Beijing doesn't want America to see its trade-war pain

Mint

01-05-2025

China has signaled that as a nation it is better able to tolerate the pain of a prolonged tariff war than the U.S. But cracks are starting to show, suggesting how deeply that pain is already setting in across its economy.
Plunging trade across the Pacific is leading to production halts and threatening to undermine job stability for millions of Chinese. On Wednesday, China's economy showed its first big signs of damage from the trade war, with a drop in export orders in April and the weakest production at the country's factories in more than a year.
Chinese officials have played down any evidence of hardship, reiterating their confidence that this year's growth target of around 5% will be reached.
But in recent weeks, signs have accumulated that many businesses are struggling to survive. Companies reliant on sales to the U.S. market, ranging from makers of toys, furniture and T-shirts, to metal producers and manufacturers of electrical appliances and construction equipment, have suspended production and put employees on leave. Those that need to source U.S. components for production, such as semiconductor plants and carmakers, have been scrambling to keep operations running.
Some business owners have likened the disruptions to production shutdowns during the Covid pandemic—with the warning that the outlook appears more dismal this time.
'Everyone I know is worried," said Feng Qiang, who recently furloughed a dozen workers at his modest machinery plant in southern China's Guangdong province because of canceled orders from his American customers. 'There is no end in sight."
While the trade war is also hitting American businesses and heightening inflationary pressure and recession risks in the U.S., the pain for China is likely to go deeper. That is partly because it has increased, rather than decreased, its focus on exports as a cornerstone of the economy.
Ting Lu, chief China economist at Nomura, noted in a new research report that surging exports in the past few years helped China avert a financial crisis when a property bust weakened investment and consumption, strained government finances and stressed banks.
The sky-high U.S. tariffs, on top of the property-sector ills, mean 'the economy is set to face two major drags simultaneously," he said.
Chinese leader Xi Jinping is showing no indication that Beijing will back down on tariffs. The government has repeatedly vowed to fight to the end, girding the nation for a long struggle reminiscent of how Mao Zedong led China to fight the U.S. forces in the Korean War of the 1950s.
A meeting last week of the 24-member Politburo, presided over by Xi, held off on launching new stimulus and emphasized the importance of strengthening 'bottom-line thinking"—a term Xi used to prepare the Chinese system for hard times.
'Xi today has the same mentality as Mao," said an adviser to the Chinese government. 'His bottom line is that no major crisis will be allowed to endanger his hold on power."
China has made much of official data showing the U.S. share of China's exports has dropped to about 15% from 18% in 2018, the start of the two countries' first trade war. Yet many economists point out that the U.S. market actually makes up nearly 21% of China's total sales overseas after goods rerouted from other countries are counted.
They say it is hard to overstate the importance of U.S. trade to the Chinese economy. Overall exports account for around 13% of China's gross domestic product, with the U.S. estimated to represent about 3% of China's GDP.
Larry Hu, a China economist at Macquarie, said China's overall exports are likely to decline by 10% this year while the country's sales to the U.S. would be 'largely wiped out."
Analysts have said China's economy was likely weaker in the first quarter than official data have suggested.
The biggest impact of the tariffs will be on jobs tied to trade; the big number of workers in manufacturing; production of raw materials; and services such as logistics and finance that facilitate trade flows. Lu of Nomura projected that Trump's tariffs will cost China as many as 15.8 million jobs.
Business owners already testify to the spreading pain.
Huang Deming, who has made garments and Christmas decorations for exports for nearly two decades, in April cut the daily shifts at his factory in southern China to two from three and put 30% of his workers on leave after three main customers canceled orders for the U.S. market.
'It is very painful, not just because of the tariffs, but because of the unpredictability," Huang said. He has sent his two sons to Hong Kong, Australia and Italy to hunt for new customers, but might have to put more workers on leave in May.
His company has tried to diversify away from the U.S. market, whose share of his business has gone from 80% before the pandemic to 60% now. Any lower than that will be hard as other markets don't pay as much as the U.S., Huang said.
Within the Chinese government, the importance of trade to jobs is no secret. While hosting a meeting over the need to stabilize exports at the height of the pandemic in 2020, then-Premier Li Keqiang said 'the foreign-trade sector, directly or indirectly, creates jobs for over 180 million people." In particular, Li highlighted such industries as textiles, luggage and plastic products, which all counted the U.S. as a major destination, as particularly consequential to employment in China.
Economists warn that falling exports would have cascading effects across the economy, putting millions more jobs on the line and risking a recession that would be hard to dig out of for many years to come.
In a sign of how fast trade is drying up, U.S. cargo bookings out of China have fallen 60%, according to Flexport, a San Francisco-based company that helps companies ship cargo around the world.
If Beijing is worried about the economic fallout, it is hiding its concern well. Unlike in the U.S., where big market drops are barometers of confidence in the economy, the Chinese leadership has a tighter grip on such expressions of concern. For instance, authorities have restricted the selling of stocks by institutional investors and have been deploying state funds to prop up the market.
To mitigate the economic costs, Beijing has quietly exempted some U.S.-made products from China's 125% retaliatory tariffs, in a sign that Chinese companies are struggling to source them from elsewhere immediately.
That was a big relief for Su Mai, a director at Huaquan Technology. Su said he was struggling to refill inventory and fulfill orders because all his suppliers stopped selling U.S. chips. His firm helps companies integrate semiconductors and other equipment into their corporate systems.
But some U.S.-made memory chips are still subject to high Chinese tariffs. 'Tariff or not, it serves as a reminder," Su said. 'We should reckon carefully how to make our products and supply chain more secure and immune from the trade war."
Meanwhile, company notices of hardship testify to the jobs already being hit.
Guangdong Road Mate Group, which makes strollers and other baby products and has more than 1,800 employees, announced recently that it would reduce working hours and put some workers on leave, citing 'the influence of force majeure such as geopolitics and tariff policies." A manager confirmed that the company's operations have been hit by U.S. tariffs.
Write to Lingling Wei at [e-mail] and Raffaele Huang at [e-mail]