Tariffs may have been Donald Trump’s weapon of choice, but China’s export engine is proving impervious to his trade war.
Despite the US president’s best efforts, China’s trade surplus is on track to end 2025 at US$1.2 trillion, topping last year’s nearly $1 trillion figure. The reason is that China has become adept at adapting, diversifying markets, rerouting supply chains and shifting its focus to sectors less exposed to US tariffs.
Shipments to Southeast Asia, for example, are topping their peak during the Covid-19 era. In August, exports to India reached an all-time high, while sales to Africa are on track to follow suit.
Ironically, the Trump 1.0 period catalyzed China Inc not just to sandbag the export sector but also to increase competitiveness in ways that the Trump 2.0 gang hadn’t noticed, notes Arthur Kroeber, head of research at Gavekal Dragonomics.
Chinese exporters now “have plenty of workarounds through transshipment and relocating late-stage production to lower-tariff countries,” he says.
These rules-of-origin-bending transshipments, of course, have painted a target on the backs of several export-geared Southeast Asian economies. Trump has pledged to punish countries engaging in the large-scale arbitrage of passing Chinese goods through lower-tariff countries to avoid US levies.
It remains an open question whether Trump will carry through on such threats. But China’s overcapacity is accelerating de-industrialization in parts of Southeast Asia. The heirs apparent to China’s low-cost manufacturing throne — including Vietnam, Indonesia and Thailand — may be seeing their “China+1” dreams dashed.
Along with China sharing – some say dumping – its overcapacity with the region, regional economies are suffering from political volatility, weak infrastructure and inconsistent policies. Vietnam, for one, is increasingly exposed to the same global headwinds battering China.
For all of Indonesia’s talk about electric vehicle factories and nickel exports, its industrial base remains fragile. Thailand’s political gridlock and aging demographics are holding back the so-called “Detroit of Asia.”
Leaders in Hanoi, Jakarta and Bangkok talk a great game of reimagining their economies for a post-industrial age. But rather than investing big in education, championing digitalization and easing up on civil liberties curbs to unleash entrepreneurial free spirits, most governments are doubling down on yesterday’s growth strategies.
All this puts Southeast Asia in a difficult position. How the region contains the potential damage to domestic industries as China’s exports boom without angering the globe’s biggest trading nation is anyone’s guess. Here, Mexico is something of an outlier among developing nations, as it threatens to impose a 50% tariff on China.
Most want to avoid a large-scale clash with China’s $18 trillion economy in addition to Trump’s America. This reluctance is offering Xi Jinping’s government some cushion even as Trump’s 30% tariff chills business activity and makes mainland consumers even less inclined to spend.
China, for its part, is trying to avoid provoking big trading partners into resorting to protectionism. Xi has been trying to prod the BRICS nations — Brazil, Russia, India, China, South Africa — to keep the global trading system operating. Trump is going the other way, cajoling NATO nations to slap tariffs of up to 100% on China over its support for Russia.
Part of the problem: China can hardly afford to let trade tensions intensify at a moment when its export boom isn’t enriching as many mainlanders as it should. Confusion over Xi’s “anti-involution” strategy to end aggressive price competition sent industrial firm profits down 1.7% in the first seven months of the year. This is exacerbating deflationary pressures.
It’s also adding to Asia’s challenges this year, on top of the clash between Team Trump and Team Xi. “We identify Japan and South Korea as the most likely to be entangled as the US and China look to gain influence through foreign policy,” says economist Thomas Rudgley at Oxford Economics.
“Key supply-chain hubs Vietnam, Singapore, Malaysia, Thailand and the Philippines will probably also be in the crossfire, as will India because of its growing regional importance,” he said.
Taiwan — a semiconductor supply-chain lynchpin — is often the focus of US-China altercations, Rudgley adds, with the US recently asking allies how they would respond to a war with China over the island.
“A major disruption in Taiwan would be a fast-acting, existential threat to high-tech manufacturers and firms dependent on these goods; existing supply chains could be severed in less than a year.”
