Commentary: Who Will Take a Hit From Trump’s China Tariff Hike

U.S. President Donald Trump recently enacted three executive orders that will introduce a 10% additional tariff on goods imported from China and a 25% additional levy on products from Mexico and Canada. Notably, Canadian energy will face a 10% tariff increase. These measures align with Trump's "America First" strategy and reinforce his commitment to his campaign promises. Despite an economically challenging backdrop characterized by inflation and high interest rates, further tariffs from the U.S. are deemed unlikely in the short term [para. 1][para. 2].

Analyzing the impact of previous tariff hikes during Trump's first presidential term, an estimated 10% tariff could reduce China's export growth to the U.S. by 8.2%. Given that the U.S. accounted for 14.7% of China's exports in the previous year, such a tariff hike would result in about a 1.2 percentage point drop in China's overall export growth [para. 3].

Although Trump initially suggested imposing up to 60% tariffs on Chinese goods during his campaign, the current 10% increase was within market expectations, indicating a more moderate approach. This restrained increase leaves room for Chinese companies to continue accelerating their exports to the U.S., bracing for possible future hikes [para. 4].

The primary objectives of these tariffs are to reduce the U.S. trade deficit and pressurize China’s growing industries. The U.S. intends to weaken industries where China holds an edge, aiming to bring manufacturing back to American soil. Industries likely to endure the brunt of these tariffs include high-tech sectors such as automobiles, lithium batteries, aluminum products, and others like furniture, toys, and clothing [para. 5].

Looking ahead to 2025, three factors may bolster China's export growth: a gradual recovery in global trade with anticipated economic growth, growing competitiveness of Chinese products, and a diversification of China’s export markets. Predictions from the International Monetary Fund (IMF) and the World Trade Organization (WTO) respectively project a 3.3% growth in the global economy and a 3% rise in international goods trade for that year, providing a positive outlook for China [para. 6].

In the previous year, China's export percentages to major traditional markets like the EU, U.S., and Japan/South Korea saw minor declines. However, exports to ASEAN countries and others like Russia, Brazil, and South Africa recorded a slight increase, illustrating a shift toward more diverse export destinations [para. 7].

High U.S. tariffs could lead to depreciation pressure on the Chinese yuan. However, this pressure might not reach the same levels as observed during the tariff hikes of 2018-2019. Key reasons include prior market adjustments to the yuan-U.S. dollar exchange rate, a current U.S. rate-cutting cycle, fiscal expansions within China, and a strengthened Chinese export sector [para. 8][para. 9][para. 10].

Despite these factors, the specter of escalating global trade conflicts persists. Canada and Mexico have announced retaliatory tariffs following the U.S. actions, while China plans to file a complaint with the World Trade Organization (WTO) and take countermeasures. Moreover, potential actions from the U.S., including stripping China's most-favored-nation status, remain a concern, although such drastic measures appear less likely this year due to U.S. inflationary pressures [para. 11][para. 12].