Deep Dive: China prepares for possible tariff hike under Donald Trump

Peter Wang owns a factory that manufactures insoles for shoes in southern China. He doesn’t like to picture what life would be like under the tariffs proposed by US president-elect Donald Trump. Instead, he chooses to think about the relatively low-stress environment for the Chinese businesses who have relocated to Southeast Asia.

Wang has already reduced his operations in the southern city of Dongguan. This is due to a broader slowdown in the Chinese economy. A significant rise in import taxes from the US would be the kiss of death. About 80 per cent of his products are sold there.

“If the tariffs are imposed, my workers will lose their jobs, and I may move to Southeast Asia to look for opportunities,” he said. That region has been a popular destination for many Chinese manufacturers. This is because shipments can be sent through countries there to avoid US tariffs.

Trump has proposed a 60 per cent tariff on all goods made in China. It could slow growth in the world’s second-largest economy. China relies heavily on exports.

Analysts believe China is better prepared now than during the initial tariffs during Trump’s first term. There are more options to cushion the impact of whatever comes next.

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Larry Hu is the chief China economist at Macquarie Capital. He believes a 60 per cent tariff by the US could cause China’s total exports to fall by 8 per cent within 12 months. Its gross domestic product (GDP) could decrease by 2 percentage points in the same period. This could have a significant effect on the economy.

It would also mean a roughly 1 per cent hit to major Western economies over the first 12 months, according to analysts from Barclays bank.

Allianz Research released their own predictions, too. They said that almost a third of the world’s GDP growth would be lost over the same period if there were a 60 per cent tariff on Chinese goods.

For Wang, the Chinese exporter, the simplest answer would be relocating to a country in Southeast Asia. This would mean lower production costs and milder tariffs.

For now, he can only rush to ship out goods before Trump officially becomes president. “When January comes, everyone will be cautious about whether to accept new orders,” he said.

If new tariffs were announced after new shipments were confirmed, “the loss would be unbearable,” he said.
Staff writers

Question prompts

1. Based on News, which of the following is true?
(1) Donald Trump has proposed a 60 per cent tariff on Chinese goods.
(2) Under Trump’s proposed tariffs, a third of the world’s GDP growth could be lost after 12 months.
(3) Trump’s proposed tariffs in Southeast Asia would be as strict as the ones in China.
(4) One expert predicted that Trump’s tariff proposal would cause an 8 per cent fall in Chinese exports after two years.

A. (1), (2) only
B. (2), (4) only
C. (1), (3), (4) only
D. (3), (4) only

2. List TWO ways in which Peter Wang’s business could be affected by increased tariffs from the US.

3. According to News and your own knowledge, why does Southeast Asia appeal to Chinese manufacturers?

Question prompts

1. Based on News, what does this cartoon represent?

2. Where is the bus travelling to? How is this significant? Explain your answer using the cartoon and News.

• Beijing could introduce more stimulus measures, like bonds, to fuel its struggling economy

• China should diversify its supply chain and ease investment regulations, experts say

Many worry about the impact that US president-elect Donald Trump’s proposed tariffs could have on exports in China. Economists have outlined a few possible routes Beijing could take as it struggles to meet its annual growth target.

China may roll out more stimulus measures to fuel the domestic market. Authorities have already unveiled a series of policies to boost activity in recent months, most notably raising the quota for local special bonds by 6 trillion yuan (US$828.7 billion or about HK$6.45 trillion) over the next three years to cover “hidden debts” held by local governments.

“With uncertainty surrounding the forthcoming US trade policy towards China, we think the Chinese government will introduce policy stimulus in multiple stages rather than rolling out all of its firepower immediately,” said the bank’s chief China economist, Jian Chang.

The most likely times for any policy changes would be during the annual meeting of the national legislature in March and gatherings of the Communist Party’s decision-making Politburo in April and July.

As with the first trade war that began in 2018, China may take the initiative and import more products from the US to discourage the country from further increasing tariffs.

Soybeans, crude oil, and petrochemicals could be most affected by enforced imports.

Shao Yu is the director of the Shanghai Institution for Finance and Development. He explained that since Trump’s pledged policies are broader this time - he has proposed tariffs ranging from 10 to 20 per cent on various countries - “it is likely that China will have to reorganise its supply chain, forming a large supply chain outside the US.”

