On April 2, U.S. President Donald Trump signed two executive orders at the White House regarding so-called “reciprocal tariffs”, announcing the establishment of a 10% “minimum benchmark tariff” on trade partners, with higher tariffs imposed on certain countries. Specifically, the U.S. implemented a 34% reciprocal tariff rate on China, 20% on the European Union, 10% on Brazil and the United Kingdom, 25% on South Korea, 24% on Japan, 32% on Indonesia, and 36% on Thailand. On April 4, China announced a series of countermeasures, including imposing a 34% tariff on all U.S.-origin imports, implementing export controls on rare earths and other resource products, and placing multiple U.S. entities or companies on export control or unreliable entity lists. These developments have pushed the tariff war initiated by Trump into a strategic standoff. The latest reports suggest that Trump plans to impose an additional 50% tariff on Chinese exports to the U.S. on top of existing measures. As noted by ANBOUND, this kind of confrontation not only impacts global trade but also brings negative consequences to the global economy, including China and even the U.S. itself. Market analysts are now predicting a potential global recession, and the IMF has warned that if such a trade war lasts for a year, it could lead to a global economic contraction of around 7%. Clearly, the evolving nature of Trump’s tariff policies and the resulting standoff are exceeding earlier expectations and are having deep and widespread effects on the world economy.

This unexpected policy shift triggered significant turmoil in global capital markets. Following a week of consecutive declines, April 7 saw another "Black Monday" in Asia-Pacific stock markets, signaling that fears of a global recession continue to haunt investors. At the same time, prices of gold, crude oil, and metals plummeted sharply, reflecting mounting concerns over an economic downturn. As traders sought safe-haven assets, the Japanese yen and Swiss franc strengthened. This market correction is also evident in China. After the Qingming Festival holiday, the A-share market experienced a delayed decline. However, signs of stabilization have emerged, and as of April 9, the A-share market had stopped falling. The sharp market drop also reflects concerns about the outlook for China’s economy amid the trade war.

If Trump’s 34% tariff hike on Chinese goods is fully implemented, the total tariff level on Chinese exports to the U.S. would reach 66%. Previously, both Chinese and international market institutions analyzed an extreme scenario where the U.S. imposed a 60% tariff, predicting that it could lead to a reduction of over 85% in Chinese exports to the U.S. and drag down China's GDP by approximately 1 percentage point. If an additional 50% tariff is added on top of that, the overall tariff level would surpass 100%. However, at such a high rate, the marginal impact may actually diminish, as it would likely result in Chinese goods almost completely exiting the U.S. market, except for those granted tariff exemptions. That said, due to the gradual contraction of U.S.-China trade in recent years, the direct impact of this trade shrinkage on China’s economy is expected to remain within a certain limit. In fact, the effect may be smaller than the blow delivered by the contraction of China’s real estate sector in recent years. The real issue is that tariffs at such elevated levels are likely to drive a restructuring of global supply chains and industrial networks in long term, which could have lasting effects on both the Chinese economy and the global economic order.

Industry-wise, traditional labor-intensive sectors in China, such as apparel and furniture, are likely to face significant challenges. Of course, these industries had already begun adjusting during the earlier phases of the trade war and under the looming threat of "Trump 2.0", with the share of exports to the U.S. gradually declining. However, many of these enterprises have rigid cost structures and limited flexibility to absorb such steep tariff changes. As a result, they may struggle to remain competitive against producers from other regions. This is especially true for original equipment manufacturing (OEM) businesses, which rely heavily on price-sensitive contracts with U.S. retailers. For them, it may become increasingly difficult, if not impossible, to secure new orders, potentially leading to a near-total exit from the U.S. market. That said, these same sectors still hold a competitive edge in trade with developed markets such as Europe.

For China, the current major export categories to the U.S. are actually consumer electronic products. The electronics industry accounts for 20% of China’s exports to the U.S. Among them, high-tech hardware products, including mature-process semiconductors, have already been impacted by high tariff levels, and the contract manufacturing industry will also be affected. Auto parts and home appliances also have high exposure to the U.S. market and will suffer significant impacts. However, these industries have relatively high entry barriers and place high demands on supply chains, making them difficult to fully replace globally at present. As a result, while these industries will face declining exports, they are still expected to maintain a certain level of market demand through technological improvements and the development of branding and distribution channels. Although pharmaceutical exports are relatively dependent on the U.S. market, a considerable portion remains within the scope of tariff exemptions, so the short-term impact is limited. In the power equipment manufacturing sector, new energy companies have already begun investing in countries near the U.S., such as Mexico. Despite facing cost pressures, there remains room for continued maneuvering in the future. The photovoltaic (PV) industry, which was previously affected by several rounds of tariffs, had sought to avoid tariff risks by expanding into Southeast Asia. However, it still appears likely to face a significant impact. Given the current state of supply exceeding demand across the industry, overcapacity issues are expected to become more severe in the future.

