Why China probably isn’t panicking over Trump
IMF estimates Trump’s tariffs, if fully implemented as threatened, could redound more severely on US than China
As Donald Trump returns for a second round of shaking up the global economy — especially China — he may end up doing far more damage at home than abroad.
Though this argument has been made here and there since the US president-elect’s win on November 5, the picture the International Monetary Fund is painting about the next four years is worth considering.
On the eve of Trump’s January 20 inauguration, the IMF’s chief economist, Pierre-Olivier Gourinchas, counts the ways tariffs, trade curbs and blunt force responses to waning US competitiveness could backfire on the biggest economy.
The bottom line: the next wave of tariffs Trump 2.0 threatens could make trade dislocations worse, reduce investment, distort market pricing mechanics, disrupt supply chains and spook global markets in chaotic and unproductive ways.
The tariffs alone, Gourinchas worries, “are likely to push inflation higher in the near term.”
Huge tax cuts in an economy at or near full employment could hasten America’s path toward overheating. Trump’s mass deportation hopes would cause even greater disruptions for restaurants, construction and myriad other businesses already short of workers. Labor costs could surge as a result, intensifying inflation pressures.
Even Trump’s promised deregulatory Big Bang might not go as Treasury Secretary-nominee Scott Bessent argues. Yes, the US might “boost potential growth in the medium term if they remove red tape and stimulate innovation,” Gourinchas says.
But, he adds, “excessive deregulation could also weaken financial safeguards and increase financial vulnerabilities, putting the US economy on a dangerous boom-bust path.”
When “we look at the risk for the US, we see an upside risk on inflation,” Gourinchas notes.
As Gourinchas’ institution points out, Trump is fortunate to inherit a US economy that’s recovered from the Covid-19 crisis better than peers. The IMF expects 2.7% US growth in 2025, faster than the 2.2% it predicted back in October.
That hasn’t stopped Trump from signaling a fresh stimulus boom to come. On top of making permanent the Republican Party’s US$1.7 trillion 2017 tax cut, Trump promises additional corporate tax cuts. Trump also has hinted at reprising his 2017-2021 role as Federal Reserve-basher-in-chief.
Back then, Trump cajoled his handpicked Fed chairman, Jerome Powell, into cutting interest rates at a moment when the buoyant US economy didn’t need it. Trump attacked the Fed in speeches, press conferences and on social media. Trump even mulled firing Powell. By 2018, the Fed surprised world markets by suddenly adding liquidity, ending efforts to normalize rates post-Lehman Brothers crisis.
On the campaign trail last October, Trump mocked Powell’s policymaking team. “I think it’s the greatest job in government,” Trump told Bloomberg. “You show up to the office once a month and you say, ‘let’s say flip a coin’ and everybody talks about you like you’re a god.”
Team Trump also argues that presidents have the right to demand that the central bank do their bidding. In August, Trump said the “Federal Reserve is a very interesting thing and it’s sort of gotten it wrong a lot.”
He added “I feel the president should have at least stayed there, yeah. I feel that strongly. I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
One motivation may be paying for Trump’s fiscal plans. The lower US rates go, the more latitude Trump may believe his administration has to add to the $36 trillion national debt.
This raises obvious threats to Asia’s vast holdings of US Treasury securities. China is the second-biggest holder of Treasuries with about $770 billion worth. Japan is Washington’s top banker, with US$1.1 trillion of US debt. Altogether, Asia’s largest holders of dollars are sitting on about $3 trillion worth of exposure.
Yet it also means that policy mistakes in Washington could be transmitted Asia’s way at blistering speed.
Beyond the risk of financial shocks from the US, China is very much on Trump’s mind as Beijing’s nearly $1 trillion trade surplus angers his administration. At more than 5% of gross domestic product (GDP), China’s surplus is the most since 2015.
This speaks to how Trump 1.0 failed to alter global trade dynamics. Eight years after Trump entered the White House for the first time, China is, by some measures, more reliant on exports today. Yet this reliance puts China directly in harm’s way as Trump 2.0 makes good on its 60% tariff threat.
That could exacerbate the domestic challenges Xi Jinping’s Communist Party faces, including deflationary currents, weak retail sales, slumping property prices and a yuan under downward pressure. As a result, mainland bond yields are at record lows.
