China | How to respond to a new wave of tariffs under Trump 2.0

Summary

The report examines China’s potential responses to the new wave of U.S. tariffs under President Trump’s second term (Trump 2.0). It highlights various policy tools that China could use but also acknowledges the significant limitations posed by its ongoing domestic economic challenges.

Key points

• Key points:
• China faces significant internal challenges, such as a struggling real estate sector and mounting local government debt, which limits its capacity to effectively respond to new U.S. tariffs.
• President-elect Trump’s threat to impose high tariffs on China seems credible, as his focus has shifted to using tariffs as a tool to bring manufacturing jobs back to the U.S., unlike his first term when tariffs were primarily used as negotiation leverage.
• Strategies like exchange rate depreciation, export tax rebates, re-exporting through third countries, and tariff retaliation helped China offset the impact of past tariffs, but these tactics may be less effective under Trump 2.0.
• Chinese authorities are unlikely to use other retaliation strategies, such as penalizing U.S. firms in China or dumping U.S. treasury bonds, as these could have significant negative side effects.
• Before engaging in external economic maneuvers, China must address its domestic challenges and consider further opening up to global trade partners to strengthen its position.

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