China Will be Hurt by Trump’s Tariffs

Appeared on Substack on May 19, 2025

https://anandanandalingam649613.substack.com/p/china-will-be-hurt-by-trumps-tariffs?r=o7w77

All the pundits have come out very strongly to argue that the trade war that Trump has started with China will end up hurting America in multiple ways. What is left unsaid is that the trade war will hurt China significantly as well, slow down its growth, and could well lead to a lot of social unrest.

When President Trump ended his first term, tariffs were 19.3% against Chinese goods and Chinese tariffs against the U.S. were 21.2%. On January 1, 2025, under Biden, the average tariffs against China had increased a bit to 20.8%. After Trump took office, the tariffs against China have gone up and down like a see-saw. At the start of the Trump administration tariffs were raised to 124% and then down to zero on some goods such as electronics. China, of course, has retaliated and imposed tariffs on US goods, with some facing a 125% tariff rate. It also banned the exports of rare earth minerals to the United States. Very dramatically on May 12th, Trump announced that there would be a pause for 90 days in the tariffs imposed on China and that the two countries would negotiate a trade deal that was better for both. Most of the liberal experts sniggered at Trump’s announcement saying that they told him so, and that the U.S. would be hurt badly by the trade war against China with inflation skyrocketing and growth stagnating.

Jeffrey Sachs has told many different forums, Trump would get an F grade in his knowledge of economics, especially trade, and that China will do better under this trade war. Joe Stiglitz has gone further in a Guardian op-ed and has used the concept of “substitutability” to say that China can easily find substitute suppliers for things it imports from the U.S. like soybeans, beef and petroleum and its products, while the U.S. will take a long time and a lot on investment to substitute for goods that it imports from China like toys, clothing, furniture and appliances. Many others have echoed the concern that Trump is wading into a surely unwinnable war. Most economists are taught from their undergraduate days that trade is good for everyone. To further the argument that having tariffs (i.e. a tax on trade) is bad for trade, pundits based in the U.S. are pushing the notion that the country will be hurt by Trump tariffs. Rightly so! What has not been discussed much is that China will also be hurt considerably. Restricting trade is actually bad for both countries.

China’s manufacturing sector is the largest in the world comprising 28-30% of global manufacturing; the U.S. is around 16-17%. In 2024, the “industrial sector” in China was 36.5% of GDP, about $6.5 trillion. It is currently the world’s largest producer of automobile units (both cars and components), largest in terms of auto sales and ownership, the largest producer of renewable energy, and largest user of industrial robots. In 2023, China’s manufacturing sector employed 114.3 million according to their National Bureau of Statistics. If one includes construction and utilities, that number increases to 164 million, about 32% of total employment in China. One caveat is that employment in 2023 in the “industrial sector” decreased by about 4-5% from its 2018 figure. Conversely, the number of manufacturing firms increased by 5.5% during that same period because more small enterprises entered manufacturing due to government incentives and the state retreated from several small-scale activities.

China’s industrial sector along with the rapidly increasing entrepreneurial activities have been the engine of its growth in the past two decades. Any external pressure that threatens growth in Chinese manufacturing will certainly have a negative effect on the country. In 2023, China exported approximately $500 billion worth of goods to the United States, a reduction of $82 Billion from 2022. In 2012, China only exported around $352 Billion worth of goods to the U.S. Thus between 2012 and 2022, China’s exports almost doubled in dollar terms to $582 Billion, approximately 7% growth per year. During this same period, China economy grew on the average around 7% as well.

It is estimated that around 20 million Chinese workers are employed in industries heavily reliant on exports to the U.S. While this is only about 20% of the Chinese workforce employed in the industrial sector, it is by far the fastest growing segment of employment. If the industries that were set up with U.S. exports in mind decline by 25-33%, which is what most experts predict, the impact on the workforce in China will be significant. In fact, according to the Wall Street Journal, already some export-oriented companies in China have suspended production and have furloughed their workers. The ripple effect will be felt in other parts of the Chinese economy including in its supply chain and logistics sectors as well as among educated professionals who make up the managerial, financial and service jobs associated with China’s industries.

One argument made by several pundits is that China could find alternative markets for goods that the United States does not buy. China’s exports to the rich OECD countries are 55.9% of total exports; of which 14% is to the U.S. Several pundits have suggested that it is likely that the other OECD countries will not follow the lead of the U.S. and will continue its trade relationship with China. Hence there is a good possibility that China could maintain its export levels to these countries. History seems to suggest that western Europe and Japan might well take the lead of the U.S. on their trade with China – just look at how the relationship of Germany and the U.K. with the Chinese company Huawei has plummeted in recent years because of the exhortations of the U.S. There is likely to be a negative effect on China’s exports to much of the OECD, especially the tech companies,

Non-OECD countries which form 44% of the export market for China do not have the buying power that the western markets do. Take the case of India. China is India’s third-largest trading partner, with bilateral trade totaling $120 billion in FY23. Major exports include electronic and electrical equipment, appliances like washing machines and refrigerators, medical and optical instruments, organic chemicals, plastics, furniture and toys. Recently China has started exporting iron, steel and automobiles. However, even though India is the world’s third largest economy in purchasing power parity terms, in 2024 it had a per capita income of $2700 in current exchange rates or $14,161 in PPP terms. The same can be said about the economic status of other prominent non-OECD countries like Vietnam, Thailand, Indonesia, Philippines and Mexico. Expecting to find true substitute markets for exports outside the OECD would be challenging for China. Several Chinese companies will likely lose money or, at a minimum, must drastically reduce their profitability. Given that Chinese industries operate on capitalist principles even though the western media tries to portray it otherwise, several companies would cease production leading to a loss of jobs and reduction in country-wide employment.

