The escalating tariffs imposed by the United States have seriously impacted Chinese exports to the U.S., forcing the Chinese government to redirect their goods to the domestic market. However, experts point out that this move will further exacerbate the deflationary pressures on the Chinese economy. Intense price wars between enterprises will erupt, squeezing profit margins and pushing up unemployment rates in China.
The U.S. market is crucial for China, being its largest trading partner. In 2024, China exported approximately $440 billion worth of goods to the United States. Currently, the U.S. President, Trump, has imposed tariffs as high as 145% on Chinese goods, essentially closing off the American market.
Xu Tianchen, a senior Chinese economist at The Economist Intelligence Unit, stated to the South China Morning Post that the high tariffs imposed by the U.S. on China are equivalent to a trade embargo, forcing Chinese exporters to compete in a smaller market. He believes that the industrial sector in China will experience the most significant downward pressure on prices, which, coupled with weak global demand leading to substantial declines in commodity prices, will further exacerbate the downward price pressure on Chinese goods.
Sheng Qiuping, Deputy Minister of Commerce of China, stated last month that efforts are being made to absorb products originally destined for the U.S. market into the domestic market, urging local governments to stabilize exports and promote consumption. Local governments and large enterprises in China have expressed support for helping exporters affected by tariffs redirect their products to the domestic market. E-commerce giants such as JD.com, Tencent, and Douyin are actively promoting these goods to Chinese consumers.
Experts warn that redirecting goods destined for the U.S. to the domestic market could plunge the Chinese economy into a more severe deflationary situation.
According to a report by CNBC, Yingke Zhou, a senior Chinese economist at Barclays Bank, mentioned that “the side effect is that there will be an intense price war among Chinese enterprises.”
For example, JD.com has pledged to invest 200 billion RMB (approximately $28 billion) to assist exporters and has set up a dedicated section on its platform for goods originally destined for the U.S., offering discounts of up to 55%.
Zhou further expressed that the influx of discounted goods originally meant for the U.S. market will erode the profitability of enterprises, thereby putting pressure on employment in China. Uncertainty in job prospects and concerns about income security have led to weak consumer demand in China.
Economists at Morgan Stanley predicted that due to the trade war resulting in reduced export orders, wholesale prices in China could further deflate from 2.5% in March to 2.8% in April.
“We believe that the impact of tariffs this quarter will be most severe, as many exporters have halted production and shipments to the U.S. market,” the team stated.
Shan Hui, Chief Chinese Economist at Goldman Sachs, forecasts that the annual inflation rate in China’s Consumer Price Index (CPI) will drop from 0.2% in 2024 to 0% in 2025.
Hui stated, “Prices need to fall for domestic and other foreign buyers to absorb the surplus supply left by U.S. importers.” The manufacturing sector may not be able to adapt quickly to the “sudden increase in tariffs,” which could exacerbate the issue of overcapacity in some industries.
Falling prices will squeeze companies’ profit margins, leading some to close shops, while others may choose to operate at a loss to avoid factory idle time.
As more and more businesses close or downsize, the impact will spill over into the labor market. Goldman Sachs economists estimate that around 16 million job positions (more than 2% of China’s total workforce) connected to the production of goods for export to the U.S. could be affected.
On May 2nd, the Trump administration canceled the “de minimis” exemption policy for goods originating from China and Hong Kong, meaning e-commerce parcels valued at less than $800 will no longer enjoy duty-free treatment. This action has impacted Chinese e-commerce companies such as Temu and Shein, which had benefited from the “de minimis” policy for a long time.
Wang Dan, China Director of the Eurasia Group, a political risk consultancy, warned that the cancellation of the de minimis policy and the decline in cash flow are pushing many small and medium-sized enterprises towards bankruptcy.
Dan estimated that the unemployment rate in regions of China that depend on exports is increasing. She projected that this year, the urban unemployment rate could average at 5.7%, exceeding the official target of 5.5%.
U.S. Treasury Secretary Besent mentioned in a press conference at the White House on April 29th regarding the U.S.-China trade war that, “Over time, we’ll see that for China, these tariffs are unsustainable. Over the past few days, I’ve seen some very large numbers indicating that if these continue, China could quickly lose 10 million jobs.” Besent stated, “Even if the tariffs drop, they could still lose 5 million jobs.”
Besent further highlighted that the U.S. has a trade deficit, with China selling nearly five times the amount of goods to the U.S. than the U.S. sells to China.
In an interview aired on NBC News on Sunday (May 4th), President Trump reiterated how the trade deficit with China has caused massive losses for the U.S. He also emphasized that the 145% tariffs on China essentially severed the trade relations. If a trade agreement were to be reached with Beijing, it must be a fair deal.