China and the Impact of “Liberation Day” Tariffs

Q2: How has China reacted?

A2: At each stage, China has retaliated with a combination of tariffs, additions to its export-control and unreliable entities lists, further restrictions of rare-earth or other critical minerals, investigations, and filing complaints at the World Trade Organization (WTO). The most important responses have been the country’s tariffs. In February, China immediately responded with tariffs on coal, liquefied natural gas (LNG), crude oil, agricultural machinery, and large-engine cars. In March, China responded with additional tariffs on a range of agricultural goods. On April 3, China called the tariffs “self-defeating bullying,” and said it reserved the right to take countermeasures. A day later, on Friday, April 4, China matched the initial reciprocal tariffs with a 34 percent across-the-board tariff on all U.S. goods, which is scheduled to take effect on April 10.

Further escalation is likely. The Trump administration has cautioned trading partners against retaliating, implying it would double its tariffs on those who do so. In China’s case, this would mean raising the tariff to 68 percent. If this occurs, China would likely immediately respond in kind with tariffs of an equal level, and could combine it with other steps as well.

Total U.S.-China bilateral trade in goods was $582.4 billion in 2024, down from $661.5 billion in 2018. Over that period, the U.S. share of Chinese exports dropped from 19.2 percent to 14.7 percent. Similarly, U.S. exports to China as a share of total American exports have fallen from 7.3 percent to 6.9 percent over the same period (see Figure 2). One should expect bilateral trade to further fall precipitously in both absolute and relative terms during 2025.

Q3: How will the reciprocal tariffs impact China’s economy?

A3:Estimates of the impact of future U.S. tariffs on the Chinese economy have varied widely. Analyses conducted in the country last year concluded that 60 percent tariffs imposed by the United States would knock less than 1 percent off of China’s GDP growth, as long as the United States acted alone. In December 2024, the Economist Intelligence Unit projected a 0.5–2.5 percentage point reduction in GDP growth from 2025 to 2027, depending on the size of the tariffs and the extent of China’s stimulus measures. Recent estimates, based on the actual U.S. tariffs imposed on China as of early April, are even more negative, predicting a 2.4 percent decline in GDP in 2025 alone.

There are several ways the effects of the tariffs could be magnified. For example, the tariffs affect several Asian countries where Chinese manufacturers have partially relocated production or that rely heavily on the imports of Chinese components. As U.S. trade with ASEAN countries is affected, for example, it will likely dampen business for Chinese firms with value chains in those regions whose products and components are destined for the United States. Second, the tariffs may trigger a recession or an economic slowdown in other regions of the world, reducing demand for Chinese goods beyond the United States. Third, other countries could impose tariffs themselves, against either a large number of countries or China in particular. Fourth, China’s retaliation could raise costs for producers and have a negative impact on business sentiment in China and further reduce foreign direct investment at a time when both need reassurance.

At the same time, the Chinese government is likely to take a series of measures in an attempt to maintain growth. In addition to the stimulus measures it has announced over the past few months, Beijing could further increase its efforts to expand domestic demand, reduce the cost of credit to producers, and seek to grow exports to third markets. Given China’s very large surplus of over $1 trillion in 2024 and restrictions already imposed on Chinese goods in response, such as on electric vehicles, expanding trade elsewhere will be challenging.

The long-run effect on China’s economy is even more difficult to determine. Much will turn on whether Beijing’s focus on technology-led growth pans out and whether it can effectively boost household consumption, which would reduce simmering tensions with commercial partners. Such a shift would require raising real wages, building a stronger social safety net, and stabilizing the housing market. At the same time, China’s global economic standing could rise if the United States’ economic strategy and foreign policy weaken its own economic foundations and international standing, creating greater opportunities for China.

Q4: What do new tariffs mean for China’s energy transition?

A4: Like other countries, China has prioritized economic growth over climate goals, especially during times of economic uncertainty. However, the new energy industry has some distinctive synergies with China’s typically infrastructure-led and supply-side stimulus approach. In practice, the government could further support the deployment of electric vehicles (which is already underway through its new trade-in programs), renewables, and other technology and infrastructure needed for the energy transition, such as its electrical grid. At the same time, China’s state planners could continue to help its manufacturers, who are already struggling due to intense domestic competition and increased trade barriers abroad. A slower economy could also force some Chinese manufacturers of clean energy technologies to consolidate, improving the long-term health of the sector. This would be a largely positive outcome for global trade and help stabilize sectors like solar that have been plagued by overcompetitive dynamics fueled by overcapacity. Should consolidation fail, China’s producers could experience even further exacerbation of competition if global demand declines.

A key question will be what impact a contraction in the economy will have on related government stimulus efforts related to energy demand and emissions. While reduced economic activity typically means fewer emissions, China’s slow economic recovery over the past couple of years has actually been associated with higher-than-expected energy and CO₂ intensity due to the post-Covid recovery, leading the country to miss its own emissions reductions targets. The continued expansion of coal power plants will continue to present a challenge for the country, and it is unclear how a trade war would affect the sector. One thing to watch is the outcome of reforms this year that will phase out feed-in tariffs and place renewable energy in more direct competition with coal-generated electricity. Analysts expect the change will increase short-term volatility even without accounting for a far more uncertain global macroeconomic outlook. All of these factors could negatively affect China’s level of ambition when it announces its updated nationally determined contribution as part of the Paris Agreement later this year.

Q5: Are there upcoming actions that will impact these tariffs?

A5: The next issue will be whether the United States responds to China’s tariffs with additional tariffs of its own and, if so, how China further retaliates. A decision on TikTok’s potential sale is due on Saturday, April 5, though this could be extended an additional 15 days (to April 20). President Trump has suggested he could lower tariffs in exchange for China approving the sale, but the odds of Beijing doing so in the current environment are low. In mid-May, the United States’ new “AI Diffusion” rule, which creates a complex export-control regime for high-end graphics processing unit (GPU) chips, comes into force, and its implementation will say something about the administration’s overall approach toward technology restrictions vis-à-vis China and others. Finally, a central issue is whether Presidents Trump and Xi will step up their direct communication. A first step would be to have a phone call; more telling would be whether the two sides would agree to have a face-to-face meeting in the coming months. Major decisions on how to manage the relationship—including de-escalation and authorization negotiations—can only be made by the two of them.

Scott Kennedy is senior adviser and Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Ilaria Mazzocco is senior fellow and deputy director of the Trustee Chair in Chinese Business and Economics at CSIS. Ryan Featherston is research associate with the Trustee Chair in Chinese Business and Economics at CSIS.