China Faces Renewed Tensions and Uncertainty Under Trump's Second Presidency

China is bracing for a resurgence of the tensions and economic uncertainty that characterized Donald Trump's first presidency, particularly amidst a weakened economy that relies heavily on exports.

Dependency on Export Markets

Last year, China's record trade surplus of close to $1 trillion accounted for over 5% of its GDP, a level not seen since 2015. This surplus drove almost a third of its economic growth, the highest since 1997. However, this dependency on overseas markets exacerbates other challenges confronting President Xi Jinping, including deflation, weak consumer demand, a property slump, and currency pressures.

Protectionism Threat to Growth

Bond yields indicate that markets anticipate further weakness in China's economy. To mitigate these challenges, Beijing is expected to continue increasing government borrowing this year to achieve its ambitious economic growth target. However, rising protectionism in the US and other major trading partners threatens one of China's primary growth drivers.

US-China Trade Tensions

President-elect Trump and President Xi recently spoke by phone, discussing trade, Taiwan, and TikTok. While Trump described the call as "very good," he and his incoming administration have emphasized plans to maintain pressure on Beijing regarding trade, including through tariffs.

Diversification Amid Trade War

US tariffs imposed over the past seven years have prompted some companies to relocate their factories out of China or source from other countries. American companies now purchase less than 15% of China's exports directly, down from 19% in 2017. While some expected manufacturing would return to the US, most relocated to markets like Vietnam, which now imports record amounts of Chinese electronic parts for assembly into products exported to the US and elsewhere.

Retaliatory Measures and Sanctions

Beijing has threatened retaliatory tariffs and other measures if the US imposes new levies on Chinese goods. It has also implemented new export controls, including a recent ban on exports of certain metals to the US and sanctions against US defense firms.

Efforts to Reduce US Dependency

China has been attempting to diversify its trade relationships, reducing its reliance on the US. It has signed trade deals with Southeast Asian nations and created the world's largest tariff-free zone. However, this diversification may limit the effectiveness of retaliation through tariffs.

Domestic Focus as Long-Term Solution

In response to the challenges posed by the US-China trade war, Beijing may prioritize structural changes, focusing on domestic consumption and reducing its reliance on exports. Fiscal measures, such as stimulus payments to households, have been suggested to boost local demand.