In the past few decades, the Chinese Communist Party has focused on an export-oriented economic structure without improving the political and economic status of its citizens. Now, the consequences are emerging in the US-China trade war. Most Chinese exporters are unable to withstand the high tariffs imposed by the United States, and domestically, they may face difficulties absorbing the impact, potentially leading to layoffs and a wave of bankruptcies and closures that could shake China’s economic stability.
Analyses by Bloomberg Economics show that most industries in China cannot bear the tariffs imposed by President Trump. This could lead to larger price cuts, decreased profits, and in the worst-case scenario, layoffs, bankruptcies, and closures. The most vulnerable industries identified include textiles, IT and communication equipment, and furniture manufacturing. Only five industries, including pharmaceuticals, tobacco, and oil and gas extraction, have profit margins higher than the tariff rates.
Some companies heavily reliant on the US market may not survive, while others may adapt by accepting lower profit margins, staff cuts, wage reductions, and flooding the domestic and foreign markets with low-priced goods, as stated in a research report.
Although the official GDP growth rate for the second quarter exceeded analysts’ expectations at 5.2%, it was largely attributed to advance shipments and price reductions which may not be sustainable.
A report released by Tsinghua University’s PBC School of Finance in June also reached a similar conclusion, highlighting how the increasing US tariffs directly squeeze enterprise profit margins. Especially vulnerable are small and medium enterprises in sectors such as toys and textiles, with profit margins typically ranging from 5% to 15%, making it challenging to fully pass on the cost increases through price hikes, potentially leading to production halts.
To retain American customers, many Chinese exporters are operating at a loss, without much room for negotiation on prices.
According to a study by Stanford University, during the 2018 US-China trade war, American tariffs significantly affected the profitability of Chinese export companies. On average, for every 1% increase in export prices due to tariffs, Chinese export companies’ profit margins decreased by 0.35 percentage points.
In the 2018 trade war, to protect profits, many businesses in China shifted their production chains to countries like Vietnam and Mexico.
As per American economist Davy J. Wong, the majority of industries in China have profit margins significantly lower than the Trump administration’s 40% tariff rate. The most at risk sectors are textiles, clothing, furniture, appliances, communication and hardware, toys, and small to medium-sized export-oriented enterprises.
Taiwanese economist Wu Chia-Lung pointed out that products with low technological content and labor-intensive nature in the export sector are most affected by the tariffs, while those with higher technological content and strong competitiveness may have room for price increases or resistance to tariffs.
China expert Wang He mentioned that if the US can easily find substitutes for some Chinese products, the impact on those industries will be severe. However, if China has a monopoly in supplying specific products, the tariff effects might not be as significant.
As per China’s General Administration of Customs, from April to June 2025, Chinese exports to the US decreased by 24% year-on-year in dollar terms, while exports to the ASEAN region, the largest export destination, increased by 18%.
A report by Capital Economics in the UK indicates that exports from China through Indonesia and Vietnam to the US saw a 25% and 30% year-on-year increase in May, respectively. This signifies that Chinese exporters are rerouting their goods through third countries to enter the US market.
Bloomberg Economic Research analysis revealed that nearly half of China’s industrial sectors depend on foreign markets to absorb 10% or more of their output, with the US still being China’s largest single trading partner.
Analysts predict that in the long term, increased tariffs may encourage US firms to source goods from other countries. Some factors that could mitigate the impact on Chinese industries include exporting to countries unaffected by similar trade barriers, domestic consumption absorption, monopolizing global markets, making it challenging for US firms to find alternative sources, and potential government intervention providing additional financial support.
Currently, the Chinese authorities are advocating for the promotion of domestic circulation, integrating internal and external trade, third-party trade diversion, and expanding into emerging markets in Southeast Asia, Latin America, the Middle East, among others.
David Wong suggests that domestic circulation alone may not compensate for the disruption caused by external trade, highlighting the lack of social welfare in China and the monopolization of valuable industries which may intensify societal pressures.
Expanding into Southeast Asia, Latin America, and the Middle East appears theoretically feasible; however, operational challenges exist, including potential countries becoming targets of US tariffs, high logistics and political risks in trade with these regions, and the need for product redesign and reorganizing supply chains, leading to substantial profit reductions.
The concept of integrating internal and external trade also faces significant obstacles.
Chinese media reports highlighted the challenges facing the “export-to-domestic” transition, including reduced policy support for transitioning companies, prolonged receivables cycles, differing product certification standards, and challenges in channel expansion and experience in domestic markets for export-oriented enterprises engaged in processing trade.
Wu Chia-Lung emphasized that the fundamental issue in the Chinese economy is the disparity between low-end consumption and high-end production structures.
He noted that high-tech products in the export sector surpass domestic demand, and finding alternative markets with similar demands to replace the US market is currently challenging.
For China to navigate through this, Southeast Asia has acted as an intermediary market. However, this route is currently being restricted.
Bloomberg’s economic experts warn that if this strategy succeeds, it could impact up to 70% of China’s exports to the US and reduce China’s GDP by over 2.1%.