The increase in import tariffs will, on one hand, lead to rising prices for certain resources and food products; on the other hand, in the long term, it presents opportunities for China’s own domestic substitution in related fields. For example, the price pressure faced by the agriculture and livestock industries may ease, and the competitiveness of their products will be enhanced accordingly. Similarly, some high-tech industries will also have room for development. However, certain fields constrained by technological limitations, such as semiconductors, may face supply-side bottlenecks and restrictions that hinder the development of the tech industry. According to estimates by Bloomberg Economics, Trump’s new 54% overall tariff rate is sufficient to eliminate most U.S.–China trade by 2030. Therefore, additional tariffs are unlikely to have a greater effect. Naturally, this will fundamentally reshape the industrial division of labor between China and the U.S., and even globally. As a senior scholar at ANBOUND has noted, this will further and comprehensively accelerate the trend toward economic “internal circulation” in various countries, and that internal circulation is by no means a concept exclusive to China.

It is worth noting that Trump’s tariff war has not involved the services trade sector, in which the U.S. has a surplus. This area may offer new opportunities for China to promote openness and stimulate external demand. On one hand, the form of foreign trade can be adjusted, i.e., shifting from goods exports to exports of technology, investment, management, and training. By restructuring external industrial chains through the “close produce” approach, China can compensate for losses caused by disruptions in goods trade and improve its current account balance through service exports. On the other hand, new economic models represented by industrial digitalization are expected to bring more possibilities to China’s external economic activities. For instance, e-commerce platforms and social media platforms are changing traditional models of goods transactions. Indeed, in the field of services trade, China has long faced a deficit due to the import of intellectual property.

In terms of investment, some Chinese industries have already shifted to Southeast Asian countries such as Vietnam and Malaysia, but they are now also facing the impact of Trump’s indiscriminate tariff policy. The “U.S.-China competition dividend” that Southeast Asian countries previously relied on is rapidly disappearing. Mizuho Research Institute has warned that tariffs, combined with rising inflation and a strengthening U.S. dollar, may intensify depreciation pressure on Asian currencies, further raising the threshold for foreign investment. As tariffs disrupt the logic of global supply chain adjustments, Chinese enterprises expanding abroad are likely to face increasing tariff barriers. The current uncertainty means that Trump’s goal of bringing manufacturing back to the U.S. is unlikely to be realized in the short term. Trump’s tariff policy is highly flexible, and enterprises will continue to factor in the political dynamics. In particular, countries neighboring the U.S., such as Canada and Mexico, are likely to see tariff reductions. As a result, multinational corporations may reassess the best locations for future investment. On the other hand, Trump’s tariffs are forcing a restructuring of the global supply chain system, and investment decisions will also take into account the stability of supply and industrial chains, making companies cautious in their decisions. At the same time, foreign capital is not expected to completely exit China, but its role will shift from a cost-driven production base to a market-driven hub for import substitution.

As it stands, the changing tariff policies will impact various aspects of the Chinese market, such as employment and investment. These derivative effects could potentially have a more severe negative impact on the Chinese economy than the direct effects on foreign trade. A current example of this is the volatility in the A-share market. It reflects the revaluation of Chinese assets under the trade conflict. Aside from the significant fluctuations in global stock markets, bond markets around the world have also seen price increases. Particularly, the yields on sovereign bonds, such as Chinese government bonds and Japanese government bonds, have significantly decreased, indicating that the market has not lost confidence in major economies due to the tariff war. U.S. Treasury yields also initially declined when "reciprocal tariffs" were announced, but due to inflation concerns, they have begun to rise again. Of course, the change in Chinese government bond yields reflects not only market expectations of interest rate cuts by the central bank but also expectations of long-term nominal economic growth slowing. However, the current situation is still not severe enough to trigger a crisis-like downturn. In this regard, China’s macro policies may still offset the external shocks of "reciprocal tariffs" through counter-cyclical adjustments. Relevant signals have already been released within the country, including monetary policies such as "reducing the reserve requirement ratio (RRR)" and "interest rate cuts", as well as fiscal support policies and a series of measures to expand opening up and promote domestic demand, which will attempt to compensate for the impact of external demand decline on the macro level. However, the focus of these macro policies remains on stabilizing internal demand, with limited effect on improving the external environment.

In terms of exchange rates, although the RMB has slightly depreciated, it remains relatively stable. Some voices previously suggested that China could use currency devaluation to offset the impact of tariffs. However, exchange rate fluctuations not only affect foreign trade but also directly impact the stability of the domestic market, including the capital market and the real estate market. Under the pressure of RMB depreciation, the situation of capital flowing out of China may further intensify. Overall, exchange rate changes are just one part of the impact, but more importantly, they reflect the competitiveness of the Chinese economy itself. If economic stability can be maintained, the RMB will still experience 'orderly' fluctuations. When it comes to reciprocal tariffs, the countries most affected in terms of risk tolerance are not the two major economies of China and the U.S., but emerging market countries, especially some export-oriented economies. Although their losses may be smaller, due to their smaller economic scale, they will face more serious consequences. For China, the bigger issue is the transformation of industrial layouts and the changing role of China in the global economy.

Final analysis conclusion:

The implementation of Trump’s reciprocal tariffs has led to panic sell-offs in global stock markets, including China’s A-shares. This volatility is a result of global investors re-pricing the economic risks under the impact of tariffs. The rise in bond market prices and the fluctuations in exchange rates both indicate that the shock to China’s economy has certain limits, with the clearing of some industries and structural adjustments still inevitable. In the long term, the tariff war will drive China and other countries towards the “internal circulation” in their economies.

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Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.