Why a trade war with Trump threatens China’s demise

China is already experiencing a broader growth slowdown. According to International Monetary Fund (IMF) figures, GDP growth has more than halved since 2010 from 10.6% to 4.8%. The IMF expects the Chinese economy to grow by just 4.5% next year, well below President Xi’s target of 5%.

Since real estate giant Evergrande collapsed at the end of 2021 with more than $300 billion in debt, China has been in the grip of a vicious real estate crisis that has weighed heavily on consumer purchasing power. Since 2019, home sales have fallen by 45% – a decline of around RMB 5 trillion (£550 billion) in terms of transactions, says Wrigley.

The real estate crisis has depressed consumer spending. In response, Chinese manufacturers have cut prices and exported surplus goods abroad. As a result, China’s global trade surplus – the amount by which Chinese exports exceed imports – has ballooned, doubling since 2019 to more than $800 billion.

Tariffs threaten to exacerbate all these underlying problems. China’s economy will not collapse, but certain parts of the country – particularly the industrial heartlands in coastal provinces such as Suzhou, near Shanghai – will be hit hard.

What is worrying for Beijing is that Trump will also wage a trade war on several fronts.

“Trump will push for decoupling more generally,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at French investment bank Natixis. Herrero, who is based in Hong Kong, expects export controls, restrictions on trade in science and technology and a boost to the repatriation of profits.

“All of that could be even more negative than tariffs.”

How might President Xi respond? Because China has a trade surplus with the US, it has less room to impose retaliatory tariffs on US goods.

“The truth is that China no longer has any products that can be subject to retaliatory tariffs because China does not import as much from the US as the US imports from China,” Chor said.

China will likely devalue the renminbi to offset tariff pressure by making its goods cheaper to export, said Simon Johnson, a professor at MIT and a former chief economist at the IMF.

“I think the Chinese will depreciate their currency substantially,” he says.

However, this will mean higher domestic inflation and deal a blow to President Xi’s hopes that the renminbi will become a global safe-haven reserve currency.

In addition to state intervention, Chinese companies are also likely to move jobs and investments out of the country in an effort to avoid tariffs.