Among the (many) pressing macro-market questions for 2025 asks if the Party in Beijing can successfully navigate another active, “hot” trade war with Donald Trump.

The narrow answer, I think, is “yes.” I mentioned this a few weeks ago, but I think it’s entirely possible that the Sino-US bilateral actually improves under Trump, given his transactional (versus ideological) approach to foreign policy and affinity for authoritarians like Xi.

As long as the narrative is “democracies versus autocracies” (i.e., the Biden administration narrative), US-China relations will remain hopelessly strained. China isn’t going to become a democracy (or no time soon anyway), and American military-security guarantees for Taiwan’s democracy, already a point of interminable friction, are becoming more untenable by the year in light of Xi’s unapologetic totalitarian turn.

If, instead, the narrative is, “Both sides have a list of grievances, real and imagined, and also a list of concessions which, if addressed and acquiesced, can bring down the temperature without touching on principle or ideology,” then there’s scope for quid pro quos, and Trump loves a quid pro quo. It helps (a lot) that Trump isn’t likely to take up the issue of Chinese backdoor support for the Russian war effort in Ukraine.

So, if trade were China’s only problem, and trade’s synonymous with Trump for the next four years, my own view is that things may turn out better than feared. But trade’s not China’s only problem nor even its most pressing concern. Rather, China’s most intractable economic problems are domestic, and importantly, they’re largely self-inflicted.

Xi’s “common prosperity” social initiative has brought about anything but common prosperity (some locals took to calling it “garbage time”), his anti-monopoly crackdown knee-capped the country’s tech titans at the dawn of a new tech epoch (giving America’s champions an even larger advantage than they already enjoyed) and the property crackdown, while defensible on some interpretations, has shown itself to be ill-advised (it’s a perpetual drag on sentiment and thereby domestic consumption).

In short, China has a full plate, and tariffs aren’t the only thing on it. But zooming in on the trade issue, the figure on the left, below, from Goldman’s econ team, gives you a sense of how the drag from tariffs breaks down, by component (e.g., actual trade, uncertainty, etc.).

The figure on the right shows how Goldman sees the Chinese economy performing in 2025, broken down by contribution. Exports are seen as a net drag of more than 2.5ppt, offset almost entirely by stimulus (“policy support”).

In a nutshell, the quandary can be phrased as follows: “Can China boost domestic demand by enough to absorb the direct and indirect growth hit from increased US tariffs?” That’s how Goldman posed the question.

The bank’s answer is that “it won’t be easy given the ongoing headwinds from demographic weakness, property price declines and broader debt deflation pressures.” And yet, there’s an argument to be made that Beijing can at least keep up appearances economically, particularly if they let the yuan depreciate to “neutralize” some of the drag from new trade levies.

“We think some of the recent policy changes — especially the CNY10 trillion debt swap for local governments — are more powerful than widely appreciated, and the government’s apparent intent to keep the 2025 GDP growth target at ‘around 5%’ points to further stimulus, much of it via fiscal policy,” Goldman mused, in a note published over the holiday week.

The bank also suggested that between the Party’s express intent to boost consumer spending “via cash handouts to retirees and households with multiple children,” alongside an extension of Beijing’s version of cash-for-clunkers, 4.5% growth in 2025’s still a “comfortable” forecast for China’s economy — “despite the longer-term downward trend.”