SINGAPORE—The last thing Xi Jinping needs right now is another showdown with Donald Trump over trade.
China is grappling with an epic property collapse, and local governments are wobbling under trillions of dollars of debt. Chinese leader Xi has responded by hitting the gas on manufacturing, pushing Chinese companies to pump out a surfeit of goods that are pouring into foreign markets and propping up the economy at home.
Now, a fresh trade war could pull the rug from under what has become a critical source of growth. In a sign of how serious he is about raising tariffs to combat what he sees as unfair trade, President-elect Trump has told allies he wants Robert Lighthizer, who served as U.S. trade representative during his first term and is especially critical of Chinese trade practices, to be his administration’s trade czar, The Wall Street Journal reported.
If the U.S. cuts back on some of the $430 billion in goods it imports from China each year, Chinese companies could try sending them to other countries, a strategy Beijing followed successfully after Trump first hit Chinese goods with tariffs in 2018. But other countries are already up in arms over an avalanche of cheap Chinese exports hurting their own companies.
Rising tariffs and mushrooming antidumping probes in Europe, Asia and Latin America are sending a strong signal that China can’t rely on other countries to mop up its ballooning industrial output, never mind extra goods shut out of the U.S. by towering new levies on imports.
Some economists believe that Trump’s policies and a darkening global backdrop for trade might nudge Xi toward something he has long resisted: Embracing a much bigger role in China’s economy for household consumption to propel economic growth.
Trump on the campaign trail pledged to raise tariffs on all Chinese imports to 60%. If enacted, that would mark a major escalation of a trade war that began during his first term and has been simmering ever since.
Trump in 2018 hit Chinese-made washing machines, solar panels, steel and aluminum with tariffs of up to 25%. China retaliated with tariffs of its own on U.S. imports, while under President Biden tariffs were raised on Chinese electric vehicles, clean-energy equipment and semiconductors.
China has managed this first phase of the conflict well. It has been able to redirect its exports to other markets, such as Russia and neighboring countries in Southeast Asia. It has also staked out a commanding global position in valuable new industries, including EVs.
The result is that China’s shares in global manufacturing and global goods exports have increased since 2018, even as its share of U.S. imports has declined.
Economists say the next phase of the trade war could be much tougher if it plays out along the lines Trump floated during his campaign.
A 60% tariff on Chinese imports would reduce trade with the U.S. by as much as 70%, according to Oxford Economics, cutting China’s share of U.S. imports to as little as 4%, from around 14% in 2023.
UBS estimates tariffs of 60% would reduce economic growth in China by around 1.5 percentage points in the year after they are enacted.
“The impact on trade would likely be much larger than the trade war 1.0,” said Daniel Yi Xu, an economics professor at Duke University.
Many economists say they doubt Trump will succeed in imposing the full 60%. Many U.S. companies oppose such high levies and Trump could back down, especially if he is able to use threats of higher tariffs to secure concessions from China.
Still, Duke’s Xu and other economists believe the odds of some significant increase in tariffs are high. U.S. policymakers on both sides of the aisle appear more united around a tough-on-China posture, which should offer Trump’s administration more runway to pursue his campaign promises.
Although China could probably offset some lost U.S. exports by shipping goods to other destinations, it can’t expect the rest of the world to embrace cheap Chinese goods. Trade barriers to Chinese imports have been rising across the world, as big economies including India and Brazil seek ways to shield domestic industries from a tide of cheap Chinese competition.
“If other countries respond by also putting up trade barriers, that’s when it starts to become a lot more challenging for China,” said Julian Evans-Pritchard, head of China economics at Capital Economics, a consulting firm.
Beijing does have an array of tools it can deploy to lessen the hit from higher tariffs. Policymakers could cut interest rates, weaken China’s currency to support sales overseas, and extend tax rebates and other perks to exporters.
They could try to force the U.S. to reconsider by retaliating, perhaps by raising tariffs on U.S. products, or by withholding supplies of critical minerals needed in high-tech industries such as chipmaking.
China is taking some early steps to get ahead of increased tariffs by showering U.S. allies with visa exemptions, cuts to Chinese import levies and other incentives to encourage trade and friendlier relations, the Journal reported.
But a broad trade conflict would spell trouble for an economy that in recent years has grown more reliant on exports and manufacturing for growth, as other parts of the economy falter. Burned by the property meltdown and lingering trauma from the pandemic years, Chinese consumers are keeping a tight grip on their wallets.
Local government finances are under severe strain and private-sector confidence is in the doldrums.
Chinese firms are also in worse shape to handle rising tariffs than they were half a decade ago. Weak spending at home has contributed to two years of falling prices for manufactured goods, crushing corporate profit margins and pushing many firms into the red.
Beijing on Friday unveiled a $1.4 trillion package to help local governments get out from under swelling off-balance sheet debts. Officials have also cut borrowing costs and taken steps to boost the stock market in the hope of sparking a revival in consumer and business confidence.
But many economists say what China needs are bolder moves to increase consumption to escape deflation and achieve more sustainable growth.
Xi has often signaled his opposition to U.S.-style consumption and the kind of reforms that would enable it, such as improving China’s threadbare social safety net to encourage households to spend more and save less. Too much support, he has said, could lead to “welfarism.”
His overriding economic goal is transforming China into a technological powerhouse that can unseat the U.S. as the world’s top economy, not a consumer-led society.
Yet over time, the kind of trade war that a second Trump presidency might unleash could leave Xi with little choice but to beef up domestic spending, as China runs out of other options for driving growth.
Real estate, which at its peak contributed as much as 25% of China’s annual economic growth, according to some estimates, is unlikely to power China’s economy to the same extent again. And public investment in infrastructure doesn’t offer as big a boost to growth as it once did, as China is already comfortably supplied with high-speed railroads, roads, airports and power plants.
That leaves consumption as the one big lever left to pull to keep the economy healthy. Currently, it only accounts for about 40% of China’s economy, versus close to 70% in the U.S.
If China took more steps to promote consumption, such as by investing more in health and education to reduce household savings, it could potentially absorb more of what it produces. That would reduce its bulging trade surplus with the U.S. and result in a more balanced global economy.
“The main option is domestic demand. It’s as simple as that,” said Bert Hofman, a former World Bank country director for China who now teaches at the National University of Singapore’s East Asian Institute.
Hannah Miao contributed to this article.
Write to Jason Douglas at jason.douglas@wsj.com
