Why a trade war with Trump threatens China’s ruin

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Understanding how China’s economy really works is difficult at the best of times. Its statistics agencies do not regularly publish data on things like local employment and, when they do, observers are often sceptical of the accuracy of the figures.

Sometimes authorities simply stop publishing data altogether, such as when youth unemployment hit a record high last year.

So when two professors wanted to examine the impact of the former Trump administration’s trade tariffs, they turned to something even President Xi Jinping could not hide: light.

Using satellite imagery, Davin Chor and Bingjing Li measured how many fewer lights were on at night across China once the tariffs were introduced. The pair were examining a long established proxy for economic activity.

Between the start of 2018 and the start of 2019, after Trump’s first tariffs kicked in, China’s industrial heartlands got darker – proof that factories were operating shorter shifts, cutting night-time production, and evidence that fewer workers were staying in factory dormitories.

Around 3.5m people in China lived in areas where GDP per capita plunged by 2.5pc over two years as a result of the tariffs, estimates Chor, who is globalisation chairman at the Dartmouth College’s Tuck School of Business. In simple terms, that is hundreds of dollars lost from a person’s annual income.

Everything is about to get much more dramatic as America’s president-elect gears up for a massive escalation in the US-China trade war.

In June 2018, Trump announced 25pc tariffs on $50bn (£40bn) worth of Chinese goods, which started to kick in the following month. This time around, he has pledged to impose 60pc levies on all Chinese goods after he is sworn in as president in January.

The US could go even further. John Moolenaar, chairman of the House select committee on China, has introduced legislation to strip the country of its “most favoured nation” status. This could mean introducing tariffs of up to 100pc.

Whether tariffs are set at 60pc or 100pc, the impact of a US trade war would be devastating for China. The economy is already grappling with a property crisis and a slowdown in consumer spending.

Economists warn 60pc tariffs will cost millions of jobs, deal a hammer blow to President Xi Jinping’s growth targets and sow the seeds of major social unrest.

“Twenty-five per cent tariffs were painful, but they absorbed it. Sixty per cent will definitely be much more painful, and there will be pockets that will feel it much more than others,” says Chor.

The US is China’s largest trading partner, buying $427bn worth of goods last year, according to the National Institute of Economic and Social Research (Niesr). This was around 15pc of China’s total exports and worth around 3pc of its national GDP.

The US buys all manner of things but the biggest imports from China are electronics, boilers, machinery, furniture, plastics and motor vehicles.

If Trump imposes 60pc tariffs, prices would almost certainly rise. Americans would buy fewer Chinese goods as a result and trade would be reduced, says Duncan Wrigley, chief China economist at Pantheon Macroeconomics.

Companies that relied on the US would struggle to find other markets to sell their products to in the same volumes, he adds.

“There would be a transition period that would be very painful, involving a lot of small exporters being put out of business,” says Wrigley.

Around 5m jobs could be lost in the three years after the new tariffs are introduced, estimates Ahmet Kaya, Niesr’s principal economist. This would be just a fraction of the total 740m jobs in China, but the losses would be heavily concentrated in particular areas.

In a worst-case scenario, China’s GDP would be 2.2pc lower over five years compared to if there were no additional tariffs, says Kaya.

He says: “Considering that China’s per capita GDP was around $12,600 in 2023, tariffs could reduce annual income by around $250 per person.”

In the UK, where GDP per capita is far higher, the equivalent blow would be worth nearly £750 per person.

Not all goods exported from China are going to the US, of course.

The world’s second-biggest economy has been diversifying since the first round of tariffs. The proportion of its exports going to the US has dropped from more than 20pc in 2018 to a record low of 13pc in 2023. Total exports have surged by more than 30pc over the same period.

Yet the US is still by far China’s largest export market, buying nearly double the proportion of goods bought by Hong Kong, China’s second-largest export partner.

