Is Trump's Trade Policy Sustainable Amidst Growing Tensions with China?

As 2025 unfolds, trade tensions between the United States and China are escalating, with former President Donald Trump threatening to impose hefty tariffs on Chinese imports upon his anticipated return to the White House. Trump's proposed tariffs could reach as high as 60%, which analysts warn could impact China's GDP by as much as 0.7% [b8db790a]. This comes on the heels of China's economy growing by 5% in 2024, one of the slowest rates in decades, slightly below the government's target of around 5% [77c0d67c]. The growth has been hindered by a property crisis, high local government debt, and significant youth unemployment, with household consumption falling to just 29% of economic activity [77c0d67c].

In a recent development, Chinese Vice Premier Ding Xuexiang addressed the World Economic Forum in Davos, Switzerland, on January 21, 2025, advocating for a 'win-win' solution to the ongoing trade tensions. He emphasized the need for balanced trade and warned against protectionism, stating that 'trade war has no winners' [36643ef7]. Ding's remarks come as Trump has delayed immediate action on tariffs, despite his campaign threats to impose them [36643ef7]. He also noted that U.S. imports from China have stagnated since 2018 due to previous tariffs, and while a trade deal was signed in 2020, U.S. officials claim that China has not fulfilled its commitments [36643ef7].

Adding to the scrutiny of the 2020 trade deal, analysts from Nomura have raised concerns about Trump's 'hawkish' memo on China, which questions Beijing's compliance. They noted that China met only 58% of its import targets in 2020 and 2021, needing to buy an additional $223 billion to fulfill the agreement [89b53e36]. Trump has threatened a 10% tariff on all Chinese goods starting February 1, 2025, and the memo directs a review of China's 'Permanent Normal Trade Relations' status, which could lead to a staggering 40% tariff [89b53e36]. The Treasury is also set to assess whether China is manipulating currency rates, further complicating the trade landscape [89b53e36].

In light of these discussions, Ding announced plans to import more competitive products and services, reflecting China's desire for balanced trade [8d4b87f2]. Notably, China's overall tariff level is currently at 7.3%, alongside a zero-tariff arrangement for least-developed economies [8d4b87f2]. Recent projections indicate that China's economic growth is now expected to slow to 4.5% in 2025 and further to 4.2% in 2026 due to the impending U.S. tariff hikes [5fbdcb8f]. Analysts at UBS highlight potential impacts on exports, corporate capital expenditures, and household consumption as a result of these tariffs [5fbdcb8f].

Citi economist Yu Xiangrong has suggested that U.S. tariffs on China may be imposed gradually rather than immediately, which could play a role in facilitating high-level dialogue between Trump and Xi Jinping. Following the November election, there have been two phone calls between the leaders, indicating a potential summit could be on the horizon, especially with no specific tariffs mentioned on Trump's first day in office on January 21, 2025 [571b8ebb].

The Congressional Budget Office (CBO) has recently analyzed Trump's tariff proposal, which includes a 10% universal tariff alongside an additional 60% on Chinese imports. Their January 2025 projections suggest that such tariffs could significantly affect the Personal Consumption Expenditures (PCE) deflator inflation and GDP, although the actual effects remain uncertain due to a lack of empirical evidence from the last 50 years [1a568ec9]. The CBO's estimates also reflect expectations of retaliatory tariffs from U.S. trading partners, indicating a complex economic landscape ahead [1a568ec9].

Scott Bessent, a key economic advisor, has pointed out that Trump's trade policies may not effectively address the underlying global trade imbalances, particularly between the U.S. and China. He noted that China maintains a trade surplus due to high investment (43% of GDP) and low household consumption (37% of GDP), while the U.S. economy relies heavily on consumer spending (68% of GDP) and imports savings, leading to a persistent trade deficit [37cdbba0].

The Biden administration has already taken significant steps to address concerns over China's military-related technologies, implementing new rules that impose penalties on U.S. investments in Chinese firms involved in these sectors [43855255]. In retaliation, China has announced export controls on 28 U.S. companies, including major defense contractors Lockheed Martin and Boeing Defense, marking a tough start to the year [43855255]. These punitive measures are framed as necessary to safeguard national security and respond to U.S. restrictions on China's access to technology [43855255].

In addition to Trump's potential tariffs, the European Union has also imposed additional duties on Chinese electric vehicles as of October 2024, further complicating the trade landscape for China [b8db790a]. The current trade environment reflects a bipartisan consensus in the U.S. on maintaining high tariffs against China, despite previous criticisms of such protectionist measures [aad7e498]. South Korean officials have expressed concern over the potential economic impacts of these escalating tensions, with 82% of surveyed Korean companies expecting harm from Trump's protectionist policies [1ed68c64].

