three scenarios for potential US tariff hikes

context: The second Trump administration's hawkish position and threats to implement further tariff hikes will present a grim prospect to the PRC. Nevertheless, President Trump's approach to trade diplomacy, often thought of by some as 'transactional and prioritising deal-making', could also present an opportunity to Beijing, which is seeking to explore and re-negotiate its position in the new global trade order.

Liu Yitong 刘怡彤 CF40 young researcher and Zhu He 朱鹤 CF40 Research Department deputy director, they lay out their forecasts for PRC foreign trade in three scenarios of potential US tariff hikes in 2025

  • first scenario: no additional tariffs 
    • PRC export advantage can be maintained due to
      • moderate expansion in overseas demand
      • strong demand brought by US expansionary fiscal policies 
    • a small increase in export growth (some 3.65 percent) could be achieved
      • PRC global export share may slightly increase (by some 0.5 percent), but export prices would likely decrease (by some 1.5 percent)
    • PRC trade surplus in goods may be reduced (by some US$13.2 bn) compared to 2024 as domestic demand improvement would drive imports (some 3.4 percent)
  • second scenario: 10–20 percent tariffs
    • PRC exports would be impacted (reducing export growth to some 1.5 percent), but historical data suggests this might not significantly reduce export growth
    • domestic policies would respond with measures such as
      • increased flexibility in the RMB exchange rate, higher export tax rebates and more countercyclical policies
    • these measures could boost import growth (to some 3.7 percent) and further reduce the combined trade surplus (goods plus services) by US$ 67.5 bn
  • third scenario: 60 percent tariffs or higher
    • a sudden and severe trade friction between the world's two largest economies
      • it would bring short-term challenges for PRC exporters to find alternative markets and for the US to find alternative import sources
          • global recession is likely, leading to a contraction in PRC export quantity and price
      • domestic policies will struggle to offset this massive impact 
    • even though the PRC can re-route its products via ASEAN and European economies, some products cannot be exported to the US in this way
      • size of PRC–US trade will be redued
    • along with the expected narrowing of trade deficits in services, the PRC current account surplus would significantly shrink