though the US has been the one leading the de-risking efforts, over the past couple of years US allies have appeared to echo US efforts. Such action reflects concern regarding perceived unfair practices, such as intellectual property appropriation, government-sponsored underpricing to gain market share and other broader security considerations.
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The question is not only whether the US government will impose heavy tariffs on all Chinese imports, but also what response might the Asian power adopt in retaliation. It should not be forgotten that President Trump’s next term in office will take place in an environment that is far from the economic, social and political reality that prevailed in the world in 2016. In recent years, China has managed to establish itself as a technological leader in areas such as electric vehicles, batteries, graphene and solar panels, while global value chains have started to diversify. Hence, despite the complex momentum that China is going through, its authorities have already taken steps to minimize the impact of tariffs. Notable policies that they have developed over the past few years include increasing investment and the creation of production centres in third countries, which are near their final markets, with the goal of exporting these products free of tariffs afterwards. Take electric vehicles as an example, data indeed shows a significant increase in China exports through these markets, such as Mexico.
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Another thing which the US could do is to devalue their exchange rate, which would allow China to counteract or even offset the increased cost of its products imposed by tariffs. More broadly, a devalued exchange rate means that cheaper exports may increase demand for Chinese goods internationally, stimulating production and employment in export-focused sectors. However, this policy would not be exempt of risk, as it could accelerate the imposition of even more aggressive tariffs by its trading partners (or trigger the start of an outright trade war), given the negative effect of this measure on the competitiveness of their exports and their financial conditions. It is therefore a delicate balancing act, which must consider the broader economic and geopolitical consequences.
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Other measures that China could take include imposing economic sanctions on American companies with interests or assets in the country, as well as restricting the sale of strategic raw materials abroad, such as gallium and germanium, which are critical for the manufacture of semiconductors and telecommunications equipment, and for the military and aerospace industry. Indeed, Fathom’s ‘China exposure index’ indicator, which measures the relative share performance of US-listed firms with revenue exposure to China, has already priced in higher trade tensions and underperformance of US firms that do business in China.
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Internally, China has taken initial steps to anticipate such turbulence by implementing a range of fiscal stimulus policies, including raising the cap of the government deficit, as well as relieving local governments from some of the bad debt that has accumulated over recent years. The mood remains cautious, however, with authorities keen to wait and see how events unfold. While China and the rest of the world await greater visibility as to what the real scenario of the commercial and international policy in Trump’s second presidency will be, as well as its implications, there is little doubt that we are witnessing an upsurge in the ongoing strategic competition between China and the US, which further points to evidence of a change to the regime of world order that we have observed since the end of the Second World War.
The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.
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