Of course one could ask the question, how come China exports to several relatively poor countries even though the profitability is low or non-existent. One of the long-term practices of Chinese companies is to take advantage of economies-of-scale. Many Chinese factories run on a 3-shift, 24-hour basis although the production output that serves the western markets, especially the U.S. might only require a 1-shift operation. The amortized fixed cost of these factories, equipment, machinery, buildings and the like, is more than paid for by the sales in the western markets, The remaining production only needs to recoup the variable cost of labor and thus can be sold at lower prices and be quite profitable in non-western markets. If sales to the U.S. drops because of tariffs, then the factories will have to recoup their costs (variable cost plus the amortized fixed cost) via sales to places like India, and it would be challenging to do so. The upshot of this analysis is that China cannot easily substitute for the loss of exports to the U.S. by developing markets around the non-western world and having sales increase there. The market substitutability could happen over time but in the near to medium term, i.e. in the next 10-15 years, there could well be turmoil in the Chinese economy.

Many pundits have marveled at the size of the Chinese population, second largest in the world and much better off than in India and have argued that China could actually make up for losses in the U.S. by selling in the domestic market. For the past decade or so, China has been trying to go from export-led growth to growing the internal economy. The 14th Five-Year Plan, broadly outlined in late October 2020, anticipated future growth as largely based on domestic consumption of goods and services, and aimed to reduce disparities between urban and rural living standards. Stimulating domestic demand in China has proved to be very difficult for a variety of reasons.

The Chinese economy has long been geared toward investment and export, not domestic consumption. Shifting to a more consumption-led model will require major reforms in wages, labor rights, rural income distribution and financial markets. China will also have to completely change the incentive systems that it has used in the past to stimulate the economy. Over the years, the Chinese Communist Party has been very supportive of domestic capitalism. China has helped stimulate the economy by providing incentives for companies like tax credits, lower interest rates, managed exchange rates, disallowing unions connected to any one company or industry, infrastructure spending and the like, very similar to the stimuli used in the U.S. None of these incentives will directly stimulate domestic consumption or aggregate demand, except for real estate because of interest rates. China will have to overcome its historical reluctance to implement western-style stimuli like cash handouts, income support like social security and subsidies in order stimulate domestic consumption.

In order to stimulate domestic consumption, the government will also have to change savings behavior of Chinese household which will be very difficult to enable. China does not have a comprehensive social security system even though it is a socialist country, and hence individuals have to save for their retirement and old age. In addition, China has an aging population with 16% over the age of 65 with a life expectancy of 79-80. Thus, Chinese households save on the average, 31.7% of their income; the comparative figure in the U.S. is 3.9%. The overall savings rate in China was 47% of GDP in 2023 compared to 17% of GDP in the United States.

In addition to considerations of saving for old age, Chinese households are increasingly cautious about the economic uncertainty in the country which will be exacerbated by the tariff war. For the past decade or more, the property market in China has been very soft and is undergoing a market downturn. In fact, large developers like Evergrade and Country Garden have defaulted, sparking a crisis of confidence in one of the primary investment vehicles for Chinese families. Real estate accounts for about 25-20% of China’s GDP (directly and indirectly) and falling home prices have reduced household wealth and discouraged spending. Hence encouraging domestic consumption is going to take a long time and will not be easy.

Thus, the tariffs imposed by the U.S. on China will indeed have a negative effect on China’s economy and worse on China’s domestic employment. Even though the western media likes to portray China as being a country ruled by iron fisted CCP, labor unrest in China is on the rise. Workers have been protesting and striking with increasing frequency since the pandemic about wages and living conditions. Key drivers of these protests include unpaid wages, unfair layoffs, factory closures, and poor working conditions. This labor unrest cuts across construction and manufacturing sectors. Even BYD, an electric vehicle giant, has seen mass strikes in its factories due to wage cuts and broken promises.

The most famous labor strike in China was the “Zhengzhou Mass Gathering Incident,” occurred in November 2022 at Foxconn’s flagship iPhone plant in Zhengzhou, Henan Province. Workers protested the strict “closed-loop” system implemented by Foxconn, which led to poor living conditions, food shortages, and a lack of separation for workers who tested positive for COVID-19. The protests and subsequent worker departures significantly impacted production at the factory. After settling with the workers, Foxconn has embarked on a massive “recruitment” of robots in their plants.

US tariffs will end up contributing to some factory closures and layoffs, leading to increased worker unrest and protests. The absence of independent and effective labor unions in China, along with limited enforcement of labor protections, contributes to the vulnerability of workers. Other companies might also take their que from Foxconn and start increasing the automation of their factories with investment in robots. As mentioned earlier, China produces more industrial robots than any other country in the world, and with the Chinese government’s historical support of investors, it will not stand in their way. China’s economic slowdown due to tariffs along with the “recruitment of robots” will make it difficult for workers to find alternative employment. To add to this potential turn of events, the absence of strong labor protections and a lack of independent unions makes it difficult for workers to effectively address their grievances through negotiations.

Hence, it is likely that there will be widespread labor unrest in China due to the tariffs. The Chinese government will have a real major issue on their hands and no amount of central control will be enough to get back on track with its economic plans and growth strategy for China. Worse, the CCP will lose its credibility with the workers.

While the Trump tariffs will certainly spark inflation in the U.S. and damage its economy, it is very likely that China ‘s economy will also be damaged badly. It is not surprising that after the initial bluster of China’s reaction against the Trump tariffs, the country was more than willing to enter talks to moderate the negative impact of tariffs on its economy and polity.