US-China Trade Tensions Flare: Tariff Hike Hits Markets, Beijing Mulls Next Move

US-China Trade War Heats Up: Trump Signs Executive Order

On Monday, March 3, US President Trump signed an Executive Order raising tariffs on Chinese imports to 20%, effective March 4. The latest tariff hike has raised market fears of a full-blown US-China trade war, impacting the two largest economies and global trade terms.

Robin Brooks, a Senior Fellow at the Brookings Institution, reacted to the tariff hike:

“China has so far chosen to ignore the US, letting the White House spin its wheels, but this approach ends tomorrow if the US imposes another 10 percentage point tariff hike on China. US tariffs are up more than during all of Trump’s first term. The pain on China is getting real.”

China’s Response: Countermeasures or Restraint?

On March 3, CN Wire reported that Beijing was analyzing potential countermeasures to any further US tariffs:

“The countermeasures will likely include both tariffs and a series of non-tariff measures, and US agricultural and food products will most likely be listed.”

However, Natixis Asia Pacific Chief Economist Alicia Garcia Herrero poured cold water on expectations for a major retaliatory response, stating:

“China is likely going to focus on what it needs to do, rather than a massive response. You don’t really want to upset a ‘bully’ further.”

Beijing’s Strategy: Domestic Consumption Over Retaliation

Beijing is prepared for US tariffs, downplaying their impact on China’s economy. Analysts believe the government will prioritize boosting domestic consumption rather than focusing on retaliation.

Bloomberg TV’s Asia Pacific Chief Markets Editor, David Ingles, shared an interview with former People’s Bank of China (PBoC) advisor Li Daokui, who dismissed concerns over the tariffs:

“I strongly believe this time around, tariff is no longer a big issue. If you give me the order of three top issues in China or challenges in China, I don’t even put top three the tariff from President Trump. In fact, the whole economy was preparing for 40% and even 60% of tariff hike from President Trump. Now he’s only proposing 10%, of course, there are indirect tariffs upon Chinese products from Mexico, from Canada, from Europe. But, overall, it’s still smaller than people anticipated. It’s smaller than the year of 2018. So, this time around, the Chinese economy is fully fully prepared. I do not think the tariff is a big issue.”

Daokui emphasized that China’s strategy is to stimulate domestic consumption:

“The way to deal with tariffs is the same as dealing with other issues in Chinese economy. That is to boost domestic consumption. And on this issue, there’s already tremendous tremendous discussions, and also a lot of policies will be implemented down the road.”

National People’s Congress Opens Amid Trade Uncertainty

China’s third session of the 14th National People’s Congress begins on Tuesday, March 4. Economists expect Beijing to roll out policy measures, targeting domestic demand and advancing its transition to a consumption-driven economy.

In December, People’s Bank of China Governor Pan Gongsheng reinforced this shift, stating:

“The priority of macroeconomic policy should shift from promoting more investment in the past to promoting both consumption and investment, with more importance attached to consumption.”

Economic Growth and Policy Priorities

In late 2024, S&P Global forecast that a 10% tariff on Chinese goods could slow China’s GDP growth to 4.1% in 2025, with higher tariffs posing an even greater risk.

On February 10, Beijing reaffirmed its commitment to economic growth, outlining plans:

• Increase residents’ income and promote reasonable wage growth.
• Better fulfill housing and consumer spending needs.
• Place greater emphasis on boosting consumption.

At this week’s Third Session of the 14th NPC, lawmakers are expected to discuss economic reforms, fiscal policies, and the Five-Year Plan. The GDP target will likely reflect China’s strategy for managing US trade pressures.

Market Reaction: Hang Seng Index Slides

Hong Kong stocks fell sharply following the tariff news, with the Hang Seng Index falling 1.34%. However, Mainland China’s equity markets showed a more muted response. The CSI 300 and Shanghai Composite Index slipped by 0.48% and 0.29%, respectively.

What’s Next? Stimulus or Trade Talks

Beijing’s response to higher tariffs will be crucial for global risk sentiment. Strong retaliatory measures could trigger a flight to safety. However, a measured response, coupled with stimulus measures, may support risk assets.

Stay ahead of market trends—explore our in-depth analysis of China’s economy and global markets here.