President-elect Trump has proposed applying a 60% tariff on all Chinese goods imported to the U.S. We view this as an unlikely, maximalist scenario that would have steep consequences for the Chinese economy and an array of sectors.

In this thought exercise, we are only considering direct effects on the Chinese economy and selected sectors. The Chinese government could implement targeted stimulus in response, or other countermeasures that would ease the pain.

However, given the difficulty of tracking the effects of rounds of cascading measures, we kept this as simple as possible. We are just looking at the consequences of an across-the-board 60% tariff, assuming no ameliorative or retributive actions from China.

We assume the scenario would involve heavy hits on the Chinese economy and on an array of Chinese industries that rely on U.S. exports. Our persistent view is that it will be difficult for companies to pass on higher tariff costs to consumers, and that it will be hard for international firms to adjust supply chains away from China.

The stakes are large. According to the United Nations, China exported about US$500 billion of goods to the U.S. in 2023. Investors are asking how such high tariffs might play out in terms of credit and the broader Chinese economy. We address their most frequently asked questions below, targeting the following categories:

Chart 1

Frequently Asked Questions

What would 60% U.S. tariffs mean for the Chinese economy? (Louis Kuijs)

It would be bad. We explore a scenario where the U.S.--from the third quarter of 2025 onwards--raises its tariffs on all imports from China to 60%, including on those products that have so far been exempted.

Given that the "effective" (weighted average) tariff is now around 14%, that would constitute a hefty increase. It would drastically hit the competitiveness of Chinese exports in the U.S., inflicting a heavy toll on China's economy.

We are only looking at the impact of U.S. tariffs on China. We do not assume retaliation from China and do not assume U.S. tariff increases on imports from other countries.

In the U.S., we would expect such tariffs to lead to weaker real GDP growth and higher inflation. That would also affect China. But this hit on China's economy would be small compared with the impact of tariffs on China's competitiveness in the U.S. market.

In the 60%-tariff scenario, China's exports of goods and services would fall 10% by 2026, compared with our current baseline estimate.

Investment would fall 5.5% by 2026 as industrial production weakened sharply and spillover effects kicked in. For example, lower employment, income and confidence would weigh on consumption.

The shock would drag down the level of GDP around 5% below our baseline forecast by 2026. Imports would also fall, but much less than exports.

What about Chinese GDP growth rates? (Louis Kuijs)

The effects would also be quite severe. Under the 60%-tariff scenario, China's GDP growth rate would manage 2.3 percentage points less growth in 2025 and 2.8 points less in 2026, pulling 2026 growth significantly below 2%.

With exports to the U.S. much less profitable, Chinese manufacturing firms would push into other markets, at home and abroad. This would intensify the downward pressure on prices and profit margins at home and the competitive pressures felt by firms in many overseas markets.

The hit to exports and growth would also lead to a major depreciation of the renminbi on the foreign-exchange market.

Chart 2

How would global PC and smartphone producers adapt to steepened U.S. tariffs on China? (Clifford Kurz)

This would be a tough adjustment, given the heavy reliance of device makers on Chinese supply lines. Smartphones and PCs accounted for about one-fifth of China's exports to the U.S. in 2023, or about US$80 billion, according to U.S. Census Bureau.

There are few alternatives to China production. Smartphone and PC manufacturers would likely pass on much of the cost of higher tariffs to U.S. consumers and enterprises. Sharply higher prices for PCs and smartphones could stifle demand and slow replacement cycles.

This would result in steep declines in revenue and profit. Lower capacity utilization and fixed costs such as depreciation will hurt operating profits, even assuming firms pass on tariff costs.

China accounts for about 60% of global PC and smartphone production; about 80% of U.S. imports of such products come from China. However, this level will likely fall, with or without fresh tariffs. PC and smartphone manufacturers have been pushing suppliers to diversify their supply chain outside of China (see "The Shifting Of China Tech Supply Chains: The Hard Part Starts," published on RatingsDirect on Sept. 2, 2024). This trend will likely accelerate with the growing risk of tariffs.

Companies most affected by falling PC and smartphone demand are likely to be U.S. companies. Apple Inc. accounts for more than half of the smartphone unit sales in the U.S., and more in terms of value. Dell Inc. and HP Inc. account for about half of PC shipments in the U.S.

Lenovo Group Ltd. also has roughly a 15% share of U.S. PC volume sales and a little less than 10% of U.S. smartphone unit sales (under the Motorola brand). All these companies have capacity to shift production outside of China. Apple in particular has been encouraging its suppliers to move production to India.

What would increased tariffs mean for global consumer appliances firms? (Sandy Lim)

One likely consequence would be an immediate boost to the earnings of global consumer appliances firms, as U.S. customers frontload orders. They would do so in anticipation of rising prices.

The category comprises refrigerators, stoves, heaters, air conditioners, etc., including components. For example, the Chinese firm Midea Group Co. Ltd. makes half the compressors used in air conditioners, globally.

With this pulling forward of demand, we would expect to see a material cut in revenue when the higher tariffs come online. The extent of the decline in earnings would depend on the amount that was pulled forward, and the rate at which end users could absorb the increased inventory.

As consumer appliances firms get more clarity on how tariffs might be applied, they will adjust capacity. Certainly they will continue to diversify their manufacturing base outside of China. The effectiveness of this strategy would depend on how aggressively the incoming U.S. administration might prevent a rerouting of China exports through other countries, and how much scrutiny they would place on components that originate in China.

