China Faces Renewed Tensions with US, Weaker Economy Hurts
Amidst geopolitical uncertainties, China grapples with a trade surplus that has propelled economic growth but also heightened its vulnerability to protectionist measures.
Record Trade Surplus, but Concerns Arise
China's record trade surplus of $1 trillion in 2024 accounted for over 5% of GDP, contributing significantly to economic expansion. However, this reliance on exports exposes China to potential shocks in overseas markets.
Challenges Facing President Xi
President Xi Jinping's administration faces numerous challenges, including persistent deflation, weak consumer demand, a prolonged property slump, and currency pressure. The uncertain trade environment further compounds these issues.
Protectionism Threatens Growth
The looming prospect of US tariffs could disrupt one of China's key growth drivers. Expert Jacqueline Rong of BNP Paribas warns that "US tariffs will be the biggest problem this year."
Trump's Tariffs and Chinese Response
President Trump has proposed imposing 10% tariffs on Chinese goods, potentially triggering retaliation from Beijing. China has previously retaliated with tariffs and other measures, such as export bans and sanctions.
Trade Diversification and Bilateral Balances
US tariffs have encouraged companies to diversify their manufacturing operations away from China, with Vietnam emerging as a significant recipient of Chinese production. Despite efforts to diversify, the US remains the largest destination for Chinese manufacturing exports, accounting for over half a trillion dollars in 2024.
Retaliatory Tools and Export Controls
China has developed new retaliatory tools, including export controls and sanctions on US defense firms. Experts predict China will become more aggressive in using these measures if new US tariffs are imposed.
Commodity Diversification and Tariff Effectiveness
China's efforts to diversify its trading relationships by reducing US imports and increasing purchases from Brazil and Russia may limit the effectiveness of US tariff retaliation. However, other countries could impose their own tariffs if Chinese imports surge.
Other Nations' Response
Mexico, Canada, and the European Union have already imposed tariffs on Chinese goods, signaling a broader concern about trade imbalances.
Domestic Focus as a Solution
Amidst trade uncertainties, China's government may need to prioritize structural reforms, focusing on boosting domestic consumption and reducing reliance on exports. Fiscal measures could stimulate household spending and mitigate the impact of potential trade disruptions.