China’s export-fueled growth strategy is facing a major roadblock as tariffs threaten to wall off America – by far China’s biggest overseas market – which absorbs about $400 billion worth of Chinese goods each year.
President Donald Trump warned that he could raise U.S. tariffs on China to more than 100% on Wednesday if Beijing doesn’t back down from tit-for-tat levies. “China will fight to the end,” shot back China’s Ministry of Commerce.
The escalating U.S.-China trade war will exacerbate the mounting global glut of Chinese manufactured goods, raising the question, Where will all these goods go, if not to the United States?
Why We Wrote This
China has long relied on exports of manufactured goods to drive economic growth. But as the United States and other nations shut China out, some argue that Beijing should rely more on consumers at home.
The world is already facing what some analysts call a second “China shock,” as shiploads of Chinese-made cars, steel, and other goods flood into foreign markets.
“Any indicator you look at just shows an enormous increase in China’s exports,” says Brad Setser, a senior fellow at the Council on Foreign Relations and former U.S. treasury official who specializes in global trade. Last year, China’s export volume grew about three or four times faster than global trade overall, he notes. Imports, meanwhile, remained flat.
“It’s been a very asymmetric pattern,” he says, designed to make China less dependent on the world, while making the world more dependent on China.
Even before Mr. Trump’s tariff blitz, many countries in Europe and beyond were pushing back on this strategy, trying to lessen their dependence on Chinese goods with targeted tariffs; that suggests that redirecting exports from the U.S. may not be so easy. To protect China’s long-term economic growth – on which the Communist Party government’s legitimacy lies – China’s leader Xi Jinping may have to change course, and take bolder steps to boost consumption at home.
“Xi’s choices become … more stimulus directed at households, or another downturn in the Chinese economy,” says Dr. Setser. “Faced with that choice, I think Xi may reevaluate.”
Growing dominance in world manufacturing
In recent decades, China has leaped ahead in global manufacturing, boosting its share of world manufacturing output from 9% in 2004 to some 29% in 2023, according to the Center for Strategic and International Studies (CSIS). Overall, China now accounts for more manufacturing output than the U.S., Germany, Japan, and India combined.
Today, Mr. Xi’s top priority economic strategy is to promote Chinese advanced, high-tech manufacturing, and he is pouring massive government investment into this task. In 2019 alone, China spent an estimated equivalent of 1.7% of its gross domestic product on industrial policy – four times that of the U.S., according to a CSIS study.
Such investments have led to successful Chinese innovation in key industries such as electric vehicles, and green energy transition products such as solar power equipment and lithium-ion batteries.
This dominance serves China’s goal to create a dense web of bilateral trade and investment ties that bolster its wealth and influence, while maintaining China as a fortress of industrial and technological self-sufficiency, says Arthur Kroeber, head of research at the financial services company Gavekal and author of “China’s Economy: What Everyone Needs To Know.”
“They want to have leverage over the rest of the world, which they think is best achieved through very deep economic ties,” he says. “If countries have a lot of eggs in the China basket, it’s less easy for them to rely on the U.S.”
China’s retaliation against Mr. Trump’s tariffs last Friday – imposing 34% in additional tariffs on all imports from the U.S., starting April 10 – shows that Beijing is calling Mr. Trump’s bluff, he says. After the first U.S.-China trade war launched by Mr. Trump in 2018, Beijing spent years fortifying itself against U.S. pressure and developing various retaliatory tools.
“The government believes China can sustain the pain longer than the U.S. consumer can … and the U.S. will cave first,” he says. As a result, in Beijing the plan is not to let Mr. Trump dictate the terms with his off-and-on tariffs.
“If you are China,” he asks, “do you have to play that game?”
China’s steely resolve
Beijing may consider more drastic steps, such as devaluing its currency to make its exports cheaper, says Mr. Kroeber. Indeed, on Tuesday China’s central bank set its reference rate for the Chinese yuan at the lowest level since September 2023 – a move considered a warning signal to Washington.
Beijing’s propaganda apparatus is working overtime to signal resolve.
A statement issued by China’s Foreign Ministry slammed the U.S. tariff policy, saying it marks an attempt to “subvert the existing international economic and trade order” and “advance U.S. hegemonic ambitions.”
China’s state television broadcasts on Tuesday night were filled with reports condemning the U.S. for “blackmailing” and “bullying” through economic coercion – while casting Beijing as the protector of the world trading system.
One program even broadcast a video of the late U.S. economist Milton Friedman extolling the virtues of free trade by describing the far-flung materials needed to produce a pencil – the same video posted on Monday by Elon Musk, who has opposed Mr. Trump’s tariff policy.
Still, if Europe, Latin America, and other parts of the world resist absorbing the “China shock,” Beijing may ultimately be forced to take stronger measures to strengthen domestic demand as a driver of its economic growth.
In fact, such a pivot to domestic consumption could create a significant strategic advantage for China, experts say.
“The opportunity for China – if China is willing and able to do it – is to replace the U.S. as a source of demand, particularly for some of its Asian neighbors,” says Dr. Setser. “To really displace the U.S., it has to show it’s willing to be a source of demand, not just a source of supply.”
