How Susceptible is China to US Tariffs?

By Marianne Mineo, Economist at Silverhorn Group

Published on March 5th, 2025

In light of the tariff war on China by the Trump Administration, a look at how this could affect China’s economy seems relevant. While a key goal of Trump’s trade policy is to bring production back on domestic soil, it is also possible that the tariffs are meant to strike a blow at China’s economy, given the context of the trade war during Trump’s first term in office, as well as a statement made by the Secretary of Defense at the Ukraine Contact Group that China is “a peer competitor…with the capability and intent to threaten our homeland and core national interests in the Indo-Pacific”.

The US-China trade war stems from a deep trade imbalance between the two nations. The US consumes 29% of global goods but produces only 15%, while China manufactures 32% but consumes just 12%. This disparity fueled tensions when China began to evolve from primarily exporting cheap products for Western consumption to more advanced high-value manufacturing which challenged Western economic dominance.

The COVID era and consequent supply chain disruptions, as well as the war in Ukraine exposed the risks of relying on single sources for critical goods like healthcare products, technology, and energy. Reducing trade dependencies have become a critical component of ensuring a nation’s international resilience and the US and EU, recognizing their vulnerability to geopolitical tensions, have been pursuing “de-risking” strategies.

Meanwhile, China has been aiming for greater international resilience, already back since the early 2000s but which was formalized in 2020 through its “dual circulation” policy (2), seeking to protect its economy from external pressures. Following the rapid spike in Chinese exports to the US between 2003 and 2007, China had already begun diversifying, possibly due to the 2008 financial crisis that gripped the US and much of the western world. In the latter years of Trump’s first term in office, and at the height of the US/China trade war, we can see another notable, if smaller drop. While it increased slightly for a time during the early days of the Biden administration, it remained far below its 2007 level and currently represents just 2.8% of China’s GDP.

A breakdown by Visual Capitalist shows the ratio of China’s exports to the US vs the rest of the world, which demonstrates that while the US remains an important importer of Chinese goods, China still has sufficient diversification to provide resilience in the event of a drop in US exports.

Although export is in large part the foundation of China’s economic growth, imports play a role in its overall international resilience. Since the early 2000s, China’s trade dependencies have shifted away from advanced economies like the US, EU, and Japan toward commodity-exporting nations in the southern hemisphere. By 2022, advanced economies accounted for just 35% of China’s trade dependencies, down from 73% in 2001. China now relies more on primary products from countries like Australia and Brazil, though it still depends on advanced economies for technology-intensive goods like semiconductors and machinery. Therefore, China’s retaliatory tariffs on the US are also unlikely to adversely affect its own economy to a notable degree.

When we look at China’s international resilience in the HoNI (Health of Nations Index) analysis, this is China’s weakest pillar within its overall economy, scoring within the minimum data value and comprising only 20% of its overall score. However, if we drill down further, we see for the most part, the reason for this low score has more to do with policy decisions that intend to protect China from over-indebtedness rather than a true lack of international resilience.

Within its International Resilience breakdown, the two pillars that are putting downward pressure on China’s overall score is its Debt Exposure and its Terms of Trade. China’s international debt exposure is very limited due to having enough capital within its economy that it doesn’t “need” to issue debt. However, in regard to the global financial system, this has caused it to be less integrated, resulting in a low Debt Exposure score. This lack of debt exposure can also pull down the Debt Affordability score, which measures a nation’s trade balance to its external debt. Because China has little external debt, this negatively skews the results.

Terms of Trade, which is the most relevant pillar for this analysis, represents the ratio between a country’s export and import prices. The low score in this pillar is due to unfavourable oil prices. As oil makes up a significant percentage of China’s imports, the changes in oil prices within the past decade have adversely contributed to its HoNI International Resilience score.

That being said, an escalation of the trade war with the US is unlikely to have any direct effect on this, given China’s main suppliers are Russia, Saudi Arabia, and Malaysia.

Conversely for the US, an estimate by JPMorgan of the annual impact of tariffs on the S&P 500’s earnings per share highlights that higher tariffs could significantly affect corporate earnings, with the most substantial impact coming from a 60% tariff on China, which could reduce earnings per share by $15.60. Lower tariffs, such as 25% on Mexico and Canada, have lesser impacts of $7.50 and $6.10, respectively. A 10% tariff on Europe and China would decrease EPS by $3.60 and $2.60. The analysis underscores the potential economic strain of escalating tariffs, particularly with China, and the potential fragility of the S&P 500 under various tariff scenarios.

In conclusion, while US tariffs aim to reshore production and challenge China’s ascension, Beijing’s shift toward commodity-exporting nations and self-sufficiency strategies have bolstered its resilience. As both nations seek to reduce dependencies, the trade war’s impact on China’s economic and international resilience may be muted, however, the potential for rising geopolitical tensions remains a wildcard.