China’s Economic Outlook Dims as Trump Imposes 10% Tariffs

US-China Trade: Trump Imposes 10% Tariffs

On January 31, the White House announced President Trump will impose 10% tariffs on Chinese goods bound for the US. The tariffs will take effect on February 4 at 05:01 GMT unless a last-minute deal is reached.

This move marks a departure from Trump’s earlier rhetoric of imposing 60% tariffs. Nevertheless, the announcement surprised traders as Trump had stated:

“Conversation with China’s Xi went fine. Would rather not have to use tariffs over China.”

The tariffs coincide with China’s Lunar New Year holidays, meaning Mainland China markets will reopen on February 5 when trading resumes.

China’s Response: Lawsuit, Labor Market Risks, and Stimulus Measures

China swiftly filed a lawsuit with the World Trade Organization (WTO) in protest, underscoring its strong objection. However, economists remain skeptical about the WTO’s ability to intervene. Alicia Garcia Herrero, Chief Economist at Natixis, commented:

“Trump imposes 10% tariffs on Chinese goods and China files a lawsuit at the WTO… not that it is going to help. Welcome to a trade war on steroids.”

A firmer response from Beijing could start a lengthy trade war, potentially impacting the world’s two largest economies. China’s labor market could bear the brunt. Weaker labor market conditions could reduce household disposable income, thereby curbing private consumption. This could hinder Beijing’s stimulus efforts to boost consumption.

Concerns about sentiment and consumption could incentivize Beijing to roll out more meaningful stimulus measures to counter the potential impact of tariffs on China’s economy. Bolstering the labor market could be one focal point.

China’s Economic Outlook Dims Amid Rising Tariff Risks

S&P Global forecasts that 10% tariffs could slow China’s economy to 4.1% in 2025, with a sharper decline under higher tariffs. Before the latest tariffs, the International Monetary Fund (IMF) projected China’s economy to grow by 4.6% in 2025.

Higher US tariffs in response to any retaliation from China could further impact the economy and global trade terms. The question will be whether Beijing will risk testing Trump’s resolve, considering the potential impact on global trade.

Economists expect US tariffs to push US import prices higher, fueling inflationary pressures. The Fed could react to higher inflation by pivoting to a hawkish policy outlook. Higher interest rates could adversely affect the US labor market and consumer spending.

Expert Views on US Tariffs and Inflation

While the US and China will feel the effects of US tariffs, the US may have more to lose, suggesting a willingness to negotiate behind closed doors.

The Kobeissi Letter highlighted China’s declining reliance on US trade, stating,

“Interestingly, China has significantly reduced their reliance on US trade since 2005. Chinese exports to the US reflect just 15% of their total annual exports. Furthermore, these goods reflect just 15% of imports to the US. Did China see this trade war coming?”

Regarding inflation and consumer sentiment, the Kobeissi Letter added:

“The question becomes, can producers pass these costs on to customers? Higher interest rates are here to stay and consumers are already exhausted from inflation. Higher prices would CRUSH consumer sentiment.”

Trump himself acknowledged the risk of near-term economic pain from tariffs, reportedly saying,

“We may have short term some little pain, and people understand that. But long term, the United States has been ripped off by virtually every country in the world.”

Based on historical patterns, China’s potential responses could include:

• Reciprocal tariffs: Targeting US agricultural products, impacting Trump’s political base in rural states.
• Currency Adjustments: Weakening the Yuan against the US dollar to offset tariff effects.
• Strategic Negotiations: In 2020, China and the US negotiations led to the Phase One trade deal, where China agreed to increase purchases of US goods and services.

China has already filed a complaint with the WTO. Meanwhile, the USD/CNY is currently at 7.2502, exceeding a peak of 7.1842 during Trump’s first term.

Market Reactions: Hang Seng Avoids Sell-Off Ahead of Mainland Response

On Monday, February 4, the Hang Seng Index avoided the broader market sell-off, slipping just 0.04%. Significantly, the Index had initially fallen over 2% before rebounding. Tech stocks limited the Index’s losses, with China’s progress in the AI space gaining traction and investor interest.

It could be different story for Mainland China markets. The CSI 300 and Shanghai Composite Index could fall sharply on Wednesday, February 5, if there’s no deal.

Meanwhile, the Hang Seng Index rallied 2.93% to 20,810 early in the Tuesday, February 4, session on hopes of a swift resolution to trade tensions.

Explore expert forecasts on US-China trade and further insights into China’s economy, the Hang Seng Index, and global markets here.