China strikes back

The initial good news that President Trump did not announce tariffs on China immediately didn’t last long. 

Additional 10% tariffs and an end to de minimis exemptions – which allowed low-value items to be imported without any duty – went into effect after three weeks. The equivalent rise in the average bilateral tariff rate during the first trade war took over a year. 

The focus on fentanyl as a justification for tariffs makes any rollback unlikely. China will struggle to deliver strong political optics, such as Mexico’s 10,000 troops on the border, while House Bill 747 – the ‘Stop Chinese Fentanyl Act’ – could spark sanctions on Chinese producers. 

Moreover, the US trade review will almost certainly conclude that China did not live up to the ‘Phase 1’ deal and that non-tariff barriers to trade, such as subsidies, remain high, leading to further tariff increases. While these could be used to create leverage to force through a new trade deal, another plan for China to purchase more US goods may struggle with credibility. All told, we continue to expect a large and lasting increase in US-China tariffs.

There are few indicators of economic activity available at the moment – as is typical following the Lunar New Year. But abrdn’s China Financial Conditions Index continues to suggest that recent easing will support 2025 growth. 

More support will be needed to mitigate the trade war impact, and our best guess is that around 1% is knocked off Chinese GDP, limiting 2025 growth to 4.6% and potentially pushing 2026 GDP growth down to 4.1%.

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