Tariffs and the Trade War: No Chinese Company Unscathed as Economic Pressures Mount

Don't Act on Chinese Stocks Without Reading This: Tariff Insights to Inform Your Investment Choices.

It’s still two months before Trump officially takes office in the White House, but the trade war 2.0 between the U.S. and China seems to have already begun. 

This article is written by Shernice, if you like my article please hit the like button or do a repost. 

On November 19, the U.S.-China Economic and Security Review Commission (USCC), a congressional advisory body, released its annual report and, for the first time, formally recommended that Congress revoke China’s Permanent Normal Trade Relations (PNTR) status—known in China as “most-favored-nation” status. 

Over the past two years, calls to revoke this status have been growing among U.S. lawmakers, including Senator Marco Rubio of Florida, who is set to become the next Secretary of State. Rubio, known for his outspoken anti-communist stance, has even been sanctioned by the Chinese government for his rhetoric.

With Trump’s victory in the U.S. presidential election and Rubio’s likely new role, the momentum for such measures is building. Trump has openly declared his intent to impose tariffs of over 60% on all Chinese imports, a move that essentially signals a willingness to revoke China's PNTR status. The PNTR represents the most favorable trade partnership, offering countries significantly lower tariffs. For example, under PNTR, the average tariff rate the U.S. applies to eligible countries is just 2.2%. Before the first trade war in 2018, Chinese goods faced an average tariff of only 2.3%. 

However, after the initial trade war launched by Trump and during Biden’s administration, the average tariff rate on Chinese imports surged to around 20%. Despite this, 52% of Chinese exports to the U.S. still benefit from these favorable tariffs, as only 48% of Chinese goods face elevated duties.

Currently, the push to revoke PNTR is gaining traction in the U.S. If Trump’s proposed tariffs on all Chinese goods are implemented, it would effectively nullify the benefits of PNTR. This mounting pressure suggests that China’s preferential trade status may indeed be coming to an end.

Recently, Wang Shouwen, China’s Vice Minister of Commerce and International Trade Representative, made some remarks addressing the escalating trade tensions with the U.S. On one hand, he assured domestic audiences that the Ministry of Commerce has already implemented measures to support Chinese businesses in dealing with these trade frictions. He emphasized that China has the capability to resolve these issues, noting that if the U.S. increases tariffs, the burden would ultimately fall on American consumers. On the other hand, Wang Shouwen signaled a willingness to engage in constructive dialogue with the U.S. to manage differences. Meanwhile, the People’s Bank of China stepped in to stabilize economic sentiment, pledging to keep the RMB exchange rate broadly stable amidst concerns of potential devaluation.

This brings us to the key question: 

Will the U.S. really revoke China’s most-favored-nation (MFN) status?

To analyze this, we must first understand the actual impact of U.S. tariffs on Chinese imports and their implications for both nations, particularly for consumers and Chinese exporters.

The Real Cost of Tariffs: An Example

Let’s take Walmart as a representative case to illustrate how tariffs work in practice. Many Chinese-manufactured goods, including toys, are sold at Walmart. However, the retail price often significantly exceeds the import cost. For example, a Chinese-made toy might retail for $10 at Walmart, but Walmart may import it for only $1. The remaining $9 is not pure profit—it covers costs like transportation, storage, insurance, logistics, and overhead. Walmart's profit margins are relatively thin, typically just a few percentage points.

Now, suppose the U.S. imposes a 60% tariff on Chinese imports, and Walmart absorbs this cost. The toy’s import price rises from $1 to $1.60. If Walmart passes this entire increase on to consumers, the retail price would rise from $10 to $10.60—just a 6% increase. In terms of overall consumer impact, this price hike would only have a marginal effect on U.S. inflation, contributing at most 0.1 to 0.4 percentage points to the CPI. Moreover, factors like declining fuel prices could offset these increases, meaning Walmart might not even fully pass on the added cost.

