This time Trump's trade war is much worse: Bank of China economist
China's trade surplus and external economic dependence could rise as a consequence.
In this briefing:
Bank of China economist Guan Tao says Trump’s 2025 trade aggression could have dire impacts on the Chinese economy - a sentiment in sharp contrast to the sanguine confidence of the Communist Party’s official newspaper.
Guan points out that the first round of tariffs in 2018 actually increased China’s trade surplus, as well as its dependence upon external demand sources.
The 2025 tariffs are faster and larger in scale than the 2018 levies.
The global nature of Trump’s new tariffs could also have severe impacts on China’s economy by hitting its indirect exports via other countries.
The severe ramifications of a Trump-led trade war make it imperative for China to switch its economy to a development model led by domestic demand and consumption.
Guan also highlights the need for China to focus on improvements to product quality - instead of competing on prices - and stymieing pernicious “involuted” competition between Chinese companies.
Bank of China economist at loggerheads with Communist Party’s People’s Daily
Guan Tao (管涛 ), chief economist at Bank of China’s investment banking vehicle, believes Trump’s current round of tariffs could have far more severe effects than previous efforts by Washington to contain the Chinese economy.
His comments are a sharp contrast to the sentiments of the People’s Daily - the flagship newspaper of the Communist Party, which has expressed sanguine confidence in China’s ability to withstand the impacts Trump’s trade aggression, thanks to diversification of its export markets and a preparatory stimulus package assembled at the end of last year.
In a recent opinion piece, Guan said the ramifications of a worsening Sino-US trade war make it more imperative than ever China advance adjustments to its economic development model, by increasing the role of consumption.
The first round of the Sino-US trade war
Guan conducted a comparison of Trump’s latest round of tariffs with the first salvos fired in the Sino-US trade war back in 2018.
Two years after Trump assumed office, Washington signalled that it would apply tariff hikes to China in April 2018. Those tariffs came in four rounds from July 2018 to September 2019, adding levies of 10 - 25% to USD$370 billion in Chinese imports.
Guan says the move initially served to spur Chinese export growth by triggering a rush for products from stateside importers.
China’s official data indicates that its exports grew 9.9% in 2018, for an acceleration of 2.0 percentage points compared to 2017. Exports to the US grew 10.8%, for an acceleration of 0.9 percentage points.
In 2019, however, China’s exports eventually took a major hit as a result of US tariffs, posting growth of just 0.5% - for a deceleration of 9.4 percentage points. Exports to the US fell 12.9%.
Tariffs increase China’s trade surplus and external dependence
Guan notes that in 2019, when Trump’s tariffs took full effect, China’s trade surplus actually increased, while external demand made a positive growth contribution of 0.75 percentage points, for an increase of 1.34 percentage points compared to the year previously.
According to Guan, this was due to the across-the-board negative impacts of US tariffs, which adversely affect China’s investment and domestic consumption levels. He describes the cycle as follows:
Tariffs restrict Chinese exports.
This undermines export-related investment and employment in China.
Chinese household incomes and consumption suffer as a consequence.
Investment and consumption in turn impacts Chinese imports.
China’s trade surplus expands.
External demand as a growth driver increases, as domestic demand weakens.
In 2019, just as the trade surplus expanded and the role of external demand increased, end consumption expenditures and capital formation saw their growth contribution drop 0.91 percentage points and 1.13 percentage points respectively.
As a consequence, real GDP growth in 2019 was 6.1%, for a fall of 0.7 percentage points compared to 2018.
This time the trade war’s far worse
Guan argues that Trump’s new tariffs launched in April of this year could have even more abrupt and dire impacts for China’s economy, “directly bypassing 2018 and creating a replay of the tale in 2019.”
Trump’s new tariff measures have greatly increased in scale and their implementation is far quicker.
In 2018 - two years after assuming office - Trump raised the average tariff applied against Chinese imports from 2.7% to 15.4% over a six month period. This figure fell to 12.5%, however, by January 2020.
This time, within two months of returning to office Trump had already applied a 20% tariff, before quickly mooting a further 34% tariff in response to Beijing’s retaliatory actions.
“The window of time left for Chinese enterprises is much shorter,” Guan writes.
The current round of tariffs also apply to a far greater range of Chinese goods.
