As President-elect Donald Trump prepares to take office in 2025, the looming threat of a trade war poses significant challenges to China’s economy. With new tariffs and economic measures on the horizon, the world’s second-largest economy faces a critical juncture, particularly as it contends with a property slowdown, deflationary pressures, and weakening export growth. This op-ed examines how these factors converge to reshape China’s economic outlook and the global trading system.
Exports have been a cornerstone of China’s economic growth, contributing nearly three-quarters of GDP growth in 2024, according to Goldman Sachs. However, the anticipated tariffs—ranging from 10% to a staggering 60%—could significantly erode this growth engine. Economists from institutions like UBS and Nomura predict export growth could stagnate or decline outright, while Capital Economics anticipates a 3.5% contraction in 2026.
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Compounding this challenge is the global recalibration of supply chains, with US allies increasingly aligning their policies to “de-risk” from China. The result: a double blow to China’s export-dependent economy, with reduced access to US markets and increased competition in third-country markets.
Domestic struggles: Property crisis and weak consumption
China’s internal economic vulnerabilities amplify the risks of a trade war. The property sector, which has been in turmoil since 2021, remains a drag on broader economic activity. New real estate construction has plummeted by 66%, reverberating through related sectors like steel, cement, and home furnishings.
Weak household consumption compounds the problem. Retail sales data and lacklustre consumer spending highlight a deeper issue: insufficient domestic demand to offset declining exports. The government has rolled out modest stimulus measures, including interest rate cuts and trade-in subsidies, but these have yet to yield significant results.
Policy responses: Stimulus and strategic adjustments
China’s leadership is not standing idle. At the recent Central Economic Work Conference, officials signalled a shift toward bolstering domestic demand and exploring fiscal stimulus. Plans to expand housing access, raise wages, and issue ultra-long-term bonds aim to address structural weaknesses.
Moreover, China has diversified its export markets, particularly in Southeast Asia, and encouraged companies to establish manufacturing operations in countries like Mexico and Vietnam to circumvent US tariffs. However, such strategies have limitations, as they rely on third-country intermediaries and face increasing scrutiny from US policymakers.
China’s currency policy remains a wildcard. Allowing the yuan to depreciate could make Chinese exports cheaper, offsetting some tariff impacts. However, excessive devaluation risks accelerating capital outflows and undermining investor confidence. Beijing’s calculated interventions in the foreign exchange market suggest a balancing act—supporting exports without triggering financial instability.
Global implications of the trade war
The ripple effects of a trade war extend beyond China. Higher tariffs on Chinese goods will likely increase costs for US consumers and manufacturers, driving inflation or reducing household consumption. For US. allies, spillover effects could lead to a surge in Chinese exports to their markets, prompting pre-emptive safeguards and new trade barriers.
Countries dependent on Chinese demand for commodities, cars, and services also face potential disruptions, as China’s slower growth dampens global economic activity. At the same time, the United States and its partners have an opportunity to restructure global supply chains and reduce reliance on Chinese manufacturing—a costly but strategic endeavour.
An uncertain future
China’s share of the global economy has been declining, from its peak of 18% of global GDP in 2021 to around 16% today. This trajectory reflects deeper structural issues, including its inability to transition from investment-led to consumption-driven growth. The impending trade war threatens to exacerbate these challenges, forcing Beijing to navigate a delicate balance of domestic reforms and international strategies.
The trade war is set to test China’s economic resilience in unprecedented ways. While Beijing has tools to counteract US tariffs—diversifying markets, stimulating domestic demand, and leveraging its currency—these measures come with significant trade-offs.
For global stakeholders, the challenge lies in managing the disruptions of a recalibrated trading system. The US and its allies must not only counter China’s trade practices but also invest in alternative supply chains and manufacturing capacity.
Ultimately, the next chapter of US-China trade relations will reshape not just their economies but the global order. How Beijing adapts to these pressures will determine whether it can sustain its position as an economic powerhouse or if it will become a diminished force in a restructured global economy.