The 2024 U.S. election has concluded, and Donald Trump is returning to the White House. Given his previous protectionist trade policies and his tough rhetoric on China during the campaign, many are concerned about U.S.-China relations and China’s economic outlook. Indeed, Trump’s return may trigger a “Trump shock.”
However, from both market and policy perspectives, this shock has to some extent been anticipated and priced in. A “Trump trade” has already begun. Thus, we have reason to calmly observe that Trump’s return may not have as significant an impact on China’s economy as initially feared and might even accelerate domestic innovation and industrial upgrades.
Tariffs have double edge
The market’s primary concern about the Trump shock is that he may once again resort to high tariffs. In fact, China is already prepared for this possibility. Trump has expressed admiration for former President William McKinley, who was known for his protectionist tariffs. The McKinley Tariff of 1890 raised tariffs on imported goods to an average of 48.4 percent, which temporarily protected some U.S. industries but also caused prices to rise. It also led to retaliatory tariffs from European countries.
Similarly, during his first term, Trump imposed tariffs on Chinese goods and even proposed a 60 percent tariff on Chinese imports. While the intent was to weaken Chinese exports, the actual effect was not as intended. For example, during the 2018-19 tensions, China mitigated tariff pressure by diversifying export markets, adding value to its products and establishing new trade partners. At the same time, the high tariffs imposed by the Trump administration were ultimately passed on to U.S. consumers, leading to higher prices and worsening inflation, leaving Americans struggling with rising costs.
Supply chain shifts
Trump’s trade policies and alliance strategy may push the U.S. to accelerate the “de-sinicization” of supply chains. However, China’s advantage globally remains significant. Its well-developed infrastructure, large market size, efficient logistics and production capabilities make it difficult to replace in the short term. Although some companies have shifted production to countries such as Vietnam and India, these countries face significant challenges in infrastructure and industrial chain integration compared with China, resulting in increased costs and reduced efficiency during the relocation process. Moreover, China has been continuously improving its business environment and upgrading its domestic industrial chains, making the Chinese market more attractive. Therefore, a complete decoupling of supply chains in the short term faces cost constraints and practical difficulties.
Domestic market potential
China has actively promoted economic restructuring in recent years, and domestic demand’s role in economic growth has steadily increased. To further tap into domestic demand potential, the government released its “Outline for Expanding Domestic Demand (2022-35), aiming to strengthen the role of domestic demand in the economy by optimizing market structures, enhancing consumer capabilities and stimulating market vitality.
The total retail sales of consumer goods for the full year of 2023 exceeded 47 trillion yuan ($6.5 trillion), an increase of 7.2 percent over the previous year, which reflected steady growth in the consumer market. Recently, the Ministry of Finance introduced a range of new policies — including support for resolving local debt and issuing special bonds — to bolster economic growth and mitigate risks. Minister of Finance Lan Fo’an highlighted the ample central fiscal space for borrowing, suggesting that China has adequate fiscal room to support growth and sustain domestic demand in the future.
These trends have shifted investors’ outlook on China in a positive direction. From January to September this year, China established 42,108 new foreign-invested enterprises, an 11.4 percent increase year-on-year. While actual foreign direct investment was 640.6 billion yuan — a 30.4 percent decrease year-on-year — actual FDI in manufacturing reached 179.2 billion yuan, while services accounted for 446.1 billion yuan. High-tech manufacturing attracted 77.12 billion yuan in FDI, accounting for 12 percent of total FDI — a 1.5 percentage point increase over the previous year.
Investment in specific high-tech sectors such as medical devices, professional services and computer manufacturing grew, respectively, 57.3 percent, 35.3 percent and 29.2 percent. Germany and Singapore increased their FDI in China by 19.3 percent and 11.6 percent, respectively. These data indicate significant increases in FDI in high-tech manufacturing and specific fields, reflecting a continuously optimized investment structure. Further, major investment sources have maintained their growth, reflecting international investors’ confidence in the Chinese market.
Policies issued in September to boost China’s economy have further improved the expectations of international investors, who increased their holdings in Chinese assets. The Standing Committee of the 14th National People’s Congress approved a proposal on Nov. 8 to increase the local government debt limit by 6 trillion yuan to replace implicit debt. This significant increase in debt limit aligns with previous policies and reinforces China’s commitment to maintaining an active fiscal policy to stimulate growth under current economic conditions.
By raising borrowing limits to replace implicit obligations, the central government aims to alleviate local government debt pressure, optimize the debt structure, reduce associated risks and free up more funds for economic development and social welfare. This strategy is expected to stimulate investment and consumption demand, improve market expectations and boost confidence in the economic outlook, further enhancing the attractiveness of China’s capital market.
Tech self-reliance
In the face of external technology blockades and trade restrictions, China has increased its investment in tech innovation, driving industrial upgrades and technological self-reliance. Notable advancements have been made in semiconductors, new energy and artificial intelligence.
Last year, China developed the “Jiuzhang-3” quantum computing prototype, setting a record in quantum information technology and opening new possibilities for high-performance computing and information security. Additionally, China’s space station entered its operational phase, raising the country’s stature in the international space field and promoting the development of its space industry. In the new-energy sector, breakthroughs in high-efficiency technology for perovskite tandem solar cells are advancing clean energy applications.
These achievements not only demonstrate China’s strength in basic and applied research but also provide momentum for high-quality economic growth.
International cooperation
Despite challenges in U.S.-China relations, China has been actively expanding economic and trade cooperation with other countries, forming a diverse market structure. Through the Belt and Road Initiative and the Regional Comprehensive Economic Partnership, China has established strong economic ties with Central Asia, Europe and Africa, with ASEAN being its largest trading partner for several consecutive years.
On Sept. 5, President Xi Jinping attended the opening ceremony of the Beijing Summit of the Forum on China-Africa Cooperation and delivered a keynote speech in which he announced the elevation of China-Africa relations to a comprehensive strategic partnership. Multiple cooperation agreements and action plans covering infrastructure, trade and investment were signed, further strengthening China-Africa economic relations.
Additionally, cooperation between China and Latin American countries is steadily advancing. Through mechanisms such as the China-LAC Forum, cooperation has expanded in energy, infrastructure and technology, with bilateral trade steadily rising.
President Xi's visit to Latin America during the APEC and G20 summits marks a new chapter in China-LAC relations. This diversified international cooperation effectively reduces China’s dependence on any single market and spreads out the risks posed to China’s economy by global economic fluctuations.
In summary, Trump’s return to power may exert some pressure on China’s economy, but China has built a multilayered response and defense mechanism through domestic demand, fiscal policies, technological innovation and international cooperation. Moving forward, it can address external uncertainties by further expanding domestic demand, leveraging fiscal policy advantages, driving technological innovation and deepening international cooperation. If China effectively utilizes these strengths, it is likely to sustain steady growth in the face of any Trump shock, keeping itself on a more autonomous and sustainable development path.