Why Tariffs Don’t Hurt U.S. Consumers Much

This example highlights why the Chinese claim that "tariffs are ultimately borne by U.S. consumers" isn’t entirely persuasive. For essential goods like clothing and footwear, many U.S. supply chains have already shifted to Southeast Asia, further reducing dependency on Chinese imports. In cases where price increases do occur, they are typically small enough to have minimal impact on American consumers’ purchasing power.

Implications for Revoking MFN Status

Given this context, the U.S. faces relatively low domestic risk in escalating tariffs or revoking China’s MFN status. The economic burden on American consumers is limited, while the political payoff—demonstrating a tough stance on China—could be significant. From this perspective, the pressure on China regarding its trade status seems increasingly credible, as the U.S. has little to lose in the short term.

China’s Ministry of Commerce may need to reconsider its narrative and strategies, as the “tariffs hurt U.S. consumers” argument appears insufficient to deter U.S. policymakers from taking tougher trade measures.

On the flip side, if the U.S. Treasury issued fewer bonds and the government curtailed its extravagant spending, the inflationary impact of tariffs could easily be offset. This makes the likelihood of China losing its most-favored-nation (MFN) status nearly inevitable. It doesn’t even need Trump’s direct intervention—Marco Rubio, poised to become Secretary of State, is likely eager to push this through as soon as possible.  

For China, however, the pressure of increased tariffs is significantly greater. Take the toy trade, for instance. Previously, Walmart could import a toy from China for $1. If tariffs raise that cost to $1.60, Walmart may opt to source from other countries like Mexico, where a similar toy might cost $1.50. Given Mexico’s proximity to the U.S., lower transportation costs would make it an even more attractive option. In such cases, Chinese exporters risk losing their U.S. customers. If they can’t find alternative markets or successfully shift sales domestically, factories could shut down, jobs would be lost, and domestic consumption—already under strain—could further weaken, intensifying competition among e-commerce platforms like Taobao and Pinduoduo for a shrinking customer base.

The Challenge of Pricing Power

The only scenario where China could confidently raise prices would be if it held a monopoly over certain goods—if Walmart couldn’t find toys anywhere else but China. Unfortunately for China, it doesn’t have that kind of market dominance. This lack of pricing power is a significant pain point, which is why China has been emphasizing technological innovation and industrial upgrades in recent years. The ultimate goal? To produce high-value goods that no one else can, thereby controlling pricing. President Xi dreams of a day when China can dictate prices on the global market with confidence. But for now, the reality is much harsher.

Two Paths for China's Trade

Faced with these challenges, China’s export strategy boils down to two options:  

1. Concede to the U.S Lower prices to retain a share of the U.S. market.  

2. Diversify Markets, Expand trade with other countries to reduce dependency on the U.S.

Currently, China seems to be pursuing both strategies. On one hand, Beijing has signaled a willingness to negotiate, with President Xi emphasizing the mutual benefits of cooperation over conflict. Officials have repeatedly attempted to reach out to the Trump administration to ease tensions. It might even be prudent for China to court Trump’s newly nominated Treasury Secretary, Scott Bessen. Known for his disdain for Democratic overspending, Bessen supports free trade and opposes blanket 60% tariffs. His views align closely with those of Elon Musk, favoring tariffs as negotiation tools rather than punitive measures. If engaged strategically, Bessen could potentially serve as a moderating force in U.S.-China trade relations.

However, Bessen’s advocacy for free trade comes with conditions. Should China’s actions—like intellectual property theft or flooding the market with cheap goods—undermine global free trade, he is likely to take a hardline stance. 

The Reality of the WTO

China must also address growing skepticism about its commitment to fair trade practices. Many argue that China has exploited the WTO framework, engaging in practices like technology theft and market flooding. If the WTO’s credibility erodes further, and other nations withdraw, China could find itself playing a game with no one left at the table. Thus, showing genuine commitment to reform and fair trade practices might be China’s best bet to avert an intensified trade war.