Trade experts warn that the escalating tariffs and restrictions could exacerbate the financial burden on U.S. consumers, with previous tariffs resulting in nearly $80 billion in taxes on American households [21ac2757]. The National Retail Federation (NRF) has projected that U.S. shoppers could lose up to $78 billion in annual spending power if the new tariffs are enacted [21ac2757]. In total, tariffs could cost U.S. households over $2,600 annually, further straining domestic economic conditions [5678097a].

As tensions rise, the European Central Bank (ECB) has responded by cutting interest rates to 3% amid fears of a trade war's impact on the global economy [ade25d63]. Additionally, NATO's European members are considering increasing defense spending to 3% of GDP, highlighting the broader geopolitical implications of the U.S.-China rivalry [ade25d63].

In a recent report, the World Bank warned that Trump's proposed tariffs could lower global economic growth from 2.7% to 2.4% if retaliatory tariffs are enacted by trading partners. The simulations suggest that a 10% increase in U.S. tariffs could reduce U.S. GDP by 0.4%, with total negative impacts reaching 0.9% when considering retaliation [4741d5ea]. The Global Economic Prospect report forecasts flat global growth for 2025 and 2026, with developing economies facing their weakest long-term growth outlook since 2000. Foreign direct investment in these economies is at half the level of the early 2000s, and global trade restrictions are five times higher than the 2010-2019 average [4741d5ea].

Furthermore, the World Bank has specifically warned that a 10% tariff could reduce global growth by 0.3 percentage points in 2025, while developing countries are expected to grow at only 4% in 2025 and 2026, widening the gap between rich and poor nations [20ae50bd].

Analysts predict that China's growth rate may drop to 4.4% in 2025 and potentially fall below 4% in 2026 if the trade war continues to escalate [b8db790a]. China's trade surplus has significantly contributed to GDP growth over the past three years, and any disruption in trade relations could have far-reaching effects on its economy [b8db790a].

In a recent opinion piece, Shakeel Ahmad Ramay from China Daily emphasized that the U.S. mindset of confrontation, sanctions, and decoupling is not sustainable. He pointed out that Trump's administration's trade measures have historically yielded positive outcomes in fewer than 20% of cases during the 1970s and 1980s. The trade war has resulted in a staggering $1.7 trillion loss in market value for listed companies between 2018 and 2019, negatively impacting U.S. companies like Qualcomm and Lam Research [ce2c0981]. Ramay also noted that China holds over one-third of global rare earth metal reserves and is advancing in technology and innovation, suggesting that U.S. sanctions may inadvertently accelerate China's technological development. He called for win-win cooperation and peaceful coexistence, emphasizing that politically motivated sanctions are detrimental to U.S. consumers and industries [ce2c0981].

Goldman Sachs has predicted a 0.8% GDP growth for the Euro Area in 2025, indicating the economic implications of Trump's trade policies on Europe [77f1056a]. Poland's alignment with Trump's policies further complicates the EU's ability to counter U.S. leverage, showcasing the challenges faced by European nations in responding to these threats [77f1056a].

In light of these developments, the ASEAN+3 region is also bracing for potential economic fallout. The ASEAN+3 growth forecast has been lowered to 4.2% for 2025 from a previous estimate of 4.4%, with AMRO warning that retaliatory tariffs against the U.S. could shave up to 2% off the region's growth by 2026-2027 [10047da7]. The economic uncertainty stemming from U.S. monetary and fiscal policies may further complicate the situation for ASEAN economies, as highlighted by AMRO's chief economist, Khor Hoe Ee, who pointed out the risks posed by interest rate differentials [10047da7].

Moreover, experts warn that the U.S. administration's plan to impose massive tariffs on China risks increasing inflation and consumer costs in the U.S., potentially slowing economic growth. Zhou Mi from the Chinese Academy of International Trade cautioned that tariffs could lead to inflationary pressures in the U.S. [7fa51a91]. Fitch has revised its U.S. inflation projection for the end of 2025 to 2.8%, above the Federal Reserve's target of 2% [7fa51a91]. Ding Yifan noted that 60% of China's exports to the U.S. are intermediate goods, which could significantly impact U.S. supply chains [7fa51a91]. If U.S. tariffs are imposed, China's economy is expected to grow by only 4.8% in 2025, as Premier Li Qiang emphasizes proactive fiscal policy and timely adjustments to navigate these challenges [7fa51a91]. Most Chinese provinces have set GDP growth targets around or above 5% for 2025, reflecting their ambitions despite the looming trade tensions [7fa51a91].