After a series of economic wobbles, China could do without new external shocks. Photo: Wei Dongsheng/VCG/Getty.
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.
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.
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SubscribeThis is the clearest, most cogent, article I’ve read about the existential economic issues facing China, and–more directly–the CCP. The forthcoming crisis from an ongoing export surplus for China is a serious issue.
Adding to China’s problems are the devastating effect of China’s real estate bubble collapse upon China’s elderly, who rely upon real estate investments to fund their retirements. Thanks to its one-Child policy, China’s ageing population cannot count on younger Chinese being able to support their elders. And even those under age 25 are suffering with publicly acknowledged unemployment in double digits–and probably really 30%.
Add to all this simply massive amounts of mis-spent capital on cities with no inhabitants, and the like, there’s every likelihood of a collapse in the Chinese economy before this decade is out.
China’s population is in decline. Best estimates are the country will have only 500 million, or so, citizens by 2100, and half of those will be 65, or older.
The world has a distorted vision of China as an economic powerhouse with world dominance in the offing. The reality is a country with a shrinking population, massive overspending on unused infrastructure, and an unbalanced economy with too little intranational growth at a time when it’s vitally needed.
When economies are in peril, demagogues will often resort to external conflict to muster patriotism, and paper over their own failures. We would do well to understand the multiple crises China faces, and adjust our foreign policy accordingly before the missiles fly.
“…. 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.”
This is the opposite in the U.S. and why it frustrates the left so much. And why Trump is hated so much by the left as he takes a wrecking ball to their plans of “transforming America”. Hallelujah!
The world doesn’t want them, but their governments do.
China, understandably, is just seeking a profit by meeting this artificial demand.
Net zero is a big boon to China. It is also nonsensical for the West. Shutting down the green deals and other subsidies to net zero projects would hurt China and help the West.
Why don’t we do this? The media!
I cannot bother to respond to this type of BS. but here is your colleague saying exact opposite: https://www.nytimes.com/2025/02/04/opinion/trump-tariffs-china-evs.html
With all due respect at this point an article in the “opinion” section of the NY times has all the weight and gravitas of a blog post on Tumblr.
As a wise person recently said – The New York Times is wrong on virtually every major story. This one too.
Does anyone read the NYT these days?
For years now I’ve heard that the Chinese economy was on the verge of overtaking us, often from those who were obviously jealous, and yet it hasn’t happened. How will they replace our imports as we move to decouple more and more? It seems unlikely that anyone could.
China’s Communist economy has been hybridized with Capitalism for many years now; with mixed results. Like a two-headed creature, it is unsure of which way to go.
You’re right in that it’s not communism or capitalism, but it’s not at all confused. It’s mostly working exactly as intended. If you ignore the rhetoric and only consider the actual structure of the state and the relationships between government and private industry, modern China has more in common with fascism or Nazism these days, where there is private ownership but all corporations answer to the state and are generally required to adopt nationalist policies and go along with government plans. Most of it is no longer directly under government control, but still coordinated behind the scenes by the CCP to pursue an ultranationalist vision. The government passes laws on what can and can’t be said in the media and even in society, directs technological research according to national goals, and directs investment and subsidies towards particular industries with an eye towards strategic control of important goods and materials. The rare earths elements where China has a near monopoly and can use as leverage are a perfect example of how the system works.
As much as it’s cliche to invoke the Nazi analogy, I find it compelling. I would go so far as to say there has been nothing that is worth of the comparison up until China under Chairman Xi. Up until about 2012 there were some important distinctions as well, such as a lack of militarism, a lack of overtly threatening neighboring states, and a generally well regulated party structure that prevented any one leader from becoming an absolute ruler with his own cult of personality. Xi Jinping has, to my mind, erased most of those distinctions and put China on a truly fascist/nationalist path. I honestly believe Xi Jinping is the closest thing the world has seen to another Adolf Hitler in the sense of being obsessed with the greatness of his people and his determination to restore China’s glory and achieve global dominance, and it scares the crap out of me. What scares me most is that the Chinese are even better at it than the Nazis were.
This author is right. China can’t keep doing what it’s doing and avoid a trade conflict. They either have to back down and compromise or things will eventually escalate, and when that happens the fundamental problems with China’s economic model will begin to show. As Xi faces internal discontent, it will be fairly easy to blame the US and then direct all those factories towards building weapons of war. Even if the US essentially gave up on Taiwan and let Xi have it, it might or might not work. It might end up like giving Germany the Sudetenland. I don’t envy the person who has to make that call, whether it’s Trump or whoever else. Honestly, if it were me I think I would probably make the same call Chamberlain made in 1938 just give in and hope it’s enough, because I’m not sure the US can win that conflict. I hope and pray that I’m wrong about this.
Mind you, President Xi won’t be around forever. So who knows – China could change tack
The stream of petty comments re the impending collapse of the economy goes nauseatingly on without end! China is on the move and irreversibly so. To propagate its demise is to bring self-inflicted doom upon those so short sighted!
At time of posting this (2hrs after yours) I see six, count them six, posts on the subject. All of them relatively well considered, not petty. Six is hardly a “stream” is it?
Are you a Sino AI bot by any chance?
I think the needless exclamation mark at the end of that post tells us all we need to know.
That’s two with if you count the ‘nutter’ Brian Doyle Esq.
Magnus wrote Red Flags in 2018 and yet the the economic situations in The US and Europe look much more precarious and their governments less able to deal with a major global crisis. Complacency.