According to Bloomberg Intelligence (BI) economists Chang Shu and David Qu, the latest 10% tariff hike on Chinese goods shifts the next move to Beijing. Signed by President Donald Trump on February 1, 2025, and effective February 4, 2025, the decision leaves little room for last-minute negotiations. Given Trump's hardline stance and Beijing's vow to retaliate, a reversal appears unlikely.
China has pledged countermeasures, including filing a complaint with the World Trade Organization (WTO). The Ministry of Commerce denounced the tariffs as a severe WTO violation that threatens US-China trade relations.
China's Foreign Ministry condemned the tariffs as "not constructive," warning they could undermine broader US-China cooperation, including efforts on drug control. However, neither ministry specified retaliation plans, adding uncertainty over Beijing's response, as reported by Bloomberg, DW, and NBC News.
Beijing faces a delicate balancing act: retaliate without triggering a trade war spiral that could derail China's fragile economic recovery.
Limited immediate impact masks significant risks
According to BI, the immediate impact of US tariffs may be limited as Chinese exporters have front-loaded shipments in recent months. However, escalating trade tensions and retaliation could disrupt trade flows.
BI's trade model suggests a 10% tariff hike could slash China's US exports by up to 40%. With 2.3% of China's gross value added (GVA) linked to these exports, this could threaten 0.9% of GDP.
China's exports slowed but did not shrink during the 2018-2019 trade war. However, BI cautions that today's global conditions differ, making direct comparisons uncertain.
Economic outlook darkens amid uncertainty
BI believes the short-term impact may be manageable unless tensions escalate. However, Trump's past remarks about imposing 60% tariffs on Chinese goods pose a serious downside risk.
Without further tariff hikes, China's GDP growth in 2025 is projected at 4.5%. However, additional tariffs could drag it lower.
Manufacturing sectors face varying pressure
Low-margin industries like textiles and basic manufacturing—many of which are already relocating from China—will be hit hardest. Sectors with stronger pricing power may pass costs to US consumers, softening the impact.
Past trade war research indicates US importers and consumers absorbed most tariff costs, reducing demand for price-sensitive goods.
Importers rush to stockpile as tensions mount
BI predicts US importers will stockpile Chinese goods ahead of further tariff hikes, temporarily easing the impact on China's exports. However, once inventories shrink and supply chains adjust, the tariff burden will grow, potentially matching BI's worst-case projections. Whether tariffs rise to the threatened 60% remains unclear, but any increase would add long-term economic strain on China.
Trump's push for higher tariffs remains a major risk. His latest measures go beyond China, with new 25% tariffs on Canadian and Mexican imports—marking the start of a broader US trade offensive.
Canada and Mexico responded swiftly. Prime Minister Justin Trudeau announced 25% tariffs on CAD155 billion(US$105.64 billion) of US goods, while Mexican President Claudia Sheinbaum ordered her economy minister to draft a counter-tariff strategy. The US tariff escalation is fueling tensions not just with China but also with key North American partners.
Beijing weighs stimulus options
China is likely to boost economic stimulus to offset trade losses. While it has vowed "corresponding countermeasures," Beijing has yet to specify tariff retaliation or direct economic actions. This vague approach may be deliberate—leaving room for negotiation while reaffirming China's opposition to US trade policies. However, the lack of details fuels uncertainty over Beijing's next steps, according to CNN.
The People's Bank of China (PBOC) has long defended the yuan, but rising US tariffs could push it toward controlled depreciation. BI expects a strategic tug-of-war between the PBOC and market forces over the yuan's stability. Meanwhile, China's upcoming National People's Congress in March 2025 is likely to unveil stronger fiscal stimulus than initially planned.
BI initially forecasted China's fiscal deficit to rise from 6.6% of GDP in 2024 to 8.5% in 2025, but mounting US tariffs could push this even higher.
Policy challenge intensifies
The near-term impact of US tariffs on China seems limited, but long-term risks loom. The severity of China's slowdown will depend on its policy moves and any further escalations from Trump. If tariffs rise further, Beijing's economic stability could face major challenges.
For now, China is likely to rely on stimulus and measured retaliation to avoid a full-blown trade war.