News in Charts: A US-China trade war

While US president Donald Trump has paused action on most fronts in his trade war, he still seems fully engaged when it comes to China, having imposed tariffs of 145% on most products from the Middle Kingdom. Some products like consumer electronics have been temporarily exempted, while the US administration works on separate tariffs on semiconductors and other electronics, in a bid to coax semiconductor production onto US soil. China’s dependency on the US market has been gradually declining, but with 15% of Chinese exports going to the US the tariffs will undoubtedly have an impact on China’s economy. However, the size of that impact will depend on the extent to which China can sell its US-bound products elsewhere, and whether it can galvanize weak domestic demand.

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China has responded to US tariffs in kind, placing duties of 125% on US goods. China’s main imports from the US consist of agricultural products and oil and gas, and prices for these goods are likely to rise. Food price inflation is generally a point of pain for the PRC; but China has been focused on increasing self-sufficiency since the first Trump administration, and has been reorienting itself towards alternative suppliers of key food products. Brazil, for example, has largely replaced the US as a key soybean exporter to China.

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China has also hit back by putting US companies on export control lists and ‘unreliable entity’ lists, restricting in the latter case their access to Chinese trade and finance altogether. Furthermore, it has placed export controls on rare earths, which are critical in the manufacturing of various defence technologies. According to the International Energy Agency, China accounts for 61% of global mined rare earth production, but controls a staggering 92% of the processing stage.

Chinese export figures came out strongly in March, most probably the result of stockpiling as suppliers braced themselves for tariffs. Official growth numbers for 2025 Q1 exceeded market expectations, coming in at 5.4%, above the stated annual target of ‘around 5%’; these were bolstered by the strong exports, as well as by robust investment numbers. Fathom’s proprietary China Momentum Indicator shows even stronger growth for the beginning of this year, with January and February averaging 7.8% growth. However, with Chinese growth over the past year heavily dependent on external demand, this picture is likely to change. A scenario in which the January/February growth averages were rolled forward for all demand components, and goods export growth was set to zero, would see China’s GDP growth for 2025 drop to 4%; with this simple exercise discounting any second-round and indirect effects of the trade war.

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The ability of China’s economy to weather the tariffs will depend in part on the extent to which it can find alternative destinations for its goods. However, despite the pause in reciprocal tariffs on most countries, Mr Trump’s 10% global tariff coupled with the uncertainty unleashed by US policies are likely to dampen global demand, which will further drag down Chinese exports. There is also a risk that if China inundates other destinations with its goods, these countries might follow the US example and put up trade barriers to protect their industries.

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China could also try countering tariffs by increasing fiscal or monetary stimulus at home in an attempt to boost demand. However, the stimulus measures taken over the last year or so to counter the impact of the ongoing housing crisis have produced only lacklustre effects. Heavily indebted households and firms may prefer to use funds to deleverage rather than spend, or equally to save more in what is an increasingly uncertain world.

The tariffs are likely to be painful, but China appears to be battening down the hatches. Meanwhile it is capitalising on the PR opportunity the Trump administration has provided to reframe itself as the defender of globalisation. And one other opportunity may also now be gaining in appeal. Insomuch as the changing geopolitical environment might help China to envelop Taiwan, either by peaceful or less peaceable means, it could also offer a way for the Chinese economy to overcome the hurdle of its reliance on imported semiconductors.

IN HOUSE

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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