The Trade War and China’s Economy

In the first few months of his second term, President Trump has been very active, with tariffs once again emerging as a key trade policy tool. Initially, China was somewhat on the sidelines, as the focus was largely on America's closest economic partners, Canada and Mexico. However, since April 2, a day President Trump called “liberation day,” the focus has shifted significantly to China. As of April 14, the tariff tit-for-tat between the US and China has escalated to the point where the US imposing around 145% tariffs on Chinese goods imports and China imposing 125% tariffs on US imports. These tariffs are so substantial that they are likely to halt most bilateral trade between the two countries. Additionally, the US will impose duties on low-cost (under $800) imports from China starting May 2 and is considering extra charges for Chinese and Chinese-made ships visiting its ports.

The new chapter of the trade war is bad news for Chinese decision-makers. China is by far the largest goods exporter in the world, and the US is the largest end-market for Chinese goods. In 2024, a significant portion of real economic growth came from strong exports, while the domestic economy, especially consumption, remained very weak, and the country entered deflation. The weakness of the economy is illustrated by the fact that the nominal euro and dollar value of China’s GDP has not grown at all since 2022.

China is by far the largest goods exporter in the world

Sources: WTO and BOFIT.

During President Trump’s first term, the trade war caused bilateral trade between China and the US to decrease. However, companies in both countries optimized their value chains to circumvent the tariffs by moving parts of the value chains to third countries. The supply chains became longer, but there was no change in the use of Chinese-made value-added in US manufacturing.

Before President Trump launched the trade war in 2018, the export sector employed over a hundred million people in China. Unfortunately, there are no newer comparable estimates, but employment in some export-oriented manufacturing sectors like textiles and clothing has clearly declined. While this is partly due to automation, if more parts of production continue to be shifted to third countries, it is likely that more jobs will move from China to these countries.

Chinese decision-makers seem to be worried. The urgency to boost domestic demand to counter the weakening export outlook is evident in government work plans for this year. However, the government’s policy space to boost growth remains limited, as the general government deficit is already very large (around 13% in 2024), and the central bank seems to be worried about the weak yuan.

Chinese officials are also seeking to boost trade with other partners. There seems to be a charm offensive towards the EU, but so far, there has not been much action. Additionally, Chinese, Japanese, and Korean top trade officials held their first joint meeting in five years to discuss trade issues. These efforts are crucial, as studies show that both uncertainty and trade restrictions are harmful to growth in all countries, including China.

Altogether, 2025 will be another challenging year for the Chinese economy. The governments around 5 % GDP growth target for this year will be very difficult to achieve.

Juuso Kaaresvirta
Senior Economist, The Bank of Finland

April 2025