Trump’s return could trigger economic havoc for China in a brutal second trade war

A potential victory for Donald Trump in the upcoming presidential election could spell disaster for China, marking the beginning of a second, even more challenging trade war between the two global powers. With the Republican nominee pledging to hike tariffs on Chinese imports to 60% or more, the economic consequences for China could be far more severe than during Trump’s first term in office, particularly given the fragile state of China’s economy.

According to Matthew Gertken, the chief geopolitical strategist at BCA Research, Trump’s return to the White House would apply significant pressure on the already struggling Chinese economy. “Trump will be putting his elbow into the Chinese economy as it deflates,” Gertken noted, highlighting China’s increased vulnerability in the face of renewed trade tensions.

The first trade war between the US and China began in 2018, according to SCMP, when Trump imposed tariffs of up to 25% on $350 billion worth of Chinese imports, covering 65% of the total imports from China that year. The Chinese government retaliated by imposing its own tariffs on American goods, sparking a prolonged trade conflict. While most economists agree that China was worse off during this period, the negative impact did not last long. China’s exports rebounded strongly during the pandemic, driven by surging demand for consumer electronics and other home comforts from Western consumers.

In recent years, Chinese exporters have successfully diversified their markets, aided by government support and competitive pricing. This strategy led to China’s goods trade surplus reaching a record high of nearly $100 billion in June, fueled by exports to the European Union and Southeast Asia. However, the broader Chinese economy is grappling with significant challenges, including a three-year property crisis, weak consumer confidence, and strained local government finances.

China’s heavy reliance on manufacturing and exports makes it particularly vulnerable to a renewed escalation in the trade war with the US. Patrick Zweifel, chief economist at Pictet Asset Management, estimated that if Kamala Harris, should she become president, maintained the Biden administration’s selective tariff policies, it might only reduce China’s economic growth by 0.03 percentage points next year. However, if Trump’s proposed 60% tariffs on all Chinese goods are implemented, the impact would be much more severe, potentially slashing China’s growth by 1.4 percentage points, reducing its economic growth rate in 2025 to around 3.4% from the expected 4.8%.

UBS Bank estimates that 60% tariffs on US imports of Chinese goods could reduce China’s GDP growth by about 2.5 percentage points in the 12 months following their implementation. However, if China takes offsetting measures, such as allowing its currency to weaken, extending tax rebates to exporters, or cutting interest rates, the decline could be limited to 1.5 percentage points.

China’s response to such a scenario could also include retaliatory actions, such as raising tariffs on US products, withholding supplies of critical minerals, or selling US assets like Treasury bonds, according to Goldman Sachs. Studies conducted by universities in China and Stanford University have shown that Trump’s first round of tariffs not only reduced Chinese exports but also squeezed corporate profits, damaged business and consumer confidence, and stifled investment and hiring. Economists predict that these effects would be even more pronounced in a second trade war, particularly if Trump targets every Chinese import with new tariffs.

In addition to pressures from the US, Chinese firms are facing growing challenges from other countries that are raising barriers to Chinese imports. With feeble demand and chronic oversupply issues, producer prices in China have been declining for nearly two years. Nick Borst, director of China research at Seafarer Capital Partners, pointed out that a company operating with a profit margin of 5% or 6% would be unable to absorb 60% tariffs, further intensifying the economic strain.

Since the first trade war, China has shifted some of its exports away from the US, focusing more on developing economies. However, as the US market could be effectively closed off by a 60% tariff, China would be forced to increase its exports to these alternative markets. However, countries like India, Brazil, and Mexico are beginning to push back against Chinese imports to protect domestic jobs and industries.

Adam Slater, lead economist at Oxford Economics, cautioned that “if China is basically locked out of the US market…they are going to have to push their goods even harder onto other destinations. And other destinations may not tolerate that.” This situation could lead to increased global trade tensions.

One potential solution for China could be to expand its manufacturing operations overseas to serve local markets directly. However, this approach has been met with mixed feelings by China’s leadership, as it could lead to lower manufacturing employment within the country.

The prospect of Trump’s return to the White House and the subsequent escalation of the trade war presents a formidable challenge for China, with significant implications for the global economy.