China’s Nightmare: A Second Trade War With Trump

Trade wars are generally a bad thing, except with China?

You bet! Trump whacked China on a temporary basis to get their attention. He's saying if you want to do business with the US, you best stop all the douchebaggery all over the world, stop shipping illegal Fentanyl to this country and open your markets to our products. Otherwise, the beatings will continue.

That's smart diplomacy.

China’s Nightmare: A Second Trade War With Trump

China’s struggling economy is overly reliant on exports, making it more vulnerable to the punishing tariffs the Republican nominee is proposing

By Jason Douglas, WSJ

Aug. 10, 2024 9:00 pm ET

Donald Trump met with Chinese leader Xi Jinping at a Group of 20 summit in Japan in 2019 in an effort to hash out bilateral issues. Photo: Kevin Lamarque/Reuters

SINGAPORE—China was bruised by its trade war with the U.S. under President Donald Trump, but ultimately bounced back. If Trump wins the White House in November, round two will be much tougher.

The Republican nominee has said he would raise tariffs on Chinese imports to 60% or more if he wins this year’s presidential election. The economic damage to China would be much steeper than in Trump’s first term because the tariffs would be higher and China’s economy is much more vulnerable.

Trump “will be putting his elbow into the Chinese economy as it deflates,” said Matthew Gertken, chief geopolitical strategist at BCA Research. “They are more vulnerable.”

The trade war erupted in 2018 when Trump placed tariffs of up to 25% on $350 billion of imports from China—65% of the 2018 total—including solar panels, washing machines, steel and aluminum. China retaliated with tariffs of its own on U.S. goods.

Most economists say China got the worst of that trade fight, but the effect didn’t last. Its exports bounced back strongly during the pandemic as locked-down consumers in the West gorged on consumer electronics and other home comforts.

Chinese exporters have since found new markets, aided by state support and low prices. China’s surplus in goods trade hit a monthly record in June of almost $100 billion, lifted by exports to the European Union and Southeast Asia.

Except for exports, China is struggling

The export surge is a bright spot for an otherwise struggling economy. An epic property crunch is now in its third year. Burned by the property meltdown and lingering trauma of the pandemic, Chinese consumers are keeping a tight grip on their wallets. Local government finances are under severe strain, and private-sector confidence is in the doldrums.

This reliance on manufacturing and exports leaves China much more sensitive to an escalation in the U.S.-China trade war.

Patrick Zweifel, chief economist at Pictet Asset Management, estimates that if a Kamala Harris presidency stuck with the more selective tariff policy of the Biden administration, it might shave perhaps 0.03 percentage point off Chinese economic growth next year.

Raise tariffs to 60% on all Chinese goods, as Trump has proposed, and the hit would be far larger, at perhaps 1.4 percentage points, which in his forecasts would pull growth in 2025 down to around 3.4% from an expected 4.8%.

UBS estimates that tariffs of 60% on U.S. imports of Chinese goods would hold back GDP growth by about 2.5 percentage points in the 12 months after imposition, though the drag could be just 1.5 percentage points if China takes offsetting actions.

A ship with cargo containers in Long Beach, Calif.; Trump has vowed to impose harsher tariffs on Chinese imports if elected this year. Photo: Allison Dinner/Shutterstock

Among those responses: Chinese policymakers could let its currency weaken further, extend tax rebates and other perks to exporters, and cut interest rates. They could try to force the U.S. to reconsider by retaliating, such as by raising tariffs on U.S. products, withholding supplies of critical minerals, and possibly selling U.S. assets, such as Treasurys, according to Goldman Sachs.

Studies published by universities in China and Stanford University found Trump’s first round of tariffs not only pinched exports but squeezed corporate earnings, hurt business and consumer confidence and throttled investment and hiring. Economists say those effects would be repeated and amplified this time since Trump would impose tariffs on every Chinese import.

Other countries are also raising barriers

Chinese firms’ profits are under pressure from feeble demand and chronic oversupply. Producer prices have been falling for almost two years. A firm operating on a profit margin of 5% or 6% couldn’t swallow 60% tariffs, said Nick Borst, director of China research at Seafarer Capital Partners, a California asset manager focused on emerging markets.

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Since 2018, China has reoriented some exports away from the U.S. and is selling more to developing economies. With the U.S. market effectively closed by a 60% tariff, China would be forced to sell even more to those other markets. But some, such as India, Brazil and Mexico, are now pushing back against Chinese imports out of concern for domestic jobs and industries.

“If China is basically locked out of the U.S. market…they are going to have to push their goods even harder onto other destinations. And other destinations may not tolerate that,” said Adam Slater, lead economist at Oxford Economics.

China could defuse such tensions by building factories overseas to serve local markets. But China’s leadership has mixed feelings about overseas expansion, said Borst, given that it potentially means lower manufacturing employment back home.