If the sincerity isn’t forthcoming, U.S.-China Trade War 2.0 will likely escalate. The alternative path for China lies in reducing its reliance on the U.S. market by expanding trade with other countries. Diversification is key to mitigating risks, but it’s a long-term strategy that requires structural adjustments to its economy. For now, the trade conflict remains a test of endurance and strategy on both sides.

Over the past few days, China announced visa-free entry for nine countries, including Japan, Australia, and New Zealand—some of the U.S.’s closest allies. This move is a clear attempt by China to drive a wedge between the U.S. and its allies, strengthening trade ties with these nations to offset potential losses from reduced access to the U.S. market.  

This strategy, however, has sparked discontent among nationalist factions within China. Granting Japan visa-free status—given its historical and political tensions with China—is especially controversial. It’s likely that China’s decision was driven more by the urgency of mitigating trade pressures than by a genuine diplomatic shift. The economic pressures of the ongoing trade conflict have forced Beijing into pragmatic but unpopular moves.

Can U.S. Allies Be Swayed?

The effectiveness of China’s charm offensive remains uncertain. Countries like Japan and the EU are wary of China’s past trade practices, including dumping cheap products into markets. Most nations would prefer Chinese investments that generate local jobs and economic growth, rather than merely serving as markets for Chinese exports. However, China’s fiscal constraints are becoming increasingly apparent.

For instance, China recently issued $2 billion in sovereign bonds in Saudi Arabia—a departure from its usual reliance on Hong Kong for such fundraising. While some see this as a geopolitical maneuver to challenge the petrodollar, the reality is simpler: China is borrowing to fill its fiscal gaps. The majority of the funds (68%) came from Asian investors, possibly including Chinese entities, while Middle Eastern investors contributed only 8%, signaling limited confidence from Saudi backers.

Why Borrow Abroad?

China’s decision to issue bonds in Saudi Arabia highlights its need to secure foreign capital to sustain its economy and strategic initiatives. However, the high borrowing costs—4.28% for a three-year term and 4.34% for a five-year term—reflect the rising financial risks. Unlike bonds issued in Hong Kong, where repayment can often be deferred, loans from foreign entities like Saudi Arabia carry stricter terms. If these funds don’t generate returns exceeding the interest rate, the borrowing could become a net loss.

A Shrinking Safety Net

China’s fiscal reserves, once robust, are now under strain. Competing globally for trade and investment opportunities requires significant spending. For example, the EU has skillfully leveraged China’s need for market access, enticing Beijing to open factories and create jobs in Europe in exchange for trade benefits. But setting up operations overseas burns through China’s foreign exchange reserves and introduces challenges like adapting to local labor laws and potential fines for noncompliance.

Additionally, the outward migration of Chinese manufacturing exacerbates domestic unemployment, fueling social unrest. This creates a vicious cycle: while China spends heavily to secure foreign markets, its domestic stability weakens, forcing the government to balance precariously between external pressures and internal challenges.

Currency and Economic Pressures

China’s central bank has promised to stabilize the yuan, but the current exchange rate of 7.3 against the dollar appears unsustainable. During the first U.S.-China trade war in 2018, similar assurances were made, yet the yuan depreciated significantly under pressure. With declining confidence in China’s economic trajectory, further devaluation seems inevitable.

An Uphill Battle

The trade war with the U.S. underscores China’s dwindling economic leverage. Competing globally requires a strong financial foundation, but China’s resources are stretched thin. Without meaningful reforms or a resolution with the U.S., China faces mounting challenges from both external economic pressures and internal socio-political instability.

In short, China’s strategy of courting U.S. allies, issuing foreign debt, and diversifying its markets highlights its attempts to adapt, but these moves come with significant risks. The road ahead for China in this trade war appears increasingly fraught.

$PDD Holdings Inc(PDD)$ 

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