Why China needs broad-based response to Trump’s tariff tantrum

Why China needs broad-based response to Trump’s tariff tantrum

A worker polishes steel bicycle rims at a factory which produces bicycle parts for export, in Hangzhou, in eastern Zhejiang province,
As the global economic landscape evolves, China’s ability to adapt and implement effective policies will determine its continued prosperity
The first three weeks of US President Donald Trump’s second term have introduced significant uncertainty and chaos into global supply chains. Trump imposed tariffs on Canada, Mexico and China and suspended the de minimis exemption, ostensibly to address the illicit fentanyl trade, before walking back on some of the actions.

As business leaders navigate the unpredictable changes in Trump’s trade policies, China must develop strategies to sustain its economic growth while anticipating a continuation of the decline in direct trade with the United States since 2022.

As of now, his threatened 25 per cent tariffs on Canada and Mexico will be paused for 30 days to allow for actions by the two countries to enhance border enforcement against illegal immigration and drug smuggling. Meanwhile, China faces an additional 10 per cent tariff.

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The suspension of the de minimis rule, which allows shipments valued at less than US$800 to enter the US duty-free, was intended to curb fentanyl shipments. It was also expected to disrupt online retailers such as Temu and Shein.

However, its implementation lacked forethought and was further complicated by the pending confirmation of Howard Lutnick as Trump’s commerce secretary. Less than a week after suspending the de minimis rule, Trump reversed his position and restored the exemption.

As Trump’s unpredictable trade policies inject further uncertainty, China must develop strategies to stimulate its slower-than-expected post-pandemic economic growth. China’s industrial output grew in 2024 by 5.8 per cent year on year, while retail sales grew by just 3.5 per cent. This indicates a need for more robust measures to stimulate domestic consumption.

While fixed asset investment increased by 3.2 per cent last year, the real estate sector saw a 1.8 per cent year-on-year drop. Although China’s GDP still grew by 5 per cent in 2024, boosted by strong fourth-quarter growth of 5.4 per cent, urgent intervention is needed to boost economic activity.

Consumer confidence in China experienced a sharp fall in 2022 and remains low. The consumer confidence index was above 120 just before the Covid-19 pandemic but hovers around 90 today, reflecting pessimism about the economy. Anaemic domestic consumption in recent years has led China to lean on exports to sustain economic growth, with exports growing 5.9 per cent in 2024, resulting in a record trade surplus.

China has traditionally focused on supply-side reforms, pushing for the export of goods such as electric vehicles and mobile phones. However, some economists argue that relying solely on exports is unsustainable as the global market cannot absorb the excess supply of cheap Chinese goods. Even Brazil, a fellow member of the Brics bloc of developing nations, has expressed concerns about the detrimental impact of Chinese exports on its manufacturing sector.

Chinese households historically have had a high savings rate, much higher than their Western counterparts. Between 2020 and 2023, they accumulated additional savings of 56 trillion yuan (US$7.6 trillion). However, Chinese consumers have been reluctant to spend because of uncertainty about the future and expectations of falling prices. This hesitation has adversely affected the property market and overall economic activity.

The central government is implementing new measures to encourage Chinese consumers to spend more to stimulate domestic consumption and support economic growth. In addition to lowering interest rates to encourage borrowing and spending, offering purchasing subsidies for properties and coupons for consumer goods, restaurants and hotels can be effective strategies.

This strategy has worked in the past. When the export market dried up during the 2008 global financial crisis, China needed a plan to keep domestic manufacturers afloat. It did so by offering subsidies to trade in old appliances and provided rural consumers with incentives to buy designated brands of TVs, refrigerators, mobile phones, washing machines and freezers.

The central government is encouraging local governments to buy unsold properties and convert them into affordable housing. However, this alone is not sufficient. Local governments should also provide low-interest loans to develop infrastructure for easy access and create small businesses in these properties to build an ecosystem that supports economic growth.

These measures and further interest rate reductions can create a conducive environment for increased consumer spending. The Chinese government should consider issuing more ultra-long-term bonds to fund these initiatives.

Given the size of China’s economy and its strengths in research, development and manufacturing, bold moves are necessary. By striking a balance between a supply-based and demand-based economy, China can continue to grow regardless of the external pressures from Trump’s tariff policies.

China’s past experiences with economic stimulus offer valuable lessons. China’s economy grew briskly during the 2008 financial crisis, maintained by government intervention despite the collapse of export markets. The state mobilised demand through state-owned banks and enterprises, supported by a buoyant property market.

Buildings are seen in Beijing’s central business district in the late afternoon sun on February 13. Photo: AFP
However, recent stimulus efforts have been less effective because of cautious credit demand and high levels of debt. To navigate the economic risks ahead, China must prioritise encouraging demand over enforcing financial discipline.

Recent policy shifts, such as allowing local governments to issue additional bonds and focusing on boosting consumption, indicate a recognition of this need. Experimenting with electronic shopping coupons and expanding trade-in programmes for household appliances are steps in the right direction.

China’s economic strategy in response to Trump’s unpredictable economic policies must be multifaceted. As the global economic landscape evolves, China’s ability to adapt and implement effective policies will determine its resilience and continued prosperity.

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