Trump's tariffs seen as far worse shock to China than first trade war

By Bloomberg News

 

Donald Trump’s latest tariff hikes threaten to inflict a bigger hit on China’s economy than it suffered during his first trade war. 

The 54 per cent US tariffs on China’s goods announced since the start of Trump’s second presidential term may drag the country’s gross domestic product growth down by 2.4 percentage points in 2025, according to Citigroup Inc., an assessment it says was made before considering any offsetting measures.

 

Economists at BNP Paribas, Societe Generale SA, Oversea-Chinese Banking Corp and ING Bank forecast a hit of 1 to 2 per cent. Last month, Beijing announced an ambitious GDP growth target of around 5 per cent for this year.  “The US tariff shock would be significantly higher and more pervasive than 2018-19,” Morgan Stanley economists led by Robin Xing said in a report. “Besides the direct tariff shock on China’s exports to the US, the indirect impact would also be notable, as the US’s pervasive tariff hikes on other trading partners would slow global trade.” 

 

 

A severe slowdown will likely prompt Chinese policymakers to roll out more stimulus. That could come in the form of several trillion yuan in additional government spending or a liquidity boost to banks, some economists said.

 

Senior officials have repeatedly signaled they’re ready to act to offset external shocks. Beijing on Thursday also condemned the US levies and pledged to hit back with unspecified measures.  

“It would be easy for China to roll out another one to two trillion yuan special sovereign bonds if necessary,” said Serena Zhou, senior China economist at Mizuho Securities Asia.

 

The government already planned to issue 1.3 trillion yuan ($179 billion) of ultra-long special sovereign bonds this year and use some of the proceeds to subsidize purchases of consumer goods. 

The trade standoff may wallop the economy just as its performance was steading in the beginning of 2025, with little sign of damage from tariff increases so far.

 

The recovery momentum has led at least seven international banks including Morgan Stanley and Citigroup to upgrade their forecasts to China’s 2025 GDP growth over the past month. 

 

The improved sentiment could falter now after the latest tariff announcements. It may also put this year’s growth target out of reach in the absence of more policy stimulus. 

What Bloomberg Economics Says...

“The tariffs, if implemented, will hurt China on multiple fronts, by weakening demand for China’s products in the US and hitting the world economy. What’s more, the US action risks stronger retaliation from other trading partners — further depressing global demand.” 

— Chang Shu, David Qu and Eric Zhu

 

“The tariff impact could start to be seen from the second quarter of 2025,” Citigroup economists including Yu Xiangrong wrote in a note Thursday. “We now see a 50-100 basis points downside risk to our 4.7 per cent GDP forecast, pending potential extra stimulus.”

 

The Communist Party’s decision-making body Politburo will convene in late April and July to discuss the economic outlook and policies — meetings it could view as potential windows for unveiling major policy adjustments.

 

Other channels for stimulus include a cut to the reserve requirement ratio for banks, which would unlock cash they can lend or invest. Analysts had flagged such a move as a likely response from the People’s Bank of China to massive tariff hikes.

 

Bloomberg Economics expects a reduction of a quarter percentage point in the RRR this month, followed in May by a decrease in the policy rate of seven-day reverse repo by 10 basis points. It predicts a cumulative 100 basis points of RRR cuts and 30 basis points of rate easing this year.

 

“We think the probability of an RRR cut in April is rising, given the needs to inject liquidity as well as to support market sentiment,” said Zhi Xiaojia, chief China economist at Credit Agricole CIB in Hong Kong.

 

One silver lining for China is that many other US trading partners have also been targeted with steep increases in levies. 

 

The result is likely a narrower gap in terms of US tariff rates between China and some of its trade competitors, such as Vietnam. As a consequence, this could potentially moderate the impact on China, as it may become more costly to substitute its products with imports from other countries.

 

What this means is that the eventual impact of the tariffs on China’s exports and economy remains difficult to quantify.

 

“The situation is more nuanced this time” compared with Trump’s first term, said Tommy Xie, head of Asia macro research at Oversea-Chinese Banking Corp. “Ultimately, the real economic cost may depend more on substitution limits than the nominal tariff rate itself.”