As China faces high tariff risk, less US reliance may soften its blow

US President Donald Trump’s second term could lead to another trade war between US and China as tariff increases resume, which in turn risks slower growth and higher prices.

Nevertheless, the world’s second-biggest economy has put in place preemptive measures to cushion the impact of possible higher tariffs as Trump returns to the oval office.

These moves include boosting economic relations with European and Southeast Asian nations. China also prioritized self-sufficiency in critical technologies to reduce US reliance.

Quick look back

• During the US-China trade conflict that began in 2018 under Trump’s first term as US head of state, China’s economic growth was cut by half a point as exports and private investments fell.
• China retaliated by hiking tariffs on US imports, stoking the nation’s inflation by about 1.1 percentage points.

Since then, however, the share of the US in China’s total trade has been steadily declining, potentially softening the impact of any tariff increase.

Source: Bloomberg

Still, caution is needed. Further developments in trade policy may significantly affect China’s trade dynamics, given that the value of China’s exports to the US eclipse what it imports in return.

Strategy: underweight stance

As an export-oriented economy, China is likely to face economic growth challenges on geopolitical tensions and trade uncertainty.

Maintaining an underweight position in China is still warranted. Investors are concerned about the lackluster domestic economy and potential escalation of another US-China trade conflict.

Financial-market players wait for the Chinese government’s firm moves to boost domestic consumption, which may cushion the impact of higher tariffs and support the broader economy.

(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses.) 

SOPHIA THERESE “PIA” BONIFACIO is a Markets Research Analyst at Metrobank’s Trust Banking Group, covering local and offshore macroeconomic research. She obtained her Bachelor’s degree in Economics with a Specialization in Financial Economics, cum laude, from the Ateneo de Manila University and is a Certified UITF Sales Person (CUSP). Pia enjoys long road trips and is a self-proclaimed milk tea connoisseur. 

ANNA DOMINIQUE CUDIA, MBA, CSS, is the Head of Markets Research at Metrobank’s Trust Banking Group, spearheading the generation and presentation of financial markets insights to clients. She used to be with Metrobank’s Investor Relations, where she brought in international awards and took part in various multi-billion peso and dollar capital raising activities. She holds a Master of Business Administration (Finance) degree, with distinction, from the University of London, and industry certifications in finance. She is a naturally curious person and likes to travel here and abroad.