Chinese manufacturers could also be encouraged to invest money overseas or even relocate production to the US to avoid tariffs.

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Ju Jiandong, a professor of finance at Tsinghua University, said China could make it easier to move funds in and out of the country. This way, it can distribute risk and encourage international stakeholders to push for more rational trade policies.

China maintains a mostly closed capital account at present, which means companies and individuals are unable to move money in or out of the country without following a strict set of standards.

While China has expanded its reach globally, the sheer volume and value of its exports to the US mean any significant reduction could reshape China’s economic landscape and reconfigure global supply chains.

Countries like Vietnam, Malaysia, and Indonesia – already beneficiaries of supply chain diversification – could become even more critical global trade hubs, Allianz Trade wrote in a report earlier this month, altering the balance of economic power.
Staff writer

Question prompts

1. According to the information presented in the Issue, which of the following is true?
(1) Chinese authorities are considering lowering the quota for local special bonds.
(2) Soybeans, crude oil and petrochemicals will likely be unaffected by enforced imports.
(3) China may need to import more products from the US to balance the hits from tariffs.
(4) China has a closed capital account, making it difficult to move money.

A. (1), (2) only
B. (2), (3) only
C. (3), (4) only
D. (1), (4) only

2. Using Issue, explain TWO measures that experts predict Beijing might enact to deal with the impact of tariffs.

3. What effect could high tariffs on China have on global trade? Explain using News and Issue.

Question prompts

1. Using Graph, note TWO trends about Chinese trade with the US from 2017 to 2023.

2. Using the information in News, Issue and Graph, how might this graph change over the next four years, and why?

• closed capital account : strict restrictions on the movement of capital - money - in and out of a country. Foreign investment is limited, and the country’s residents cannot transfer funds abroad easily.

• export: to send goods out of the country to sell or trade

• gross domestic product (GDP): how much a place produces in a certain amount of time. To find a country’s GDP, add up all consumer spending, investment, government spending minus taxes, and the value of exports minus imports. The final number gives us an idea of a country’s economic health.

• import : to bring in goods from another country to sell or trade

• local special bonds: companies or governments issue bonds because they need to borrow large amounts of money. Investors lend money by buying bonds. Eventually, the bond issuer has to pay the loan back with interest. A town’s local government issues a special bond for a specific purpose.

• stimulus measures: policies introduced by the government to promote economic growth. These measures aim to increase spending, create jobs and support businesses within the country or state.

• tariffs: taxes or fees the government puts on goods from different countries. These may be used to regulate international trade or encourage people to buy things made in their own countries.

News
1. A
2. With most of his products exported to the US, Peter Wang’s company would struggle significantly if Donald Trump followed through with his plan to put massive tariffs on Chinese goods. Wang claimed that many of his workers would lose their jobs, and he might need to move his business. He will also be cautious about accepting new orders in the new year.
3. Manufacturers can avoid tariffs by sending shipments from and through Southeast Asia to the US. The tariffs would be cheaper, and the region would have lower production costs, making it a popular location for many businesses.

Cartoon
1. This cartoon shows how difficult it would be for China to move forward in its economy and ship exports with the tariffs proposed by Trump. The bus represents China, as seen through the flag. It is being blocked by signs that say ‘trade barrier’, showing how Chinese trade will be hindered moving forward.
2. The bus is travelling to Southeast Asia, representing how manufacturers and businesses are looking to relocate to the region, as there are fewer tariffs and lower production costs.

Issue
1. C
2. China may have to reorganise its supply chain to move away from the US. Chinese manufacturers could also be encouraged to invest money overseas or relocate production to the US to avoid tariffs. Finally, China could also open up its capital account so it is easier to move money in and out of China, making things easier for international investors. (accept all reasonable answers)
3. Countries like Vietnam, Malaysia, and Indonesia could become even more critical global trade hubs. Chinese companies may choose to move to Southeast Asia and operate from there. This would alter the balance of economic power from powerhouses like China to smaller countries in Southeast Asia.

Graph
1. The graph shows that the imports from the US have remained fairly consistent and steady, while the exports to the US have declined steadily over the period of six years.
2. Over the next four years, the ‘exports to the US’ will likely continue to decline, while the ‘imports from US’ may rise a bit, since China may be forced to import more from the US to balance things out, just like they have done in the past.