Tensions between the United States and China have surged as President Donald Trump's surprise 145% tariff hike earlier this month catapulted Trade War 2.0 into full swing. In retaliation, China has imposed 125% tariffs on US exports, with both sides digging in for what analysts are now calling a battle of endurance.
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'President Trump shocked markets on 2 April with a stronger-than-anticipated "Liberation Day" tariff hike, which sparked a series of back-and-forth escalations and retaliations,' said Lynn Song, Chief Economist for Greater China at ING.
At these unprecedented tariff levels, bilateral trade is expected to shrink dramatically, particularly in sectors where substitution is feasible. 'We expect the majority of trade with viable substitution products will effectively be phased out, leaving only products with no viable alternative suppliers,' noted Song.
Despite concerns of a hard decoupling and stalled dialogue, both Washington and Beijing appear open to negotiations — albeit strictly on their terms. 'Whoever blinks first will likely come to the negotiating table in a weaker position,' said Song, adding that whether recent exemptions for smartphones, computers, and semiconductors from the sweeping tariffs amount to "blinking first" remains to be seen.
In the face of these external shocks, China is shifting focus toward bolstering domestic demand. During last month's National People's Congress, the Chinese government reaffirmed its commitment to achieving "around 5%" GDP growth for 2025, announcing a raft of supportive measures including an ambitious equipment renewal scheme and trade-in policy.
President Xi Jinping reinforced this domestic pivot, declaring the government is intent on "fully unleashing" domestic demand. Fiscal and monetary tools are expected to play a critical role. 'We think that the time has come and expect an interest rate cut and or a Reserve Requirement Ratio (RRR) reduction to be unveiled in the coming weeks,' said Song.
As policymakers signal resolve, the People's Bank of China (PBoC) is also expected to act in the near term to support vulnerable exporters and maintain financial market stability.
Trade-related headwinds are mounting. While China's economy showed resilience in Q1 2025 with exports growing 5.8% year-on-year, ING now expects a slowdown in the second quarter, revising its full-year GDP forecast down to 4.5%, with inflation also falling to 0.0% from an earlier forecast of 0.7%.
'Amid heightened uncertainties this year, trade-in policy beneficiaries – namely automobiles, home appliances, home renovation and decoration materials, and consumer electronics – will likely outperform,' said Song.
The escalating tariff regime presents significant challenges for both economies, but China's strategy now hinges on the rapid implementation of domestic stimulus measures. "Overall, the success or failure to achieve this year's growth objective will depend on the speed and effectiveness of China's policy response," concluded Song.
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