“It is going to be a further drag on the Chinese economy,” Chor says of the tariffs. “It will be an unwelcome, negative shock to demand for Chinese goods and demand for manufacturing and labour.”

China is already grappling with a wider slowdown. Since 2010, its GDP growth rate has more than halved from 10.6pc to 4.8pc, according to the figures from the International Monetary Fund (IMF). The IMF expects China’s economy will grow by just 4.5pc next year, well short of President Xi’s 5pc target.

Since property giant Evergrande collapsed at the end of 2021 with more than $300bn in debt, China has been gripped by a vicious property downturn that has weighed heavily on consumer spending power. Since 2019, home sales have plunged by 45pc – a drop of around RMB 5 trillion (£550bn) when measured by transactions, says Wrigley.

The property downturn has depressed consumer spending. Chinese producers have cut their prices in response and exported surplus goods overseas. As a result, China’s global trade surplus – the amount by which its exports exceed its imports – has ballooned, doubling to more than $800bn since 2019.

Tariffs threaten to worsen all of these underlying problems. China’s economy will not collapse but certain parts of the country – particularly industrial heartlands in coastal provinces such as Suzhou, near Shanghai – will be hammered.

Worryingly for Beijing, Trump also will be waging trade war on multiple fronts.

“Trump will be pushing on decoupling more generally,” says Alicia Garcia Herrero, chief economist for Asia Pacific at French investment bank Natixis. Herrero, who is based in Hong Kong, expects export controls, restrictions on the trade of science and technology, and a push for the repatriation of profits.

“All of that can be even more negative than tariffs.”

How could President Xi respond? Because China has a trade surplus with the US, it has less scope to impose retaliatory tariffs on US goods.

“The truth is, China has run out of products to put retaliatory tariffs on, because China doesn’t import as much from the US as the US imports from China,” says Chor.

China is likely to devalue the renminbi to offset the burden of tariffs by making its goods cheaper to export, says Simon Johnson, MIT professor and former chief economist at the IMF.

“I think the Chinese will let their currency depreciate substantially,” he says.

However, this will mean higher inflation at home and deal a blow to President Xi’s hopes of the renminbi becoming a global safe haven reserve currency.

Beyond state intervention, Chinese companies are also likely to shift jobs and investment out of the country in an effort to avoid tariffs.

At the end of October, Roborock, a Chinese company that manufactures robotic mopping devices, told investors it had set up a factory in Vietnam to cope with tariffs.

Similarly, Zhejiang Cuori Electrical Appliances, which produces iron and small kitchen electrical appliances, has set up two factories in Vietnam since last year.

“Our US customers asked us to set up factories abroad or else our orders would be reduced,” the company’s spokesman told Chinese financial media Yicai Global.

Ultimately, President Xi may be forced to launch major fiscal stimulus to stop growth slowing further and fomenting unrest.

The Chinese authorities are all too aware that economic grievances can turn into major social unrest. A period of sluggish exports between 2013 and 2016 triggered protests as factories shut down.

“A lot of that was not overtly political as far as the nature of the protests. It was more about literally ‘we would like to be paid the wages we are owed for the work that we did and we can’t locate the manager because the manager has disappeared and the factory gates have been locked’,” says Chor.

“You will probably get pockets of the population in parts of China where there’s a large concentration of manufacturing activity, where dissatisfaction will become harder to contain.”

The Chinese government recently unveiled a massive $1.4 trillion package of economic support. However, despite the mammoth headline figure, the package disappointed investors.

The cash is to bail out indebted local governments, rather than stimulate demand – in effect treating the country’s economic ailments, rather than boosting spending.

The decision has sparked speculation that President Xi is deliberately holding something back in preparation for Trump.

“There are some thoughts that China is saving some ammunition to offset the impact of tariffs next year,” says Wrigley.

Whether President Xi has a big enough fiscal bazooka to offset Trump’s tariff blitz remains to be seen.

Additional reporting by William Yang

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