By Wenli Zheng

Decoding the impact of tariffs on China

Should President Trump choose to escalate tensions further, China is likely to respond in kind.

April 2025

China had previously clearly indicated its willingness to engage in dialogue and negotiations with the U.S. at any time. However, should President Trump choose to escalate tensions further, China is likely to respond in kind.

Implications for China's economy:

To provide context, the real estate sector constitutes over 20% of China’s GDP and has experienced a substantial downturn over the past 3-4 years, during which time China's economy continued to grow. In contrast, total exports to the US account for only around 3-3.5% of China’s GDP, so the economic shock from tariffs is much smaller.

However, there are obviously a lot of moving parts with tariffs and the range of possible outcomes is wide. For that reason, instead of guessing what the next tariff moves might be, we would like to base decisions on what’s possibly knowable at this time.

Amid all the uncertainties, two things are becoming clear:

The Trump administration wants strategic manufacturing to return back to the U.S., including sectors such as steel, autos, semis, pharma, shipbuilding etc. To be fair, the message here has been clear and consistent. The incremental takeaway from the reciprocal tariffs is that, to achieve this goal, there is high level of tolerance in Washington to endure near term pain and disruption.
Whatever happens to the tariffs, the uncertainty alone will make many businesses and consumers take a pause (beyond immediate pre-tariff rush purchases). Commodity types of businesses that are sensitive to marginal change in global demand supply balance will likely see a disproportionate impact.

To try and gauge the tariff’s impact on China’s economy, let’s put some numbers around it. Exports of goods are 18% of China’s GDP, with direct export to the U.S. accounting for 15% of that. Thus, direct exports to the U.S. are about 2.7% of China’s GDP, or 3%-3.5% if we include trade diversions and re-exports of intermediate goods.

For Chinese stocks, the MSCI China Index has a surprisingly low revenue exposure to the U.S. of around 1% (Source: Goldman Sachs Global Investment Research. As of 6 April 2025). The reason for this is that large parts of the exports out of China are done by MNCs or Taiwanese OEMs. Nevertheless, Chinese companies may suffer from the secondary impacts of a weaker domestic economy.

Over the past four years, China’s macro environment has been characterized by weak domestic demand and resilient exports. This trend is likely to reverse over the next few years. As exports faces strong headwinds, the domestic economy is showing signs of bottoming out, even before any meaningful additional policy stimulus.

The fact that China’s economy went through a de-leveraging over the past 3 to 4 years (in particular, as the property bubble deflated) has given Beijing policymakers more room to maneuver. Policy has clearly become more supportive of domestic consumption, a trend that is expected to continue.

Lastly, we believe that the current trade disruption is bound to create pockets of money-making opportunities, as it did during COVID. We want to keep our antennas pointing up and think creatively. In the face of the heightened U.S.-China trade conflict, we will be vigilant and prepared to identify and take advantage of the potential opportunities that emerge. As a bottom-up asset manager, we remain steadfast in our approach to scour the market for potential investments that align with our investment criteria, proactively identifying strong businesses with solid growth prospects, even in these uncertain times.

As of 6 April 2025.

Source: FactSet, Goldman Sachs Global Investment Research.

Wenli Zheng Portfolio Manager

Wenli Zheng is the portfolio manager of the China Evolution Equity Strategy in the Global Equity Division. He also co-manages the Greater China portfolio of the International Small-Cap Equity Strategy. Wenli is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price Hong Kong Limited.

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202504-4393480

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