The 2018/ 2019 tariffs affected USD$370 billion in Chinese commercial exports to the US, accounting for three quarters of the total. By contrast, the 2025 round of tariffs affect all Chinese exports to the US.
Global nature of tariffs hits China’s indirect exports
The geographic scope of US tariffs has also greatly increased, which could have severe impacts on Chinese exports routed via other countries.
In 2018, Guan argues that the tariffs were largely a means of spurring negotiations amidst unresolved Sino-US trade frictions.
This time, however, Trump’s tariffs also heavily target Canada and Mexico (25%) as well as ASEAN nations, with Vietnam, Indonesia and Malaysia slapped with tariffs of 46%, 32% and 24% respectively.
Guan points out that could badly affected indirect exports to the US by Chinese companies.
It could also prompt some countries to step up their own tariffs on Chinese imports to obtain tariff relief from the US.
Guan further notes that the uncertainty created by escalating tariff wars will exacerbate downward pressure on the world economy, and undermine global trade growth.
Tariffs could still further expand China’s trade surplus
The application of retaliatory tariffs by Beijing means China’s imports could come under greater pressure as a consequence, especially given that effective domestic demand - and consumer demand in particular, remains “insufficient.”
Guan further notes that around 80% of China’s annual imports are intermediate goods, of which a considerable portion are used for the manufacture of export products.
“If export markets aren’t there, then related imports will also greatly contract.”
As a consequence, Guan’s conclusion is that this year will see a repeat of 2019, with exports slowing and imports easing even more, leading to an increase in China’s trade surplus.
In terms of the three main drivers of demand, he says external demand will once again increase as a driver of economic growth in response to the tariffs, as well as further impact overall economic growth via associated investment and consumption.
China needs to accelerate changes to its development model
While Guan differs with the Communist Party’s People’s Daily on the impacts of the Trump-led trade war, he is in full agreement with calls for China to change its economic development model and give greater play to domestic demand.
Guan says the trade war reiterates the need to accelerate ongoing adjustments to China’s economic model, chief amongst them Beijing’s push for consumption growth in 2025 as part of its large-scale fiscal stimulus package
According to Guan, Chinese policy makers have “thought about all these matters earlier on…these aren’t stopgap measures to deal with external shocks.
“The external environment at present will force China to accelerate its push for related reforms and adjustments.”
He points out that as early as 2020, Beijing called for the “establishment of new development conditions” (构建新发展格局).
Beijing also incorporated this goal into the report of the twice-a-decade 20th National Party Congress held at the end of 2022, as well as the 2024 Communist Party Central Committee Resolution on “Further Comprehensively Deepening Reform and Driving Chinese-style Modernisation.”
Guan says China’s development model will see the reorientation of macroeconomic policy towards greater improvement of Chinese living standards.
This is a transformation flagged last year, with the launch of subsidies for consumer durables, as well as the declaration of the Central Economic Work Conference that the chief mission going forward would be spurring consumption and ramping up domestic demand.
Guan notes that a Politburo meeting in July 2024 announced that the focus of economic policy would shift “more towards benefiting living standards and spurring consumption.”
“This unveiled the prelude to the shift in China’s macroeconomic policy.”
The Two Sessions Congress held in March this year also called for “strengthening the orientation of macroeconomic policy towards living standards” in its official report.
“In the past, China’s macroeconomic policy focused more on investing in things and expanding government investment,” Guan writes.
“Now, it needs to drive more resources towards investing in people, and servicing living standards.”
Improving product quality and stymieing pernicious competition
According to Guan, China also needs to transform its external trade development strategy, focusing more on quality instead of cheap prices.
“For a long period of time, China’s external trade and exports has implemented meagre profits and high sales, using a sales strategy to win based on price,” he writes.
“The tariffs storm has impacted the international price competitiveness of Chinese products…Chinese exports can only achieve greater price negotiating capability by switching from winning on price to winning on quality.”
China will also need to deal with the problem of pernicious “involuted” competition that leads to adverse price wars and diminished efficiency.
Guan sees both the private and public sectors working together on this issue under the leading guidance of the Communist Party.
“Standardising the external trade order is extremely important,” he writes. “This area will regard the combined effort of enterprises, industry, markets and the government.”