With the possibility of Donald Trump reclaiming the U.S. presidency, market participants should brace for a more intense and damaging round of trade tensions between the world’s two largest economies. Trump’s proposed tariff hike to 60% or more on Chinese imports threatens to inflict far greater damage on China’s already fragile economy, compared to the first trade war during his initial term.
Back in 2018, Trump’s tariffs of up to 25% on $350 billion worth of Chinese goods—65% of total imports from China at the time—sparked a trade war that rattled global markets. Despite the initial blow, China’s economy rebounded, buoyed by a pandemic-driven surge in exports. Chinese companies, supported by state aid and competitive pricing, found alternative markets, pushing China’s goods trade surplus to a record $100 billion in June 2023.
Yet, beneath the surface, China’s economic woes have deepened. The country is grappling with a prolonged property market crisis, sluggish consumer spending, and a significant decline in private-sector confidence. Local governments are under severe financial stress, and the once-vibrant growth engine is sputtering. In this context, a new wave of tariffs could prove far more debilitating.
Vulnerabilities in the Chinese Economy
The fragility of China’s economic foundation is evident. Unlike during the first trade war, when the economy was relatively resilient, the current scenario is markedly different. A 60% tariff could slash China’s GDP growth by 1.4 percentage points in 2025, dragging it down to approximately 3.4%, according to Pictet Asset Management. UBS forecasts an even steeper decline, with potential losses of up to 2.5 percentage points in the first year following the tariff implementation.
China’s heavy reliance on exports exacerbates its vulnerability. As global demand weakens and geopolitical tensions escalate, Chinese firms are already feeling the squeeze from falling producer prices and shrinking profit margins. For companies operating on thin margins of 5-6%, a 60% tariff could be devastating, likely leading to widespread business failures and job losses.
China’s Possible Countermeasures
In response to heightened tariffs, Chinese policymakers could deploy several countermeasures. Devaluing the yuan, increasing export tax rebates, and further cutting interest rates are all options on the table. Additionally, China might retaliate by imposing its own tariffs on U.S. goods, restricting exports of critical minerals, or selling off U.S. Treasury holdings—a move that could rattle global financial markets.
However, these measures might only offer temporary relief. The deeper issue lies in China’s structural economic weaknesses. While the country has diversified its export markets, shifting more towards developing economies, it faces growing resistance from these regions. Nations like India, Brazil, and Mexico are increasingly erecting barriers against Chinese imports to protect their domestic industries.
Strategic Shifts and Long-Term Implications
One potential strategy for China is to accelerate the relocation of manufacturing operations to overseas markets. This would not only help mitigate the impact of U.S. tariffs but also address rising protectionism in other regions. However, such a shift could be politically sensitive within China, as it may result in lower domestic manufacturing employment, a key concern for the Chinese leadership.
For traders and investors, the implications are significant. A renewed trade war would likely lead to heightened volatility in global markets, particularly in sectors heavily exposed to U.S.-China trade flows. Investors should closely monitor developments in U.S. trade policy and be prepared for potential disruptions in supply chains and shifts in global trade dynamics.
Key Takeaways:
- Increased Tariffs: Trump’s proposed 60% tariffs on Chinese imports could severely impact China’s already vulnerable economy, potentially slashing GDP growth by up to 2.5 percentage points.
- Economic Vulnerability: China’s heavy reliance on exports, combined with internal economic challenges, makes it more susceptible to a second round of trade wars.
- Potential Countermeasures: China might respond with currency devaluation, increased export incentives, and retaliatory tariffs, though these measures may only provide temporary relief.
- Global Market Impact: Renewed trade tensions could lead to significant market volatility, particularly in sectors reliant on U.S.-China trade.
Conclusion
As the U.S. presidential election approaches, the prospect of renewed trade tensions between the U.S. and China is becoming increasingly real. For market participants, this scenario demands close attention, as the potential economic fallout could reshape global trade patterns and trigger substantial market volatility. Investors should consider strategies to hedge against these risks and remain vigilant in tracking policy developments on both sides of the Pacific.
