After Trump’s victory, it looks more likely that the new administration will impose wide-ranging tariffs on many countries worldwide, which could create a series of unprecedented disruptions in trade.
China first comes to mind, with a projected additional 10% tariff above any additional tariffs once Trump steps into office. There is much conversation in the United States on the effect of tariffs on the American economy. A vast majority of economists are sure that it will raise prices and have an adverse impact on GDP.
How do Tariffs Affect China?
Little is written about how China would perceive Trump administration's threats of added tariffs. To better understand the situation, I contacted my staff and other contacts in China to learn about the country's mood and how they perceive the expanded tariff regime.
The Lasting Effects of Trump’s First Presidency
It is important to remember that the Trump tariffs never left and that the Biden administration expanded them, so China has some experience with them. The tariffs were not good for anyone. The trade war did not reduce the US trade deficit or boost US exports. It costs jobs in both countries and hurts economic growth across the board. The only winners were other countries that produced similar goods. For example, Brazil has gained ground with China as an exporter of farm products.
China suffered more because its economy is more export-oriented than the United States. Growth has stagnated, and the country is struggling with a real estate downturn, debt issues, and rapidly rising youth unemployment. Hurting ourselves to hurt China more hardly seems like much of a win for US tariff policies.
China’s Options to Strike Back
Banning Critical Materials for High-Tech Industries
China dominates the global supply chain for many critical materials, such as rare earth elements, essential for manufacturing advanced technologies such as semiconductors and military equipment. By restricting the export of these materials, China can severely disrupt high-tech industries in the U.S. and other countries reliant on these supplies. Previous export restrictions on rare earths have demonstrated China's ability to leverage its control over these resources as a strategic tool in economic disputes. Such measures could force industries to seek alternative sources or innovate around supply shortages.
Decreasing Import Reliance on the U.S
To mitigate the impact of reduced trade with the U.S., China can diversify its import sources and strengthen economic partnerships with other countries. A prime example is its growing trade relationship with Brazil, mainly in agricultural products such as soybeans. The gap between American and Brazilian soybean exports to China has dwindled significantly over the past few years, highlighting the U.S.’s weakening position in agricultural imports to China.
Depreciating the Yuan Against the Dollar
China has historically employed monetary policy to counterbalance economic pressures, including trade tariffs. By allowing the yuan to depreciate against the dollar, Chinese exports become more competitively priced in international markets, offsetting the impact of U.S. tariffs. While this approach can carry risks, such as capital outflows and potential inflation, it provides an immediate way to maintain export volumes.
Retaliating Through the WTO and Blacklisting American Entities
China can also leverage legal and administrative mechanisms to retaliate against the U.S. Filing complaints through the World Trade Organization (WTO) allows China to highlight perceived violations of international trade rules, potentially resulting in favorable rulings or creating diplomatic pressure. Additionally, China can blacklist American companies, barring them from accessing its massive market. These retaliatory measures serve both as a warning to other companies and a strategy to pressure the U.S. government to reconsider its trade policies.
What’s the Word on the Street?
The MTG staff in China has provided an interesting insight into the coming trade war: They say that the general impression is that, in the end, the trade war could be a net positive for China in the end. The “in the end” is important as most Chinese expect that the next six months to a year will be difficult as the weight of the tariffs depress an already struggling manufacturing sector. Afterwards, there is a belief that there will be a fundamental shift as countries move away from the United States (especially if the tariffs are as broad as the incoming administration is threatening). Other countries look to China as a significant manufacturing source again.
Will that happen, or is this Chinese propaganda that has filtered down to the general population? It is hard to tell, but many believe this should be a warning sign to American companies and consumers that tariffs will not likely scare China into submission or concessions.
Is Reshoring the Only Option?
Many companies are understandably uncertain about how to address these challenges. The first step is to better understand your costs and risks.
Cost Reduction Strategies
Chinese manufacturers can adopt several cost-saving measures to counter the impact of tariffs. Streamlining production through automation and advanced manufacturing techniques can reduce labor and operational costs. By increasing production volumes, manufacturers can achieve economies of scale, and vertical integration—such as sourcing raw materials in-house—helps lower per-unit costs while enhancing overall efficiency.
Supply Chain Optimization
Optimizing supply chains is another critical way for China manufacturers to offset tariffs. Diversifying export markets beyond the U.S., particularly to regions like Southeast Asia and Europe, reduces reliance on a single trade partner. Localizing supply chains by sourcing materials domestically or regionally can cut transportation costs and shorten lead times. Enhancing logistics networks and adopting digital tools like blockchain and real-time tracking improve operational efficiency while stockpiling critical goods ensures stability during trade disruptions.
Reshoring
Reshoring or near-shoring is an option, but it comes with risks. Supply chains in the significant nearshoring countries, Vietnam and Mexico, are strained by the rush of new development, and each has its difficulties. Reshoring to the United States is possible, but not for all types of products. For every major manufacturer that can relocate, dozens of other smaller companies do not have the volumes or the cash reserves to move forward.
Navigating the Fallout of U.S.-China Trade Relations
The trade war between the U.S. and China has proven to be a complex and costly endeavor for both sides, with no clear winners. While China has implemented adaptation measures, such as diversifying trade partners and optimizing supply chains, the tariffs have exposed the fragility of global trade relationships. For businesses, the message is clear: navigating these challenges requires careful planning and adaptability, but reshoring isn’t a simple or universal solution. The ongoing tensions serve as a reminder that trade wars are rarely as straightforward or effective as they might seem.
What are your plans to meet this challenge? If you are uncertain, please reach out. Our team would be happy to speak with you about your options.
