China - After Liberation day

The dust from Trump’s tariff announcements at ‘US Liberation Day’ is not completely settled, but it has become clear that China will be relatively hit hard by the so-called reciprocal tariffs. The additional 34% (50% of the relative trade deficit – in import terms – of the US versus China in 2024) will come on top of the two times 10% already levied in February and March (ostensibly for fentanyl-related reasons). We understood from comments from Treasury Secretary Bessent that the additional 34% would replace the tariffs already in place before Trump 2.0 (averaging around 10%). If that’s indeed the case, the average US import tariff rate on all imports from China would rise further to 54%, and that would also include small-value trade that until now fell under a so-called ‘de minimis clause’. If that’s not the case, the average tariff rate could even rise to around 65%.

How did Beijing react?

In February and March, Beijing reacted immediately on US 10% tariffs with counter tariffs and non-tariff measures, in a targeted and measured way (see here and here). By targeting farm states, Trump’s core fan base, China tried to create leverage, while showing it would not tolerate to be bullied but at the same time leaving the door open for a deal later on. This time around, China has so far not come with counter tariffs yet, although Beijing officially urged the US to cancel the tariffs and stated it would take countermeasures to protect its own rights and interests. Beijing has also contacted other trade partners hit by US tariffs, including in the EU and in Asia. Earlier this week Beijing stated it would react jointly with Japan and South Korea (also see below), although this was not confirmed by other capitals yet.

Yesterday, in the run-up to the new tariff announcements, the news was floating around that China’s National Development and Reform Commission has told its regional branches to tighten restrictions for local companies aiming to invest in the US. This may be done to create additional leverage for Beijing in future (trade) negotiations with Washington. It should be noted that Chinese investments to the US had already fallen to very low levels in the course of last year. Moreover, some investment restrictions had been tightened already more broadly in February, in an aim to stem capital outflows that put pressure on the yuan.

What does this mean for our forecasts: key factors to take into account

• Larger export shock: Although the 54% tariff rate is not that far from what we have assumed (see below), the quicker build-up would lead to a sharper blow to Chinese exports to the US. Moreover, typical trade diversion channels would be broken, as countries like Vietnam (46%) or Mexico (25% on parts of its imports) now also face high US import tariffs. What is more, it is clear now that the bigger shock to the rest of the world following the US reciprocal tariffs, will be a negative factor for Chinese exports in general. More indirectly, the tectonic shift in the trade relationship with the US may also lead to negative sentiment and confidence effects.

• Negotiation or escalation?: The hike to 54% on all Chinese imports is relatively close to our base case assumption of 45%, certainly if we compare this to what we had assumed for the rest of the world and what has been communicated in that respect (also see our broader global update published later today). However, we assumed a gradual built-up towards 45%, while in practice we are faced with a much quicker build-up. We should add that this is still a first take, because there could be (at the one hand) negotiations –or retaliation leading to further escalation. In terms of negotiations, Trump recently hinted on a 10% discount for China should Beijing agree with a TikTok deal, which would bring the overall tariff rate very close to the 45% of our base case.

• More support likely: Beijing already committed to step up fiscal support to prop up domestic demand and stabilise the real estate market. This is for instance visible in an expected increase in the nominal budget deficit to 4% of GDP (from 3%) and the consolidated deficit. We have long held the view that Beijing would hold part of its powder dry until more would be known from additional US tariffs. Bottom line: we expect a further stepping up of fiscal support, next to monetary easing in the form of policy rate and RRR cuts. We also expect Beijing to tolerate more CNY depreciation, but not a disorderly one.

• Trade reorientation: Typical trade diversion channels used after the first US-China tariff war in 2018-19 are likely to dry up, as countries like Vietnam (46%) or Mexico (25% on parts of its imports) now also face high US import tariffs. However, next to trade diversion there is also trade reorientation attempts. Stronger trade cooperation between China and other trade partners could help stemming the fall-out, and also would help China’s trade partners to prevent a flooding of products from China/Asia into other European and other markets. Remarkable in this respect is the rapprochement between China, Japan and South Korea – see below.

• Resilience: China’s economy is showing resilience over the past few months, partly helped by stimulus, and the March PMIs are further proof for this – see below (and here).

Taking the above factors into account (and adding that many developments are still ‘in flux’) we leave our China GDP growth forecasts (4.3% for 2025 and 4.2% for 2026) unchanged for now. We are still at the ‘right side of consensus’ (a bit below the median estimate, partly reflecting our tariff assumptions), we expect more support, and we notice some resilience of the Chinese economy – with more indications in that respect coming from the Q1-25 GDP figures published on April 16th. All in all, we will review our GDP growth forecasts later this month, and will publish revised forecasts in our April Global Monthly.

A remarkable rapprochement between China, Japan and South Korea

Another remarkable development has been the recent ‘rapprochement’ between China (the US’s structural adversary) and Japan and South Korea (traditional US allies in Asia) in the run-up to ‘Liberation Day’. Last Sunday, the three countries held their 13th Trilateral Economic and Trade Minister’s Meeting in Seoul, the first such meeting since 2019. According to the press statement following this meeting, the countries endorsed the ‘rules-based, open, inclusive, transparent, non-discriminatory multilateral trading system within the WTO at its core’. They called for reforms to strengthen the WTO and also agreed to speed up working on their trilateral free trade agreement – in the context of a wider Regional Comprehensive Economic Partnership that covers around 15 countries accounting for around 30% of global GDP. Moreover, it was stated that the three countries aim to cooperate on supply chain stability, green and digital initiatives, and some upcoming international events. This shows that while US import tariffs are forming economic headwinds (with all three countries facing high country-specific tariffs since yesterday, while the 25% tariffs on cars particularly hit Japan and South Korea), countries are trying to find ways to mitigate the hit from this over time. More broadly, it shows that US isolationism may have widespread repercussions for global alliances.

China’s March PMIs confirm the economy’s resilience on the eve of more US tariffs

On the back of further stimulus measures and possibly still some trade frontloading, China’s March PMIs showed a further improvement and came in a touch better than consensus expectations. On the manufacturing side, the official index published by NBS on Monday moved a bit further up from the neutral 50 mark separating expansion from contraction, reaching a one-year high of 50.5 (February: 50.2, consensus: 50.4). The alternative index from Caixin published on Tuesday rose to a four-month high of 51.2 (February: 50.8, consensus: 50.6). On the services side, the official non-manufacturing PMI picked up to a three-month high of 50.8 (February: 50.6, consensus: 50.4). The underlying construction sub-index is showing a sharp recovery over the past few months, and reached a 10-month high of 53.4 in March. The official composite PMI, a weighted average of the output subindices for manufacturing and non-manufacturing, rose to a three-month high of 51.4 (February: 51.1), remaining firmly in expansion territory. Caixin’s services PMI also came in stronger than expected today, at 51.9 (February: 51.4, consensus: 51.5). Caixin’s composite PMI rose to a four-month high of 51.8.