After a series of economic wobbles, China could do without new external shocks. Photo: Wei Dongsheng/VCG/Getty.


February 5, 2025   4 mins

Even though it is Chinese New Year this week, Beijing has wasted no time in hitting back at Trump’s additional 10% tariff on all US imports from China. For now, though, this remains a mere skirmish, yet to escalate into a full-blown trade war — it could yet lead to some sort of negotiation and agreement. We’ve seen this already in Mexico and Canada. The risk, though, is that while these north American countries are neighbours and supposedly America’s allies, China is a strategic adversary. Trade conflict is a symptom of deeper political and economic tensions. The problem for China is that its economy is not well positioned to weather a new major external shock.

For now, a 10% tariff increase would have a minor impact, maybe subtracting about 0.2% from Chinese GDP in 2025 — a fairly trivial amount in an $18 trillion economy. Nonetheless, Beijing can’t be seen to lose face. And so, having previously promised “countermeasures”, and that it would file a complaint with the World Trade Organisation, it will also lift tariffs on 10 February by 10% on American coal and LNG, and levy 15% on crude oil, agricultural equipment and large autos. Even so, these products barely account for $14 billion — or less than 10% — of imports from the US; China can get almost as much oil and gas from Russia to compensate. Because China has fewer American imports on which to act, it is notable that it announced investigations into Google, Intel and Nvidia for possible breach of anti-monopoly laws, along with export controls on tungsten and about two dozen other rare earth minerals.

“Almost 20 years ago, Premier Wen Jiabao noted that China’s economy was unbalanced, unstable, uncoordinated and unsustainable.”

These initial moves by the US and China are hardly of sufficient gravity to qualify as a trade war. None will have a serious impact on the world’s two largest economies, and any of them could be suspended, or dialled back if there were a sudden willingness to calm down and discuss at least temporary ways of addressing mutal concerns.

If, though, the Trump Administration takes offence and escalates further, China would be bound to respond — by allowing the Renminbi to decline and perhaps with targeted measures on exports of sensitive materials. But any move would be carefully weighed. Beijing would dearly relish it if the President’s attention were to remain focused on his nearer neighbours, along with those who are yet to feel the slap of a tariff, such as Europe and even Britain. One imagines that nothing would please China more than to watch Nato countries in disharmony and distrust over the coercive tariff policies of the US.

Ultimately though, it is the fracturing of Sino-US relations that will be the major axis on which the world will pivot. Everyone would feel the blowback. And even as both tread gingerly for now, it is inevitable that as China and the US both struggle for global dominance, they will throw down the trade and commercial gauntlet from time to time. These tensions are a symptom of their adversarial relationship, and as the world order shifts, it is certain to intensify.

What is more important, though, beyond this spat over tariffs, is a far more consequential trade story which has been playing out over the last few years and which has deep, deleterious roots.

According to the IMF, China’s balance of payments surplus in 2025 is expected to be 1.6% of GDP — or roughly $300 billion. This is most probably a considerable underestimate, since it was in the region of $600-700 billion in 2024, or around 3.5% of GDP. In actual fact, China’s trade surplus probably reached around $1 trillion last year, with Chinese exports growing four times more than the estimated 3% rise in world trade.

This matters because in a properly functioning trade system, countries produce and export what they are good at and import where they have shortcomings. In China’s case, exports are booming, partly because China’s uniquely well-funded industrial policies are the cornerstone of its economic and political strategy, and partly because China produces things the world wants — like EVs, batteries, wind and solar equipment — relatively cheaply. This focus on production and capacity, bolstered by serious industrial policies which stress self-reliance, has contrived to propel exports at breakneck speed, and keep imports subdued. But the consequence of such imbalance is that far from being the main engine of world growth, as is often claimed, China is one of the biggest drags on it. Put another way, countries that sell more to the rest of the world than they buy are forcing other nations to import more which subtracts from growth; while countries that buy more than they sell, like the US or UK, are offering stronger export opportunities for other countries, which adds to growth.

The reason imports are so weak is twofold: China owns the entire supply chain in a large number of goods, so it has no need to import intermediate or component products; more important, though, is the fact that household incomes, and therefore consumer demand, are in the doldrums. And the government has no desire, or finds it hard politically, to recalibrate this economic imbalance.

For now, then, China’s modern, vibrant tech sector is concealing other vulnerabilities. It sits alongside leading firms and brands in clean energy, electric vehicles, batteries, industrial machinery, semiconductors, robotics, life sciences and biotechnology. But it only accounts for about 13% of GDP. And much of that remaining 87% is treading water, with the country’s still outsized real estate and infrastructure sectors facing difficult years ahead as they come to terms with excess supply, shrinking demand, and severe financial problems among heavily indebted provincial governments.

A plethora of measures have been undertaken to stabilise the real estate market, encourage the equity market to rise and banks to lend, as well as restructuring local government debt — but the implementation of market reforms and the redistribution of income, wealth and ownership, entailing a redistribution of political power to private households and entrepreneurs, can’t possibly be contemplated by Beijing. So while the glitzy tech sector prospers, the greater part of the economy suffers from slow growth, troubling unemployment, stagnating productivity, and misallocation of capital.

Almost 20 years ago, Premier Wen Jiabao noted that China’s economy was unbalanced, unstable, uncoordinated and unsustainable. In some important ways, things are much worse now. But its impressive looking tech scene and surging exports are drawing attention away from systemic weaknesses for which they cannot compensate.

China can probably withstand or deflect a trade spat or disturbance, even as its economy struggles. But if serious trade conflict were to break out, with high tariff rates and other restrictions, things could get painful pretty quickly. And not only would Chinese mercantilism be on the hook — the whole world would feel the chill. Trump may be the proximate cause of protectionist tariffs as we look around the world, but unless China is willing to change its economic and political ways, trade conflict and commercial resistance are inevitable.


George Magnus an economist and author of Red Flags: Why Xi’s China is in Jeopardy. He is an Associate at the China Centre at Oxford University.

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