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Inside China 17 February 2025

Trade war: the impact on China

Jeremy Stevens

Inputs from academic literature
The trade war has affected bilateral trade between the US and China significantly, particularly by way of reducing Chinese exports to the US. Various research shows annual reductions in US import volumes from China ranging from 5% to over 16% from baseline, demonstrating clear trade distortions caused by tariffs. Studies unanimously indicate that US consumers have largely borne the burden of tariff costs, which have mostly passed through to higher prices, with some residual eroding of profits.
While both China and the US have experienced negative consequences due to the trade   war, the overall impact on China's GDP is estimated as relatively modest, with almost all the various models reporting decreases of less than 2% p.a. 
Still, the trade war has adversely affected income growth and welfare in China, with studies estimating real income losses of up to USD94bn, but highlighting that the impact is diverse, particularly affecting low-income households and retirees, and certain parts of China more than others – thereby exacerbating inequality. 
So far, the trade war has had a complex impact on corporate innovation, redirecting firms' innovation strategies towards a certain type of innovation (directly connected to the contest) buoyed by state support. 
China’s mobilisation of state support has been felt elsewhere too, for instance, even though job creation has also slowed in the related sectors, especially inside private-owned firms; state-owned enterprises (SOEs) have provided some stability in employment levels. The trade war has also driven some local authorities in China to expand their investments in social security and employment measures.
The economic landscape has shifted significantly, with many Chinese firms reporting reduced profitability because of tariffs. The stock market has reacted negatively, especially for firms reliant on US exports. Firms that have been more resilient are those that have been able to shift resources towards the domestic market and diversified.
The trade war has manifest in more volatile currency markets, pressuring the Chinese yuan (CNY) – which is expected to remain a litmus test for tensions.
The trade war has influenced public sentiment in China. State narratives depict the country as a victim – but domestic feelings could shift if economic challenges intensify, suggesting a volatile public perception landscape.
While the trade war has largely harmed the global economy, some third countries (such as Vietnam and Taiwan) have benefited from shifts in US import patterns away from China. 
The trade war reflects broader geopolitical tensions, with research suggesting that the conflict is driven not just by trade deficits but by structural shifts in economic globalization and technology. 
This context points towards a long-term reconfiguration of global power dynamics. 

Inputs from academic literature

The trade war has affected bilateral trade between the US and China significantly, particularly by way of reducing Chinese exports to the US. Various research shows annual reductions in US import volumes from China ranging from 5% to over 16% from baseline, demonstrating clear trade distortions caused by tariffs. Studies unanimously indicate that US consumers have largely borne the burden of tariff costs, which have mostly passed through to higher prices, with some residual eroding of profits.

While both China and the US have experienced negative consequences due to the trade war, the overall impact on China's GDP is estimated as relatively modest, with almost all the various models reporting decreases of less than 2% p.a. 

Still, the trade war has adversely affected income growth and welfare in China, with studies estimating real income losses of up to USD94bn, but highlighting that the impact is diverse, particularly affecting low-income households and retirees, and certain parts of China more than others – thereby exacerbating inequality. 

So far, the trade war has had a complex impact on corporate innovation, redirecting firms' innovation strategies towards a certain type of innovation (directly connected to the contest) buoyed by state support. 

China’s mobilisation of state support has been felt elsewhere too, for instance, even though job creation has also slowed in the related sectors, especially inside private-owned firms; state-owned enterprises (SOEs) have provided some stability in employment levels. The trade war has also driven some local authorities in China to expand their investments in social security and employment measures.

The economic landscape has shifted significantly, with many Chinese firms reporting reduced profitability because of tariffs. The stock market has reacted negatively, especially for firms reliant on US exports. Firms that have been more resilient are those that have been able to shift resources towards the domestic market and diversified.

The trade war has manifest in more volatile currency markets, pressuring the Chinese yuan (CNY) – which is expected to remain a litmus test for tensions.

The trade war has influenced public sentiment in China. State narratives depict the country as a victim – but domestic feelings could shift if economic challenges intensify, suggesting a volatile public perception landscape.

While the trade war has largely harmed the global economy, some third countries (such as Vietnam and Taiwan) have benefited from shifts in US import patterns away from China. 

The trade war reflects broader geopolitical tensions, with research suggesting that the conflict is driven not just by trade deficits but by structural shifts in economic globalization and technology. 

This context points towards a long-term reconfiguration of global power dynamics. 


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