China is ready to go head-to-head with President-elect Donald Trump’s tariffs as he prepares to take back the Oval. If Trump pushes for tariffs as high as 60% on Chinese goods, Beijing isn’t about to sit back.
China’s top economists have been weighing in on the risks and how much damage Trump’s tariffs could do. The consensus? It’s not pretty, but it might not be a total disaster either.
According to Bloomberg’s survey, most economists predict China’s growth will take a slight hit, but not enough to send them into a tailspin. Specifically, 15 out of 19 economists think China’s GDP growth will drop by less than 1% annually over Trump’s four-year term.
But there are some more pessimistic voices out there—three analysts expect a hit of 1 to 2 percentage points, while one brave soul sees no impact at all.
But if you’re the Chinese government, even a small dent in GDP growth isn’t ideal. So, China’s policymakers are getting creative with plans to counteract the tariffs. Dennis Shen, the head China economist at Scope Ratings, is clear on what he expects: slower growth due to Trump’s policies, but a slowdown that China will offset with budgetary and monetary stimulus.
The plan? Keep the economy stable, despite the potential chaos of a US-China trade war on steroids.
Fiscal stimulus and currency play
Analysts say the top defense mechanism will be raising the deficit, followed by looser monetary policy, more support for housing, and additional investments in advanced manufacturing.
In addition to government spending, Beijing might also devalue the yuan. A weaker yuan would make Chinese goods cheaper abroad, softening the blow of US tariffs on China’s export-dependent economy.
Over half of the economists surveyed think the yuan could weaken as China’s central bank tries to balance out the damage from tariffs. But the exact level of devaluation? That’s a hot debate. Some experts say the yuan could dip to around 7.3 to 8 per dollar by 2025.
Others see a more drastic drop. Zhennan Li, an analyst at Banque Pictet & Cie SA, says the yuan could hit 7.5 if Trump’s tariffs go to 20%, and as low as 7.7 if the tariffs go all the way to 60%.
Not everyone’s on board with a big currency drop, though. Some analysts, like Raymond Yeung from ANZ Bank, argue that China would rather keep the yuan stable than go for a major devaluation. A weaker yuan could spark capital outflows as investors pull their money out of China, nervous about a currency freefall.
And China can’t afford to scare off investors, especially since the country’s already on track for its first net outflow in foreign direct investment since 1990.
Retaliation: Targeting US agriculture and high-tech components
Now, if anyone thinks China’s only going to play defense, they’ve got another thing coming. If Trump ramps up tariffs, China’s ready to retaliate. And they know exactly where to hit the US where it hurts: agriculture.
Most economists expect China to slap tariffs on US agricultural products, the same sector they targeted during Trump’s first term. Farms across the Midwest and the South, key regions for Trump’s political base, could be hit hard if China raises tariffs on American crops.
The economists point to soybeans, beef, and corn as likely targets. These goods were all in China’s crosshairs during the first round of tariffs, and there’s no reason to think they wouldn’t be again.
But China’s retaliation plan doesn’t end with food. High-tech components are also in the mix. Analysts say Beijing could restrict its exports of rare earth elements—metals that are crucial for the production of electric vehicles and other advanced tech.
If China decides to cut back on rare earth exports, it could disrupt supply chains for high-tech industries in the US, creating a ripple effect across the electric vehicle market. And with the EV industry booming, that could send shockwaves through the American economy.
Expanding trade ties and overseas manufacturing
Beijing also has a plan to open other doors. One strategy on the table is building stronger trade relationships with other regions. Southeast Asia and the EU are high on China’s list, as both areas have shown interest in strengthening their trade with China.
Chinese manufacturers are also likely to increase investments in production facilities outside of China, especially in Southeast Asia, to bypass US tariffs altogether.
But here’s where it gets tricky. Expanding exports to new markets isn’t a free pass. Some economists warn that other countries might see an influx of Chinese goods as a threat to their industries and could impose their own tariffs in response.
Julian Evans-Pritchard, head of China economics at Capital Economics, sees a potential “multi-front trade war” if other countries start raising trade barriers to keep out cheap Chinese products.
China’s trade surplus is already hitting record highs, which doesn’t exactly make the situation easier. The trade surplus—the difference between what China exports and imports—is on track to reach nearly $1 trillion this year if it keeps growing at the current rate.
China’s goods trade surplus hit $785 billion in the first 10 months of the year, up almost 16% from last year’s record-breaking numbers.
Foreign companies are pulling out of China, adding another wrinkle to the trade conflict. China’s foreign direct investment (FDI) liabilities—essentially the money foreign companies have invested in China—dropped sharply in the first nine months of the year. If this trend keeps up, 2024 could be the first year since 1990 where China sees a net outflow of FDI.
In response, the State Council announced it would step up financial support to industries to promote stable trade, economic growth, and jobs. Chinese companies, meanwhile, have ramped up their exports as domestic demand slows.
More Chinese goods are being manufactured and shipped abroad, even as the economy’s electrification and domestic manufacturing rise, replacing demand for foreign-made goods with local products.
China’s trade surplus with the US rose by 4.4% this year, while its surplus with the EU jumped 9.6%. Southeast Asia’s ASEAN nations saw their trade gap with China grow by nearly 36%, according to the latest data. China now exports more to around 170 countries than it imports from, which is the highest level since 2021.
A currency war could also be on the horizon. India, China’s neighbor and a growing trade rival, has hinted it may allow its currency, the rupee, to weaken if China decides to drop the yuan to offset Trump’s tariffs. If the yuan falls, it would make Chinese exports even cheaper, which could push India to let the rupee slide to stay competitive.
China’s policymakers clearly have a lot on their plate right now.