We’re already starting to see a clear impact of tariffs across various pockets of trade, as well as noticeable effects on new investment and sentiment. Numerous corporates and investors are taking a a “wait-and-see” stance this year amid continued uncertainty.
That said, the overall impact so far has fallen well short of doom-and-gloom forecasts that prevailed at the start of the year. Through the first half, the direct drag from US trade has been something in the area of -0.2pp on GDP. This has been more than offset by trade with other economies, with total net exports contributing 1.7pp to GDP growth in 1H25. As a result, we’ve seen the market generally revise China GDP forecasts higher in recent months.
The main question is whether or not China’s export resilience can last?
Barring further de-escalation, China’s exports will continue to be affected by tariffs. The drag from the US could worsen in 2H25, particularly as we’re not seeing another round of frontloading which helped boost exports in 1Q25. The current levels of 50-55% are already quite restrictive and have greatly hindered the price competitiveness of many exports.
We expect China’s total export growth to slow further in the second half, but full year export growth should remain in low-to-mid single-digit growth range barring additional shocks.
However, we do see some reasons not to fall into the trap of excessive pessimism.
- China’s fastest-growing exports are not reliant on the US.
- China’s biggest export outperformers over the past year have been ships, semiconductors, and autos. Customs data shows that the exports of these products to the US represented only around 1-2% of China’s total in 2024.
- Amid China’s Great Transition, China’s move up the value added ladder has resulted in many Chinese champions producing very competitive products, and even in the case of US tariffs or restrictions, these products will continue to do well in other economies.
- Exports to the US have proven to be stickier than expected. Despite the rapid escalation of tariffs to 145% in April, we saw a significant slowdown of exports but far from the “de facto embargo” that the tariffs purportedly represented.
- The biggest monthly YoY decline of China’s exports to the US was in May, when growth cratered to -34.5% YoY, but this rebounded to -16.1% YoY in June.
- By subcategory, copper products (135.8%), toys (-2.8%), and the optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments category (-1.6%) have all fared relatively well in 1H25 despite the major tariff shock.
A wildcard will no doubt be on how the August tariff developments play out. Obviously, the biggest and most direct catalyst will be what happens once the 12 August tariff ceasefire between China and the US is set to end.
Given the unpredictability we’ve seen so far this year, estimating tariff hikes is a bit of a dart throw. Our base case is that we won’t see tariffs reverting back to the April peaks. Following the test of endurance earlier this year, it was clear that such high tariffs are a lose-lose proposition for both parties.
That said, we also cannot rule out tariffs moving higher either, with a further 10% hike well within expectations. With tariffs already at 50-55%, the marginal impact of a further small-scale tariff hike could be relatively manageable. However, as the April episode proved, politics tends to trump economics. A more aggressive than expected re-escalation could lead to a bigger hit to the trade outlook.
Direct tariffs aside, another downside risk in recent months has been other countries signing explicit or implied “anti-China” clauses targeting China’s re-exports and foreign entities in their trade deals with the US. The impact will depend on how many economies agree to these clauses, and how strictly they are enforced. This trend certainly represents another downside risk moving forward.
At the same time, the direction of tariffs globally will play a big role in gauging the impact moving forward. The setup of the financial services industry often leads to economists looking at the tariff issue from the perspective of their country alone, with the rest of the world seen as a static variable.
In our view, this can lead to some overestimation of the tariff impact, as seen in the numerous estimates on China’s GDP at the start of the year. Arguably, the biggest element when considering the tariff impact is the risk of losing out on exports to competitors via substitution products. If tariffs rise significantly across the board, but not enough to make US-manufactured products viable, this could help mitigate part of the impact compared to if only China and a few other economies are hit. Given the currently speculated tariff rates of 15-20% on most of the key global economies, we could well be seeing this sort of scenario unfold.
An outsized external demand shock was seen as one of the main risk factors for China this year. The resilience of external demand so far is one of the key reasons for China’s outperformance in 1H25. We expect exports will likely moderate in the second half of the year, but nonetheless continue to be a growth contributor. This should help China stay on track to reach its growth target of “around 5%” this year.