What a Trump presidency might mean for China trade relations

Donald Trump’s emergence onto the stage in 2015 changed American politics. Nowhere is the change more emphatic than in trade imbalances and China relations. Since 2016, tariffs, previously a four-letter word in trade circles, have been raised and ties with China, formerly passive, have soured. Under Biden, Trump’s tariffs have been kept level and rapprochement with China has been elusive. Now, with Trump returning to the presidency, all eyes are trained on what comes next.

Emboldened by his decisive victory over Harris, Trump’s appointees to his new cabinet indicate he will dial up tariffs and further cool relations with China. Marco Rubio and Mike Waltz, both vocal critics of China, have been tapped for prominent roles in Trump’s new administration. Robert Lighthizer, US Trade Representative in Trump’s last term, is slated to take a leading role as ‘trade czar’.  

Tariffs are the order of the day

With such a team, more tariffs on trade generally and on China in particular are almost a certainty, in our view. But despite this seeming clarity, markets must wrestle with several major ambiguities.

Though tariffs are likely to go up, by how much is still unknown. Trump floated a 60% tariff on Chinese imports when campaigning, but Trump’s claims in 2016 were of a similar range (45%) and weren’t fully realised in government. Raising tariffs too high might encourage tariff evasion, with Chinese firms routing goods via bogus trade to Mexico or Vietnam, stunting their efficacy.

The timing and scope of the new tariffs are also unclear. Trump’s first administration waited a year to impose their first round of targeted tariffs on a range of products, then rose them in increments rather than all at once. Will a new administration do the same? The evidence is mixed. Newly-tapped nominee for Treausry Secretary, Scott Bessent, while downplaying the impact of tariffs, has emphasized phased implementation. Whereas Trump’s nominee for the Commerce Department, Howard Lutnick, takes a more aggressive stance. A headlong rush to raise broad tariffs would heighten the risk of dislocation, with firms and markets struggling to react. 

Moreover, the end-goal of the tariffs remains uncertain. The last Trump term saw repeated negotiations with China over tariff reductions in exchange for purchases of US produce, a bargain that was disrupted by COVID lockdowns. That left a key question on tariffs unresolved. Are tariffs designed to be a negotiating tool, or are they an objective in and of themselves? If the former, markets can hope negotiations can produce a favourable result, if the latter, such negotiations will be a red herring.

And all the above sidesteps the ripple effects of tariffs. Research from the first round of Trump’s import taxes found that much was passed on in higher prices. Moreover, the renminbi was allowed to weaken as tariffs rose, offsetting the hit to China’s export sector. With inflation still a potent domestic issue, and monetary policy still tight, Trump’s new team have a political incentive to keep the pace and tenor of tariff rises moderate. 

A bitter Beijing 

All this leaves authorities in Beijing in a bind over how to handle Washington. With a large trade surplus with the US, China will be in a weaker position in the event of two-way tariffs. Moreover, the domestic economy remains weak, despite stimulus, meaning domestic growth can less withstand an export slowdown. Beijing can either acquiesce or double down.

For acquiescence, the problem remains the same as in 2017. Trump’s demands for China to dismantle its system of state-directed support to favoured industries are at odds with the country’s core development strategy. Short of this, China could try to delay and dilute tariff action by negotiation. But having tried Trump’s patience with negotiation rounds in his previous term, this is likely to be less effective.

But doubling down carries its own risks, leaving China exposed to a sharp tariff hike. While dependence on US demand is smaller than it was, it remains significant. We judge a rise in US tariffs on China to 60% would leach 1.5 percentage points from GDP growth. To offset this, Beijing would lean harder on its organs to stimulate domestic growth, at a time when financial and fiscal strains are already pronounced. Capital flight from firms and investors to third countries could intensify, putting strain on the system of capital controls, with authorities tackling a disorderly renminbi weakening.

While neither option looks appetising, Beijing is likely to face the effects of a Trump re-election sooner rather than later.

Dealing with opposite day

Markets are focusing on the positive effects of a Trump victory (tax cuts and deregulation), but the shape of the new administration’s trade policy remains unknown.

We remain sceptical that global risk assets can maintain their rally for a sustained period as the fallout from tariffs comes into view. We are bearish on the renminbi as authorities seek to mitigate the impact of tariffs as and when they are imposed.