At the same time, China’s economy faces increasing headwinds as it is increasingly embroiled in a trade war with the United States. In April, China’s official purchasing managers’ index (PMI) for manufacturing activity fell to 49.0. This contraction dropped below the important 50-point mark that indicates expansion. Manufacturing just enjoyed its biggest growth in a year this past March. Yet this latest dip comes just as that momentary wave of hope had crested.
Tariffs have been imposed on numerous goods as a result of the Trump admin’s continuing trade war. In fact, for some products, tariffs have gone as high as 245%. In response, China has raised U.S. levies in kind, hitting tariffs of up to 125% on U.S. products. Chinese officials have denounced Washington’s tariffs, calling them a “meaningless numbers game.” This uncertainty muddies the economic waters, especially for manufacturers who depend on exports to the U.S.
Yet, even in the face of these significant challenges, China has started to grant tariff exemptions for select imports from the United States. These exemptions are for pharmaceuticals, aerospace equipment, semiconductors and ethane. Analysts have argued these measures focus on the negative impacts of the trade war. Above all, their goal is to ensure the continuity of critical supply chains.
Indeed, we can expect China’s exports to the U.S. to plummet, possibly by as much as half, as the trade war continues to heat up. This expected export plunge has already prompted all of the biggest Wall Street banks to lower their GDP forecasts for China. America’s economy is projected to expand by 5%. The growth may be temporary, experts are cautioning that continued trade escalation will further deter expansion.
To offset the negative effect of these tariffs, China would have to introduce at least another 2 trillion yuan of fiscal stimulus. While the move is a broad population-building effort, it is explicitly intended to add economic resilience. Dan Wang, an economist, emphasized the urgent need for increased stimulus, stating, “Offsetting impact of tariffs will probably require doubling stimulus this year.”
Recent shipping data underscores just how dire the crisis has become. In the last several weeks, the number of cargo-carrying container ships departing China for the U.S. has suddenly dropped by container ship. This decrease underscores both the short-term impact of tariffs. It simultaneously fuels greater macro concerns over the state of international trade and China’s overall capacity for exports.
At this moment, in spite of these massive economic headwinds, Beijing is counting on optimism regarding China’s long-term economic prospects. Trump administration officials insist that they are “1000% confident” when it comes to steering the country through this stormy transition. And the ongoing China-U.S. trade war presents substantial threats to China’s manufacturing base. The latter undermines the country’s long-term economic growth.