Chinese Exporters Shift Focus Amid U.S. Tariffs

In recent years, the Chinese economy has faced significant challenges due to soaring tariffs imposed on its exports to the United States. To counteract this, China is actively encouraging its exporters to redirect their goods to the domestic market. However, this maneuver poses the risk of driving the already struggling economy deeper into deflation.

Local government entities and major companies are backing initiatives to support exporters affected by these tariffs. For example, e-commerce giants like JD.com, Tencent, and Douyin (the Chinese counterpart to TikTok) are leading efforts to promote sales of these goods to domestic consumers.

Recently, Sheng Qiuping, vice minister of commerce, emphasized the importance of China’s large domestic market as a critical resource for helping exporters withstand external pressures. He urged local authorities to work together to stabilize expenses and promote consumption. However, economists are pointing out that this situation has ignited fierce price competition among domestic firms.

JD.com has committed around 200 billion yuan (approximately $28 billion) to assist exporters. The platform has created a dedicated section for goods originally aimed at the U.S. market, offering discounts of up to 55%. While this strategy may appear beneficial short-term, analysts warn that an influx of discounted products could hurt companies' profitability, leading to negatively impacted employment rates.

Currently, consumer demand in China is already weak, exacerbated by uncertainties surrounding job stability and income. Recent data reveals that after staying just above zero in 2023 and 2024, the consumer price index has dropped into negative figures for two consecutive months. Furthermore, the producer price index has seen a decline for the last 29 months, signaling deepening economic challenges.

Predictions suggest that deflation in China could worsen further, with estimates of a 2.8% decline in wholesale prices by April, an increase from March's 2.5%. According to Morgan Stanley economists, the adverse effects of tariffs are expected to be most pronounced in the current quarter, with many exporters halting their production and shipments to the U.S.

Goldman Sachs has forecasted a decline in China’s consumer price index to 0% this year, down from a 0.2% increase last year. The producer price index is expected to fall by 1.6%, indicating persistent economic strains.

The ongoing trade war has pushed U.S. tariffs on Chinese products to unprecedented levels—reaching 145%—which Beijing has retaliated against with tariffs of its own. This tit-for-tat approach has drastically impaired trade relations between the two nations. Observers suggest that Beijing's attempt to support exporters may only serve as a temporary fix, lacking long-term viability.

The financial pressure on exporters has been compounded by a weak domestic market, resulting in price wars, slim profit margins, delayed payments, and high return rates. For many exporters who previously capitalized on higher prices in the U.S. market, selling to domestic consumers represents a means to unload excess inventory rather than a pathway to profitability.

As businesses face diminishing margins, some companies may opt to shut down entirely, while others may continue to operate at a loss to keep their factories running. This disruption is set to influence the labor market severely, with estimates indicating that around 16 million jobs—over 2% of China's workforce—depend on the production of goods destined for the U.S.

The elimination of the "de minimis" exemption by the Trump administration has added to the burdens on smaller Chinese businesses, threatening their sustainability. Analysts expect that urban unemployment could average 5.7% this year, surpassing the government’s target.

Compounding these issues is the property sector's ongoing struggles, which have considerably strained government finances. Experts warn that the combination of harmful tariffs and the downturn in the property market poses a serious risk to the economy, potentially resulting in unexpected drops in consumer demand.

Despite rising calls for more substantial stimulus measures, many economists believe that the Chinese government may delay any proactive fiscal intervention until clear signs of economic deterioration manifest. Authorities appear to view deflation not as a crisis but more as a mechanism that could support household savings during a period of transitioning economic dynamics.

As tensions linger and both markets grapple with increased competition, there is a sentiment that tangible solutions will eventually manifest. However, experts recognize that it may take a significant amount of time for the U.S. to shift manufacturing back to domestic soil. In the meantime, consumers on both sides may face elevated prices as a result of these ongoing economic shifts.