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The Trump administration's levying of an additional 10% tariff on all Chinese imports—and Beijing's swift announcement of retaliatory tariffs—is a sign that the already tense relationship between the world's two biggest economies is unlikely to improve any time soon. It will also strike a blow to China's economy that we expect will lead to more fiscal and monetary stimulus this year.

What We're Watching

U.S. President Donald Trump's executive order implementing tariffs on China took effect on Feb. 4, and the Chinese government quickly responded with selected levies on American imports.

The additional 10% tariffs are the latest salvo in a trade war that took root during Mr. Trump's first term in 2018, when the president applied 25% tariffs on a wide range of Chinese exports, resulting in a series of tit-for-tat moves by the countries.

This time, China wasted no time in retaliating, responding with tariffs on U.S. coal, gas and other goods, restrictions on exports of some minerals, and an antitrust investigation into California-based Google. Beijing also vowed to bring a suit before the World Trade Organization, alleging that the Trump administration's action violates the body's rules.

What We Think And Why

Even with exports to the U.S. now representing just 14% of total Chinese exports, we think the tariff will have a meaningful effect on China's $20 trillion economy, given that we expect them to remain in place.

While China's recent stimulus measures—such as monetary easing and measures to support consumption and the property sector—should bolster economic expansion, our prevailing base case projects 4.1% GDP growth in 2025 and 3.8% in 2026. That's 0.2 percentage point (ppt) and 0.7 ppt lower than our forecast in September, reflecting the incorporation of an additional 10% U.S. tariff on China and their direct and indirect effects via lower investment and consumption.

S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses—specifically with regard to tariffs—and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).

The effects of the newly announced tariffs on China with regard to our previous forecast are minimal, since we already factored them into our baseline since November. But beyond the effect on GDP, we think the levies will amplify downward pressure on prices and potentially weaken the yuan (effects also already included in our November forecast). Against this backdrop, we expect the People's Bank of China to cut its policy rate by 40 basis points in 2025.

On a sector level, an escalating trade war can weigh on consumers that remain cautious despite retailer discounts and government subsidies, bringing downside risks to our already lackluster 4%-5% retail sales growth forecast for 2025. Homebuyer sentiment could also be affected, disrupting a market that is finally stabilizing after three years of downturns, in turn hitting building materials and other related sectors.

The resulting pressures on growth could weaken demand for oil and steel, and further challenge commodity chemical sectors, which are already facing structural supply gluts and a shaky recovery. Metals markets also face downside risks in this scenario, despite some demand for industrial metals in green-industry markets.

Lastly, tariffs pose a significant obstacle for China's fast-growing exports of autos and auto parts. The direct impact will be manageable for Chinese automakers, given their limited exposure to the U.S. (China's auto exports to the U.S. accounted for only about 0.4% of auto sales last year).

The indirect impact, however, could be more significant. As Chinese auto parts makers are integrated into global supply chains, they will be exposed if their invested locations are abruptly hit with fresh U.S. duties. For example, of the 33 Chinese auto suppliers registered in Mexico in 2023, 18 shipped about $1.1 billion of auto parts to the U.S. that year. A 25% tariff on Mexico would hit the sales and margins of these producers.

What Could Change

In our view, the Trump administration is likely to impose further tariffs on Chinese exports beyond the recent 10% levies. President Trump has threatened across-the-board levies on China as high as 60%. This extreme (albeit unlikely) scenario would strike a heavy blow to the Chinese economy and on an array of industries. It would also cause major economic disruption in the U.S.

China exported about $500 billion of goods to the U.S. in 2023, according to U.N. estimates—so the stakes are significant, and the effects could be quite severe.

In mid-November, before the release of our forecast, we estimated that China's exports of goods and services would tumble 10% by 2026, compared with our September baseline estimate; investment would fall 5.5% as industrial production weakened sharply; and, overall, the shock would drag down GDP by around 5% below our baseline forecast.

GDP growth would likely be 2.3 percentage points less this year and 2.8 points less in 2026, pulling next year's expansion significantly below 2%.

Imports would also fall, albeit much less than exports would. With exports to the U.S. far less profitable, Chinese manufacturers would likely push into other markets, which would intensify the downward pressure on prices and profit margins at home and the competitive pressures felt by firms in many overseas markets.

Moreover, the hit to exports and growth would likely lead to a major depreciation of the renminbi, triggering cascading effects across global financial markets and supply chains.

The severity and uncertainty of this or other scenarios may turn out to be the most important drag on global growth in 2025, as they cloud the outlooks of firms and markets alike, in China, the U.S., and elsewhere around the world.

Writers: Joe Maguire and Molly Mintz