Trade War 2.0: How Escalating Tensions Are Upending China's Growth Outlook

The U.S.-China trade war has reignited with a vengeance, and investors are scrambling to recalibrate their expectations for the world’s second-largest economy. In April 2025, global banks like UBS and Goldman Sachs slashed their 2025 GDP growth forecasts for China to as low as 3.4%, a stark contrast to Beijing’s 5% growth target. The catalyst? A “tariff shock” that has sent exports into a tailspin and introduced unprecedented uncertainty into China’s economic trajectory.

The Tariff Tsunami

The U.S. has escalated its punitive measures, pushing effective tariffs on Chinese goods to a staggering 145%, the highest since the peak of the 2018–2019 trade war. UBS economists estimate these tariffs could slice 2 percentage points off China’s GDP growth, with exports to the U.S. potentially collapsing by two-thirds in the coming quarters. The impact is already visible: China’s March exports, boosted temporarily by businesses rushing to beat the tariffs (“front-running”), surged by 14.8%. But the sugar rush is fading.

The fallout extends beyond the U.S. Total exports in dollar terms are projected to decline by 10% in 2025, as other trading partners adopt narrower but still impactful retaliatory measures. Meanwhile, Beijing’s countermeasures—such as its own tariffs on U.S. goods—have deepened the rift, creating a vicious cycle of protectionism.

Analysts Sound the Alarm

UBS, the most pessimistic among major banks, now sees China’s economy growing just 3% in 2026, signaling a prolonged slowdown. Goldman Sachs and Citigroup followed suit, trimming their 2025 forecasts to 4% and 4.2%, respectively. All cite the same culprits: tariff-driven export collapse and weakening global demand.

The banks’ warnings come as China’s Q1 GDP growth of 5.1%—while better than expected—was likely inflated by front-running. UBS economist Tao Wang cautions that the true impact of tariffs will hit harder in the second half of the year, when supply chains adjust and inventory builds subside.

Beijing’s Playbook: Stimulus and Hope

To offset the pain, China’s policymakers are preparing a fiscal stimulus package worth up to 2% of GDP, targeting domestic demand and vulnerable sectors like manufacturing and small businesses. The People’s Bank of China (PBOC) is also expected to ease monetary policy, with rate cuts of 30–40 basis points and reserve requirement ratio reductions.

Yet skepticism abounds. Even with these measures, UBS argues that the tariffs alone could derail growth, leaving Beijing’s 5% target out of reach. The bank also notes unusually high uncertainty, as both sides dig in for a protracted battle. A U.S.-China tariff truce remains possible, but negotiations face political headwinds in Washington and Beijing.

Global Contagion

The ripple effects are already spreading. China’s export slump is hurting commodity exporters like Australia and Southeast Asian manufacturing hubs. Meanwhile, multinational corporations reliant on Chinese supply chains—think Apple (AAPL) or Siemens (SIE)—face rising costs and disrupted operations.

Conclusion: Navigating the New Normal

The data paints a clear picture: China’s growth outlook has been downgraded not just for 2025, but for the foreseeable future. With tariffs eroding export competitiveness and domestic stimulus measures offering only partial relief, the 5% target is now a distant hope.

Investors should brace for volatility. Sectors like tech (e.g., Semiconductor Manufacturing International Corporation (SMIC)), which rely heavily on U.S. components, and exporters like Foxconn (HNHD) face heightened risks. Meanwhile, defensive plays in consumer staples or infrastructure (e.g., China Construction Bank (939.HK)) may offer shelter.

The path forward hinges on two variables: the pace of tariff negotiations and Beijing’s ability to stabilize growth through unconventional measures. Until then, the storm clouds over China’s economy will keep global markets on edge.