How will US’ additional tariffs impact the Chinese economy

Since the inauguration of the Trump administration on January 20th 2025, the US tariffs on Chinese goods have been hiked by an additional 20%. The possible upcoming tariffs scheduled to announce on April 2nd is further casting doubts on China’s economic growth for 2025 and beyond.In this paper, we quantify the impact of the existing additional 20% tariffs set by the Trump administration on Chinese goods across the board. The most immediate channel of the tariff impact is to lower demand through higher prices. However, we also need to consider two additional features, namely the growth of the US economy and the price elasticity of US consumers to Chinese goods.Firstly, the US economy has been growing remarkably and so have its imports (almost 30% when comparing the 17/18 period to that of 23/24 (Chart 1). Such a rapid growth in the target market for Chinese exporters reduced the impact of US tariffs on Chinese companies. This means that future US growth remains essential to understand the impact of Trump’s protectionism on China. Secondly, the US consumer’s reliance on Chinese goods are also changing. Currently, the average US tariffs on Chinese goods have already risen markedly, nearing 20% at the beginning of 2025 compared to the previous 3.1% at the onset of the first Trump administration in early 2018 (Chart 2).To do so, we develop a model to assess the impact of US additional import tariffs on the Chinese economy, taking into account the two channels, namely growth and exporter’s resilience to tariffs. Our results show that, if the average US tariff on China increases from 20% to 40%, US’ imports from China could fall by 14% from the current level, even if the US nominal GDP is able to grow by 5%. According to our calculations, this would possibly translate to about 2 percentage points decline in China’s GDP growth rate. The ultimate impact will be even bigger if the external shock spills over to broader confidence decline.When moving to China’s response, its exporters will look beyond the US for their global expansion, but as more countries become cautious about importing from China, this will be not easy. Ultimately, China will have to focus more on domestic demand. This explains why more accommodative fiscal and monetary policies was released during the Two Sessions. This will be key for China to sustain 5% growth in 2025.