Rudgley notes that “we updated our analysis of global exposure to Taiwan conducted amid peak tensions in 2024, and find vulnerabilities have since risen among the most-exposed nations, such as South Korea, China, Japan, and the US. This research extends beyond China-Taiwan tensions and highlights how sanctions — the likely policy response — could magnify the fallout across countries.”
Though China’s export engine has so far confounded the skeptics, it won’t necessarily continue to do so. Xi’s government continues to slow down trade-deal talks with Trump’s administration, which could anger the White House into imposing higher tariffs. Upping the odds that a clash of the titans in Washington and Beijing might lay waste to the global financial system.
Here, the US should be careful about what it wishes for. Neither nation is as ready for this economic brawl as their respective policymakers seem to project.
A Fitch Ratings downgrade reminded investors that China isn’t in a state-of-the-art financial position. Earlier this year, Fitch downgraded China’s sovereign rating to ‘A’ from ‘A+’ amid concerns about its shaky public finances.
“The downgrade reflects our expectations of a continued weakening of China’s public finances and a rapidly rising public debt trajectory during the country’s economic transition,” says Fitch analyst Jeremy Zook.
Zook adds that “in our view, sustained fiscal stimulus will be deployed to support growth, amid subdued domestic demand, rising tariffs and deflationary pressures. This support, along with a structural erosion in the revenue base, will likely keep fiscal deficits high.”
At the same time, Zook notes, “we expect the government debt/GDP to continue its sharp upward trend over the next few years, driven by these high deficits, ongoing crystallization of contingent liabilities and subdued nominal GDP growth.”
In other words, China has some fiscal space to reach its 5% economic growth target. But it’s not unlimited and deploying the stimulus “bazooka” yet again could come at a high cost in the long run.
The US, meanwhile, is carrying a $36 trillion-plus national debt into this fight as recession talk heats up. Even worse is the self-inflicted nature of the US reckoning to come, one punctuated by a $10 trillion stock loss so far. Hedge fund manager Bill Ackman, meanwhile, warns of a self-inflicted “economic nuclear winter” in Trump’s America.
“By placing massive and disproportionate tariffs on our friends and our enemies alike and thereby launching a global economic war against the whole world at once, we’re in the process of destroying confidence in our country as a trading partner,” says the Trump-supporting billionaire founder of Pershing Square.
Ackman adds that “business is a confidence game. The president is losing the confidence of business leaders around the globe. The consequences for our country and the millions of our citizens who have supported the president — in particular low-income consumers who are already under a huge amount of economic stress — are going to be severely negative. This is not what we voted for.”
Nobel economics prize laureate, Paul Krugman, observes that “Donald Trump burned it all down,” adding that “Trump isn’t really trying to accomplish economic goals. This should all be seen as a dominance display, intended to shock and awe people and make them grovel.”
Only China is not bending the knee, much to Trump’s surprise and chargrin. As far back as April, the People’s Daily, the Communist Party’s official newspaper, reported that Beijing is no longer “clinging to illusions” of striking a giant trade deal with the US.
Back then, China’s commerce ministry criticized the “blackmail nature of the US” trade war, vowing that Beijing will “fight till the end.” It called Trump’s threat to layer another 50% tariff on China “a mistake on top of a mistake.”
Hong Kong’s leader John Lee called Trump’s trade war “reckless” and representative of “ruthless behavior” that’s imperiling the city’s economy.
“The reckless imposition of tariffs affects many countries and regions around the world with huge tax rate increases and covering a wide range of goods, disrupting the world’s economic and trade order, bringing great risks and uncertainties to the world,” Lee says.
These provocations, he adds, have Hong Kong pivoting toward increasing trade with Southeast Asia and the Middle East.
All this has Xi ramping up moves to bolster domestic spending. The People’s Bank of China has been cautious about rate cuts this year, amid concerns about yuan weakness. The PBOC has latitude to ease amid weak pricing power.
Especially with China suffering from deflationary forces, and fending off “Japanification” talk abounds as China lowers its inflation target to 2% from 3% in 2024.
Still, rumors of the death of China’s export engine have been greatly exaggerated in ways Trump World didn’t expect.
Follow William Pesek on X at @WilliamPesek
