China's Economic Crossroads: Tariffs and the Path Forward

The economic landscape of China is at a critical juncture, with Goldman Sachs recently revising down its GDP growth forecasts for 2025 and 2026. The revised projections of 4% and 3.5% respectively, down from 4.5% and 4.0%, underscore the significant impact of escalating tariffs between the United States and China. This downward revision is not merely a statistical adjustment; it reflects a broader narrative of economic vulnerability and the need for strategic policy responses.

The tariff escalation between the world's two largest economies presents a formidable challenge. Goldman Sachs' analysis highlights that a 20 percentage-point increase in the effective tariff rate imposed by the incoming Trump administration on Chinese goods could weigh on China’s real GDP by 0.7 percentage points in 2025. This scenario is not hypothetical; it is a stark reminder of the interconnected nature of global trade and the potential for economic coercion to disrupt growth trajectories.



The sectors most affected by these tariffs are likely to be those heavily reliant on exports. Strong exports have been a bright spot in China's economy, contributing 70% of the expected 4.9% headline real GDP growth in 2024. However, with significantly higher US tariffs, the growth of total exports is expected to decelerate sharply. Chinese exporters may continue to gain market share in emerging-market countries, but the overall contribution to real GDP growth from exports is likely to drop materially in 2025. Goldman Sachs Research expects China’s total goods export volume to be flat next year relative to this year, a stark contrast to the 13% gain in 2024.

To mitigate the economic impact of tariffs, China has several policy options at its disposal. Historically, China has relied on infrastructure and property construction to support its economy. However, given the current property downturn, which is expected to weigh on China’s GDP growth by 2 percentage points in 2025, this approach may not be as effective as in the past. Instead, China's policymakers are likely to focus on cutting policy rates considerably and increasing the fiscal deficit. This policy easing is expected to provide a large dose of stimulus to blunt the impact of tariffs and stabilize growth.

In the long term, China's strategy will need to pivot towards export diversification and the adoption of new technologies, particularly artificial intelligence (AI). The emergence of new AI models in China could drive faster development and adoption of the technology, translating into lower labor costs and higher productivity as more tasks are automated. Goldman Sachs Research now estimates that generative AI will start raising potential growth in China by 2026 and provide a 0.2-0.3 percentage point boost to China’s GDP by 2030. This technological leap could be a game-changer, helping China to achieve a more self-reliant and technology-driven growth model.

However, the path forward is fraught with challenges. The property sector's downturn is likely to continue to be a significant drag on growth, with new home starts and government revenue from land sales plunging by 60-70% from their peak in 2020-21. The structural challenges in the property market suggest that there is no quick fix, and the downturn is expected to linger until 2030. Additionally, the labor market remains weak, with 15% of young people unemployed and more than 10 million students graduating from colleges annually. The implementation of new technologies will need to be managed carefully, particularly given the current weak state of China’s labor market and persistent deflationary pressures.

In conclusion, China stands at a crossroads. The downward revision of GDP growth forecasts by Goldman Sachs is a wake-up call, highlighting the need for strategic policy responses to mitigate the impact of tariffs. While policy easing and stimulus measures can provide short-term relief, the long-term solution lies in export diversification and the adoption of new technologies. The challenge for China's policymakers is to navigate these complexities while fostering a sustainable and self-reliant growth model. The world watches with bated breath as China charts its course through these turbulent economic waters.