April 9, 2025

A sharp escalation in trade tensions between China and the United States has prompted leading global investment banks to revise down their growth forecasts for the world’s second-largest economy. In just one week, both nations imposed significant new tariffs on each other’s goods, deepening concerns over global trade flows and undermining China’s near-term growth outlook.

A New Wave of Tariffs – And a Direct Hit to Growth

Citi was among the first institutions to respond to the renewed tensions, lowering its 2025 GDP forecast for China from 4.7% to 4.2%. Analysts at the firm noted that prospects for a new trade agreement between Washington and Beijing appear “extremely limited” following the latest developments.

Natixis followed suit, cutting its forecast to 4.2%, down from 4.7%. While Morgan Stanley and Goldman Sachs have maintained their projections at 4.5% for now, both warned of mounting downside risks tied to trade volatility.

U.S. President Donald Trump announced that an additional 50% tariff on Chinese goods would take effect on Wednesday, pushing the cumulative increase in U.S. import duties on Chinese products to 104% since the beginning of 2025. In retaliation, Beijing raised tariffs on all American imports by 34%, further straining bilateral trade relations and clouding export prospects.

China’s Exposure – Quantifying the Damage

Goldman Sachs estimates that an initial 50% tariff hike could shave 1.5 percentage points off China’s GDP, with a second wave reducing output by another 0.9 points. According to the bank, much of the economic impact from tariffs has already materialized, suggesting diminishing marginal effects from further escalation.

Chinese exports to the U.S. currently represent about 3% of national GDP, comprising approximately 2.35 percentage points in domestic value-added and 0.65 points from related manufacturing investment. Consequently, extended disruptions in bilateral trade channels are expected to weigh heavily on China’s domestic economic engine.

Mutual Dependency – But the Leverage Tilts Toward Washington

Although the U.S.-China conflict is often framed as a standoff between equals, the economic reality reveals a deeper dependency on the Chinese side. While China is a key trading partner for the U.S. in terms of imports, exports to the U.S. make up around 3% of China’s GDP—compared to less than 1% of U.S. GDP that relies on Chinese demand. Moreover, Chinese firms are more directly exposed to tariff shocks due to their export-oriented model and dependence on access to advanced markets.

In contrast, the U.S. economy is more diversified, with domestic consumption accounting for nearly 70% of GDP, giving Washington greater short-term bargaining power. Still, in the long run, a sustained trade war could also hurt American companies with significant exposure to China, particularly in tech, automotive, and financial services, while accelerating a broader decoupling that may be costly for both sides.

Beijing’s Next Move – Rate Cuts and Fiscal Stimulus?

Amid growing pressure, Beijing has signaled it may resort to monetary and fiscal measures to support domestic growth. Interest rate cuts, increased government spending, and infrastructure investment are all on the table, especially as the official 2025 growth target of “around 5%” becomes increasingly difficult to attain under current conditions.

According to Shehzad Qazi of China Beige Book, Beijing’s policy response options are becoming more limited, undermining its leverage in the trade standoff. Nevertheless, some economists argue that the marginal impact of new tariffs is diminishing, reducing the overall effectiveness of U.S. pressure.

Looking Ahead – Key Data Incoming

China is scheduled to release March trade figures next Monday, followed by Q1 GDP data on April 16. These indicators will be crucial in assessing the short-term economic toll of the latest trade escalation. Any material deviation from expectations could trigger swift market reactions and policy responses, both in Beijing and Washington.