Wu Chia-Lung mentioned that as the US is restricting intermediary markets, starting with Southeast Asia and Africa, then countries involved in the Belt and Road Initiative and eventually the BRICS nations. Any country backing China against the US will likely face market closures.
He pointed out that for China, the best solution lies in boosting domestic consumption.
Once domestic consumption patterns align with production structures, formerly export-oriented products can shift to serve domestic markets, for example, moving from lower quality to higher quality sportswear, illustrating a decrease in reliance on foreign markets.
Wu Chia-Lung emphasized that China currently relies on foreign markets to sustain its production structure. Engaging in a trade war with political rather than economic motives might eventually harm China’s economy.
While tensions between the US and China have somewhat eased following official meetings, the prospect of permanently removing tariffs remains limited.
Long-term agreements between the US and China may still include a minimum 10% tariff rate, with fentanyl tariffs excluded from current negotiations. Previous tariffs imposed utilizing the Section 301 provisions during Trump’s first term continue to apply to numerous Chinese goods. Therefore, even with successful negotiations, Chinese export products could still face tariffs exceeding 40%.
During the initial stages of the trade war, Trump and his cabinet made it clear that the objective of the tariff dispute extends beyond addressing the trade imbalance between the US and China to induce the restructuring of the Chinese economy and increased openness to the US.
Wu Chia-Lung believes that the US aims to settle political scores rather than economic issues.
According to Wang He, by establishing a tariff alliance isolating China, significant progress has been achieved through agreements with countries like the US, UK, and Vietnam. If other nations reach similar agreements with the US, it would reshape the international trade landscape significantly.
He highlighted that China currently dominates 30% of global manufacturing, and any reorganization of global supply chains will take time. In the medium term, China’s exports may sustain, but if the current isolation status quo remains unaltered within five years, with other countries expanding their industrial capacities, Chinese exports would likely deteriorate substantially.
However, Wang He asserts that the extent and consequences of the US-China trade war depend on the final negotiated settlement, which will clarify the situation.
David Wong indicated that the current US tariffs have the potential to destabilize China’s economy significantly, with risks including employment uncertainties, a potential surge in small business bankruptcies, and increased fiscal pressure on local governments.
Wu Chia-Lung pointed out that if the export sector suffers, it could lead to various complications similar to blocked blood vessels. Increased unemployment, loan defaults, deteriorating local finances, and potential social unrest could spark protests or other forms of civil unrest.
Ultimately, economic conditions deteriorate when a vast population suddenly loses jobs and orders. The ensuing ripple effects include layoffs, price cuts, and various negative economic impacts.
As numerous experts have pointed out, the Communist Party of China heavily relies on exports because shifting to a consumption-oriented domestic economy would require raising the economic and political status of its citizens, potentially challenging the interests of the Chinese Communist Party.
Wang He noted that China’s insufficient domestic demand is a long-standing issue, where a significant majority is low-income earners with a stark wealth gap, ranking among the highest globally. To promote domestic circulation, most people need increased income levels, requiring a major shift in the current pattern of extreme wealth disparities perpetuated by the communist regime.
For the Communist Party, Wang He believes they lack the capacity and willingness to initiate these necessary changes.
While tensions in the US-China trade relations have somewhat subsided following diplomatic meetings, the possibility of permanently lifting tariffs remains limited.
Any long-term agreement between the US and China might still involve a minimum 10% tariff rate, with fentanyl tariffs excluded from the negotiations. The previous tariffs imposed under Section 301 during Trump’s term could continue to apply to a wide range of Chinese goods, potentially resulting in tariffs exceeding 40% for Chinese export products.
In the early stages of the trade conflict, Trump and his administration indicated that the imposition of tariffs was not solely aimed at addressing the trade deficit between the US and China, but also to prompt China to adjust its economic structure and increase access to the US market.
Wu Chia-Lung suggested that the US is more focused on settling political scores rather than addressing economic issues.
Wang He stated that the US is building a tariff alliance aimed at isolating China, evidenced by agreements with countries like the US, UK, and Vietnam. If other nations follow suit with similar accords, it could fundamentally reshape the global trade landscape.
He highlighted that China currently controls 30% of global manufacturing, and restructuring global supply chains will take time. While in the short to medium term Chinese exports might hold up, within five years, if the current estrangement from China persists, the industrial capacity expansion in other countries could lead to a collapse in China’s export sector.
However, Wang He suggests that the true extent of the US-China trade war and its consequences will only become clear once final negotiations are concluded.
David Wong stressed that the current US tariffs could severely destabilize China’s economy, posing risks like spreading employment risks, a potential surge in small business bankruptcies, increased fiscal pressure on local governments, and internal social strife.
Wu Chia-Lung highlighted that if the export sector is heavily impacted, much like blocked blood vessels, it could lead to various complications including a surge in unemployment, increased debt default rates, exacerbated fiscal conditions at the local level, potentially sparking social unrest, protests, or suicide cases.
Overall, the economic situation may worsen due to a sudden loss of jobs and orders, unveiling various detrimental economic impacts.