Readjusting production capacity outside of China would hit product margins, given the lower efficiency of overseas factories, less seamless supply chains, and likely higher labor costs.

How would increased tariffs on China-sourced consumer goods affect U.S. shoppers? (Sandy Lim)

Higher tariffs would raise the prices of China-made furniture, toys, clothing and shoes purchased in the U.S. Chinese firms shipped about US$100 billion of consumer goods to the U.S. market in 2023. Margins for U.S. product makers that source from China would drop, because they would be unlikely to fully pass on higher tariff costs to consumers.

The effects would vary by sector. For example, U.S. markets are more reliant on China exports of furniture and toys than apparel and footwear.

As customers source from other countries, they might need to bear an initial higher cost. Supply chains for certain subsectors are concentrated on Chinese producers. The entities that relied on China-centric supply chains would need to spend time and money to create new supply chains.

China-made products could also invite additional scrutiny at customs, resulting in higher working capital for consumer goods companies. U.S. customs could take longer to clear imports. Even with proper documentation, shipments may be delayed by weeks as U.S. customs check for the source of components of China export goods.

With higher excess factory capacity in China, and demand unlikely to materially improve in both the U.S. and China, deflationary pressure would grow for factory output prices. Volume growth might not be able to offset price declines. The consequence would be a falling market value for the products in question.

Chart 3

How would softer economic growth and weakened consumer confidence affect Chinese property sales? (Edward Chan)

A trade war would hit growth and sentiment, likely delaying the recovery in the property sector.

The stabilization of China's property market relies on the restoration of confidence of homebuyers and developers (see "China Property Watch: Charting A Path To Stabilization," Oct. 17, 2024). Even though U.S. tariffs would not directly target Chinese property, if China's economy softened, developers would be even less inclined to invest.

Land acquisitions and construction starts would likely drop from the current low level. Homebuyers that sense developers lacked confidence in the market may be discouraged from buying.

Confidence is already fragile. In the year to end-September, national new-home starts fell 22% in gross floor area, year on year. By our estimate, new land acquisitions by rated developers will shrink significantly in 2024.

In the event of a trade war and a much weakened economy, we assume many homebuyers would delay their purchases. China's property sales would likely fall below our base case, and the property market would take much longer to stabilize.

What would 60% U.S. tariffs mean for China's auto-parts firms? (Claire Yuan)

The effects would be manageable. The U.S. is China's largest export market for auto parts, accounting for about 15%-20% of the country's auto-components exports in recent years.

Nevertheless, exports to the U.S account for less than 5% of Chinese auto suppliers' total revenue, by our estimate.

That said, a 60% tariff would clearly hit the competitiveness of Chinese auto suppliers reliant on the U.S. market. With carmakers already facing muted volume growth and a less-favorable price environment in U.S., it would be difficult for Chinese parts firms to fully pass through the added tariff costs to customers. As such, auto suppliers with high export exposure to the U.S. would likely face lost sales or squeezed margins, or both.

How significant would higher tariffs be to China electric-battery makers? (Stephen Chan)

The impact would also be manageable. The U.S. is the top export destination for Chinese electric battery makers, accounting for 4%-8% of total Chinese battery sales and production in 2023 and 23% of the total value of Chinese battery exports in the first nine months of 2024. Most of the exports are likely for energy-storage solutions, such as storing and distributing electricity at a grid level.

We estimate the total cost of energy storage systems from China is 40%-50% lower than that in the U.S. It follows, then, that a 60% tariff would erode the cost advantage of Chinese battery suppliers. Given the highly competitive nature of this industry, Chinese suppliers with meaningful U.S. exposure would find it hard to pass through the additional cost to customers.

For electric vehicle (EV) batteries, we believe Chinese exports to the U.S. will continue to slow. Chinese producers are already in an unfavorable position under the U.S.' Inflation Reduction Act. Under the act's "foreign entity of concern" clause, EVs that contain batteries made by Chinese suppliers cannot easily get tax-incentive entitlements in the U.S. Their cost is already not as competitive as those of Korean players in the U.S., and would be significantly less competitive under heightened tariffs.

How vulnerable is China's commodities sector to sharply steeper tariffs?(Annie Ao)

Any new tariffs would most likely be aimed at downstream commodities sectors, including steel, aluminum and chemicals. We expect a limited direct hit on the steel and aluminum sectors given that China's exports to U.S. are small--at a low single-digit of China's annual output. The U.S. government already hiked the tariff on certain Chinese steel and aluminum products, to 25%, in 2024.

The chemical sector would be less affected as China is a net importer of most chemical products, especially high-end and advanced chemicals. Companies focusing on vitamins, polymeric MDI and agrochemical materials will be more vulnerable due to higher U.S. export exposure. That said, the indirect impact from tariffs on steel and chemicals stemming from diminished demand for key end-use products would be meaningful. Such end-use products include cars, machinery and home appliances.

Certainly, steep U.S. tariffs would further strain these two industries, which are already struggling due to soft domestic demand and excess supply.

Writing: Jasper Moiseiwitsch

Digital Design: Halie Mustow

Related Research

• After Trump's Win, What's Next For The U.S. Economy?, Nov. 7, 2024
• U.S. Elections 2024: How Could A Second Trump Term Affect U.S. Credit? , Nov. 7, 2024
• China Property Watch: Charting A Path To Stabilization, Oct. 17, 2024.
• The Shifting Of China Tech Supply Chains: The Hard Part Starts, Sept. 2, 2024