Some economists think the IMF is missing the point.
“The IMF really needs to find a way to talk about global trade that includes the risks coming from China’s industrial policies and unbalanced pattern of growth, not just the risks from the US,” says Brad Setser, senior fellow at the Council on Foreign Relations.
Setser argues that “it’s totally reasonable to talk about the risks coming from the US. But it isn’t reasonable to ignore the risks from China just because China doesn’t use tariffs to bring its imports down … and the IMF doesn’t mention Chinese imports at all here.”
Yes, Setser concludes, “Trump’s tariffs will have an impact – but right now the main factor slowing global trade is the fact that China’s imports — in volume terms — aren’t growing. And the IMF should care about the gap between China’s export volume and import volume growth.”
Economist Katrina Ell at Moody’s Analytics notes that a “lift in government spending helped to hide some of the economy’s weaknesses. As China’s economic woes mounted in the second half of the year, local governments were instructed to offer more support. And that they did, with government expenditure growth rising in each month since June.”
Despite the extra spending helping the economy record its fastest quarterly expansion since March 2023, EIl says, “it wasn’t enough to break the shackles of deflation. The GDP deflator fell 1.2% in 2024, marking the second consecutive year of falls.”
Overall, Ell says, “China ended the year strongly. But much of that came from temporary sugar hits. Under the hood, China’s problems haven’t gone away. We expect growth to slow to 4.3% in 2025 as tariffs drag down exports and investment.”
Odds are, more Chinese stimulus is on the way, says Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
“The shift of policy stance in September last year helped the economy to stabilize in Q4, but it requires large and persistent policy stimulus to boost economic momentum and sustain the recovery,” Zhang says.
For now, China’s exports will probably remain strong in the near term as companies try to “front-run” higher tariffs, says Zichun Huang of Capital Economics. “Outbound shipments are likely to stay resilient in the near-term, supported by further gains in global market share thanks to a weak real effective exchange rate,” Huang notes.
Yet China’s priority should be to stop its run of seven straight deflationary quarters, says Larry Hu, chief China economist at Macquarie Bank.
“We don’t bet against policymakers’ will and ability to deliver 5% real GDP growth in 2025, but can they achieve higher inflation?” Hu reckons. “It will largely depend on the fiscal and housing stimulus, which is key to boosting domestic demand.”
Here, Trump’s policies won’t help. There’s hope the “Tariff Man” act is meant to conifer China into a huge trade deal. Bessent is perceived to be a proponent of this plan.
Other Trump advisers, not so much. These include Peter Navarro, who co-wrote a book titled “Death By China.” And trade czar Robert Lighthizer, who’s hinted at Trump 2.0 considering its own currency devaluation gambit.
But the tariff threats also could blow up on Washington in ways US lawmakers might not appreciate.
Take the risk of China hitting back in a variety of ways, warns Takatoshi Ito, a Columbia University economist who served as Japan’s deputy vice minister of finance. “If other countries adopt retaliatory tariffs, total exports from the US — and global trade overall — may well decline,” Ito says.
“Moreover, high US tariffs would fuel domestic inflation, forcing the Federal Reserve to raise interest rates, which would probably cause the US dollar to appreciate, causing exports to fall and imports to rise.”
This has economists doubting if the Fed will cut rates at all in 2025. “Inflation is above target and the Fed was primarily cutting to ensure a strong labor market, which has been met,” write Bank of America economists. “This means no further cuts needed,” adding they “see risks for the next Fed move more skewed to a hike versus cut.”
Others are more sanguine about overheating risks. “Core inflation isn’t accelerating, and that’s the story,” says Jamie Cox, a managing partner at Harris Financial Group.
“The market may have had its hair on fire about inflation running away again, but the data do not support that conclusion. What we are seeing is the typical ebb and flow of the data as inflation is being pushed out of the system,” Cox says.
But Trump’s policies could exacerbate inflation risks in short order – and further threaten the dollar’s status as the global reserve currency.
In recent testimony to Congress, Bessent said keeping the dollar at the very center of global trade and finance is a top Trump 2.0 priority. That might be easier said than done as Washington’s fiscal excesses collide with a new Trump team spoiling for fights everywhere.
Follow William Pesek on X at @WilliamPesek