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Can China Weather The Tariff Storm?
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 autocrac
Does Goldman’s estimate for the economic drag of tariffs accounting for the percentage of total Chinese exports going to the US versus a global number?
China real GDP USD 12.6TR, so GS is saying real GDP tariff impact -2.6% = USD 330BN.
China exports to USA are about USD 500BN. Interesting to guess what GS is assuming for tariffs, elasticity, and multiplier. E.g. suppose Trump slaps average 50% tariffs on Chinese exports to US, which cuts US demand by 20%, and multiplier is 4. That would be about USD 400BN hit to GDP, before any benefit from less Chinese imports from US and diversion of Chinese exports to other countries.
Can China muster USD 330BN in “policy support”? For one year, surely. On an ongoing basis?
China central govt debt was about USD 4.3TR in 2023, up about USD 0.5TR from 2022. It will have grown again in 2024, and as the central govt recapitalizes its big banks and backstop local govts/LGFVs, it will grow more. So adding USD 0.3-0.4TR to offset tariffs would be a big lift. You might see cent gov debt jump USD 1 TR a year, which Xi wouldn’t like. However, China’s debt is owned domestically for the most part, by entities over which the government has significant control/influence, and right now the appetite is such that this debt yields 1%. So I’m going to guess Xi can fill even a big tariff hole in the short term, in principle. In practice, if a Chinese consumer goods maker goes bust or moves its production to Mexico leaving its Chinese employees jobless, I don’t think China has the mechanisms to fill those holes. Xi doesn’t like handouts, so it’ll be up to the factory laborers to find jobs as semiconductor equipment technicians or AI prompt engineers.
Currency is the way to thread this needle. The Chinese are Communists and Xi is trying to be one, so he can just create social funding out of air. Rates will drop by fiat and deflation will go away. Prices go up, there is money laying around, and people buy. Real estate will be sold and a weak yuan will fire up the export sector. With the won falling out of bed and the yen weaker than it has been in decades, Xi almost has to do it. . Make the U.S. dollar the winner (loser). But do it fast. If my negative Trump views are right, he will screw up global equities – big time – and the tariff card can’t be used further than the first shot. With Trump it’s a new game – even though this will not be a win for anyone.