Trump tariffs: China is a manufacturing powerhouse- can tariffs change that?

U.S. President Trump has again imposed tariffs on Chinese goods in just a few months, meaning that imports from China now face tariffs of at least 20%. This is the latest trade measure taken by the Trump administration against Beijing, following high U.S. tariffs already in place on Chinese goods; for example, Chinese-made electric vehicles face a 100% tariff, and clothing and footwear face a 15% tariff. These tariffs are part of a broader strategy to reshape the economic relationship between the two countries.

Trump's tariffs directly hit the core of China's manufacturing sector—a vast network of factories, assembly lines, and supply chains that produce and transport almost everything, from fast fashion and toys to solar panels and electric vehicles. In 2024, China's trade surplus with the world reached a record $1 trillion (£788 billion), thanks to strong exports ($3.5 trillion) that exceeded its imports ($2.5 trillion). The sheer scale of this surplus highlights China's dominance in global trade.

China has long been the "world's factory," thriving since the late 1970s when it opened its economy to global commerce, leveraging cheap labor and state investment in infrastructure. So, how much damage will Trump's trade war inflict on China's manufacturing success? Tariffs are taxes imposed on goods imported from other countries. Most tariffs are set as a percentage of the value of the goods and are typically paid by the importer. This system has been a cornerstone of international trade for centuries.

For example, a 10% tariff means that a product worth $4 imported from China to the U.S. would face an additional charge of $0.40. Raising the price of imported goods is intended to encourage consumers to buy cheaper domestic products, thereby helping to boost the growth of the home economy. Trump has stated that his recently implemented tariffs are designed to pressure China to take more action to stop the flow of the opioid fentanyl into the U.S. He has also imposed a 25% tariff on the U.S.'s neighbors, Mexico and Canada, claiming their leaders aren't doing enough to combat the illegal drug trade across borders.

Analysts say that Trump's tariffs will indeed hurt Chinese factories. Harry Murphy Cruise, an economist at Moody's Analytics, told the BBC that exports have been "China's lifeline," and if these tariffs persist, exports to the U.S. could fall by a quarter to a third. China's exports are enormous, accounting for a fifth of the country's income, meaning that a 20% tariff could weaken overseas demand and shrink the trade surplus. This potential reduction in exports could have significant consequences for China's economic growth.

Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis in Hong Kong, told the BBC: "Tariffs will hurt China. They really need to do more. They need to do what Xi Jinping has been saying—stimulate domestic demand." This is a daunting task in an economy where the property market is slumping and young people dissatisfied with the status quo are struggling to find well-paid jobs. Chinese people's consumption is not enough to revive the economy, and Beijing has just announced a series of measures to stimulate consumption.

Analysts say that while tariffs can slow down China's manufacturing growth, they cannot easily stop or replace it. Ms. Garcia-Herrero said: "China is not only a big exporter, but sometimes the only exporter, like solar panels. If you want solar panels, you can only go to China." Even before Trump became president, China had already begun shifting from manufacturing clothing and footwear to advanced technologies like robotics and artificial intelligence (AI). This has given China a "first mover" advantage, not to mention the production scale of the world's second-largest economy.

Ding Shuang, chief China economist at Standard Chartered Bank, said that Chinese factories can produce high-end technology in large quantities at low cost. "It's really hard to find alternatives... China's position as a market leader is hard to topple." China has imposed retaliatory tariffs of 10-15% on U.S. agricultural products, coal, liquefied natural gas, pickup trucks, and some sports cars. Furthermore, China has imposed export restrictions on U.S. companies in the aviation, defense, and technology sectors and announced an antitrust investigation into Google.

For years, China has been adapting to the tariffs of Trump's first term. For example, some Chinese manufacturers have moved factories out of the country. Supply chains have also become increasingly reliant on Vietnam and Mexico, circumventing tariffs by exporting from there. However, Ms. Garcia-Herrero said that Trump's recent tariffs on Mexico would not hurt China too much because Vietnam is a bigger backdoor for Chinese goods. "Vietnam is key. If tariffs are imposed on Vietnam, I think the situation would be very difficult," she said.

Analysts say that China is more concerned about U.S. restrictions on advanced chips than tariffs. These restrictions have been a major sticking point between the two countries, but they have also fueled China's determination to invest in indigenous technologies independent of the West. That is why Chinese AI company DeepSeek released a chatbot comparable to OpenAI's ChatGPT, shocking Silicon Valley and unnerving Washington. The company reportedly stockpiled Nvidia chips before the U.S. began cutting off China's access to the most advanced chips.

While this may "affect China's competitiveness, I don't think it will affect China's position as a manufacturing powerhouse," said Ding Shuang of Standard Chartered Bank. On the other hand, any progress China makes in advanced technology manufacturing will boost its high-value exports. Analysts say this is thanks to state support, unparalleled supply chains, and cheap labor. "Globalization, combined with China's pro-business policies and market potential, helped attract the first foreign investors," Chim Lee, an analyst at the Economist Intelligence Unit, told the BBC.

Subsequently, the government doubled down, investing heavily in building a vast network of roads and ports to bring in raw materials and ship Chinese-made goods around the world. A stable exchange rate between the RMB and the U.S. dollar also helped. Analysts say that the shift to advanced technologies in recent years has ensured that China will continue to remain relevant and ahead of its competitors. China already has immense economic influence as a manufacturing powerhouse. But as Trump's tariffs disrupt the U.S.'s relationship with the world, there are also political opportunities.

Moody's Cruise said: "China has an opportunity to position itself as an advocate for free trade and a stable global force." But this will not be easy, as Beijing has been accused of violating international trade norms, such as imposing tariffs of over 200% on Australian wine imports in 2020. Analysts say China must also look beyond the U.S., which remains China's top export destination. China is the third-largest market for U.S. exports, after Canada and Mexico. China's trade with Europe, Southeast Asia, and Latin America has been growing, but it is hard to imagine that the two largest economies in the world can stop depending on each other.