China’s Consumer Deflation Extends in April as Tariffs Take Toll

China’s consumer prices slipped further into deflation in April 2025, as punitive U.S. tariffs and retaliatory measures deepened economic headwinds. The consumer price index (CPI) fell to 0% year-on-year, extending its decline for the third consecutive month, while producer prices plunged to -2.5%, their sharpest drop in four years. This deflationary spiral, exacerbated by a self-reinforcing cycle of trade contraction, overcapacity, and weak demand, poses significant risks to both Chinese and global investors.

Tariff Escalation and Immediate Economic Shock

The April slump followed a dramatic escalation in U.S.-China trade tensions. On April 9, the U.S. imposed a 145% tariff (combining Section 301 and reciprocal duties) on all Chinese imports, while China retaliated with a 125% tariff on U.S. goods. These measures, the highest since the Smoot-Hawley era, immediately disrupted trade flows. Chinese exports to the U.S. collapsed by 21% year-on-year in April, while imports from the U.S. fell 14%,

highlighting the severity of the shock.

Yet overall Chinese exports grew 8.1% in April, buoyed by transshipment via third countries and last-minute pre-tariff shipments. However, this misleading strength masks a deeper problem: the domestic economy is buckling under deflationary pressures.

Domestic Deflationary Pressures Intensify

To offset lost U.S. demand, Chinese authorities urged exporters to redirect goods to domestic markets. E-commerce giants like JD.com, Tencent, and Douyin launched platforms offering discounts of up to 55%, sparking a ferocious price war. This has eroded corporate profits and worsened overcapacity. Analysts warn of a self-reinforcing cycle: falling prices depress demand further, while excess inventory pressures companies to cut prices again.

The result is a deflationary spiral. Household spending, already constrained by weak wage growth, has stalled. Morgan Stanley estimates that China’s PPI will fall to -2.8% in April, the lowest since 2015, as factories slash prices to clear stockpiles.

Labor Market Strain and Corporate Distress

The tariff war has also taken a toll on jobs. Goldman Sachs calculates that 16 million Chinese jobs—over 2% of the labor force—are tied to U.S.-bound production, with many at risk of layoffs. Urban unemployment is projected to hit 5.7% in 2025, surpassing the government’s 5.5% target. Small and medium-sized enterprises (SMEs), which rely on U.S. markets, face insolvency as cash flows collapse. The end of “de minimis” exemptions for low-value shipments has further squeezed margins.

Global Fallout: No Refuge in Protectionism

The U.S. economy is not immune. The tariffs raised its average effective tariff rate to 27%, the highest since 1903. While post-substitution effects may lower this to 18.5%, the drag on U.S. GDP is already clear: a projected 1.1 percentage point reduction in 2025 growth, plus a $170 billion annual drag on long-term GDP. Consumers feel the pinch too, with apparel prices spiking 64% in the short term. Meanwhile, Canada’s economy contracted 2.2%, and China’s growth slowed to 4.0%, well below its 5% target.

Policy Responses: Delayed and Inadequate

Beijing has been cautious in its response. While fiscal stimulus is held in reserve, officials frame deflation as a “buffer” for households—a stance that risks underestimating the danger. Analysts like Peking University’s Justin Yifu Lin argue that the U.S. faces long-term reshoring challenges, but short-term pain is already here: U.S. households now bear $3,800 annually in tariff-related costs.

Investment Implications

The deflationary environment poses risks for sectors exposed to overcapacity, such as manufacturing and retail. Investors should avoid companies reliant on U.S. exports or thin margins. Instead, consider sectors insulated from trade wars, such as domestic healthcare or technology with strong local demand.

Conclusion

China’s April 2025 data underscores a grim reality: the tariff war has triggered a self-reinforcing deflation cycle, job losses, and structural damage to both economies. With CPI at 0% and PPI plunging to -2.5%, the risks of prolonged stagnation are high. While Beijing’s delayed stimulus and U.S. intransigence leave little room for optimism, investors must brace for a prolonged period of weak growth and heightened volatility. As the data shows, there are no winners in this trade war—only losers.

The path forward hinges on a de-escalation of tariffs, but with political capital invested on both sides, that seems increasingly unlikely. For now, investors would be wise to prioritize defensive strategies and sectors with domestic resilience.