China's Export Juggernaut Defying And Denying Trump's Tariffs

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Most want to avoid a large-scale clash with China's $18 trillion economy in addition to Trump's America. This reluctance is offering Xi Jinping's government some cushion even as Trump's 30% tariff chills business activity and makes mainland consumers even less inclined to spend.

China, for its part, is trying to avoid provoking big trading partners into resorting to protectionism. Xi has been trying to prod the BRICS nations - Brazil, Russia, India, China, South Africa - to keep the global trading system operating. Trump is going the other way, cajoling NATO nations to slap tariffs of up to 100% on China over its support for Russia.

Part of the problem: China can hardly afford to let trade tensions intensify at a moment when its export boom isn't enriching as many mainlanders as it should. Confusion over Xi's“anti-involution” strategy to end aggressive price competition sent industrial firm profits down 1.7% in the first seven months of the year. This is exacerbating deflationary pressures.

It's also adding to Asia's challenges this year, on top of the clash between Team Trump and Team Xi.“We identify Japan and South Korea as the most likely to be entangled as the US and China look to gain influence through foreign policy,” says economist Thomas Rudgley at Oxford Economics.

“Key supply-chain hubs Vietnam, Singapore, Malaysia, Thailand and the Philippines will probably also be in the crossfire, as will India because of its growing regional importance,” he said.

Taiwan - a semiconductor supply-chain lynchpin - is often the focus of US-China altercations, Rudgley adds, with the US recently asking allies how they would respond to a war with China over the island.

“A major disruption in Taiwan would be a fast-acting, existential threat to high-tech manufacturers and firms dependent on these goods; existing supply chains could be severed in less than a year.”

Rudgley notes that“we updated our analysis of global exposure to Taiwan conducted amid peak tensions in 2024, and find vulnerabilities have since risen among the most-exposed nations, such as South Korea , China, Japan, and the US. This research extends beyond China-Taiwan tensions and highlights how sanctions - the likely policy response - could magnify the fallout across countries.”

Though China's export engine has so far confounded the skeptics, it won't necessarily continue to do so. Xi's government continues to slow down trade-deal talks with Trump's administration, which could anger the White House into imposing higher tariffs. Upping the odds that a clash of the titans in Washington and Beijing might lay waste to the global financial system.

Here, the US should be careful about what it wishes for. Neither nation is as ready for this economic brawl as their respective policymakers seem to project.

A Fitch Ratings downgrade reminded investors that China isn't in a state-of-the-art financial position. Earlier this year, Fitch downgraded China's sovereign rating to 'A' from 'A+' amid concerns about its shaky public finances.

“The downgrade reflects our expectations of a continued weakening of China's public finances and a rapidly rising public debt trajectory during the country's economic transition,” says Fitch analyst Jeremy Zook.

Zook adds that“in our view, sustained fiscal stimulus will be deployed to support growth, amid subdued domestic demand, rising tariffs and deflationary pressures. This support, along with a structural erosion in the revenue base, will likely keep fiscal deficits high.”

At the same time, Zook notes,“we expect the government debt/GDP to continue its sharp upward trend over the next few years, driven by these high deficits, ongoing crystallization of contingent liabilities and subdued nominal GDP growth .”

In other words, China has some fiscal space to reach its 5% economic growth target. But it's not unlimited and deploying the stimulus“bazooka” yet again could come at a high cost in the long run.

The US, meanwhile, is carrying a $36 trillion-plus national debt into this fight as recession talk heats up. Even worse is the self-inflicted nature of the US reckoning to come, one punctuated by a $10 trillion stock loss so far. Hedge fund manager Bill Ackman, meanwhile, warns of a self-inflicted“economic nuclear winter” in Trump's America.

“By placing massive and disproportionate tariffs on our friends and our enemies alike and thereby launching a global economic war against the whole world at once, we're in the process of destroying confidence in our country as a trading partner,” says the Trump-supporting billionaire founder of Pershing Square.