The Chinese economy isn't having a good time.

Despite a protracted deflationary slump, the CCP have refused to heed the advice of the IMF and others to spend their way out of the current crisis and boost domestic demand, for fear of re-inflating their various bubbles.

Unfortunately for Beijing, Trump's re-election threatens to make things quite a bit worse.

So in this video we're going to take a look at Trump's tariff-centric China policy, why it aggravates the CCP's pre-existing dilemma over stimulus, and what might happen next.

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When he first came onto the political scene in 2015, one of Trump's big talking points was China.

Trump was a vocal critic of the fact that the US ran and still runs a large bilateral trade deficit with China.

In other words, that the US imports more goods from China than China does from the US.

Since its entry into the global economic system in the 80s, China had always run a trade surplus with the US, but it really ballooned in the 2000s and was running at about $350 billion when Trump took office in 2016.

During the 2016 campaign, Trump promised to remedy this imbalance with tariffs.

And during a meeting with the New York Times editorial board in January 2016, he even suggested a flat 45% tariff on all Chinese imports into the US.

The thinking here was that by making Chinese imports more expensive for American consumers, tariffs would reduce the amount of Chinese stuff that Americans imported, and encourage them to buy American-made stuff instead, simultaneously reducing the bilateral trade deficit and also rejuvenating American manufacturing by creating new demand for American-made goods, albeit at some cost to the consumer, given that these goods would probably be more expensive than their Chinese equivalents.

Or else why would they need tariffs to be competitive?

In the end though, Trump's tariffs weren't as dramatic as he implied they would be during the campaign.

Trump began applying tariffs to an ever-expanding list of Chinese goods in July 2018, with the tariff rate ranging between 7.5% and 25%.

By the end of his presidency, Trump had imposed tariffs averaging about 20% on around $380 billion worth of Chinese goods, representing about 75% of the $540 billion or so worth of Chinese goods that the US imported from China in 2018.

However, because China responded with its own tariffs, and the US began importing different goods from China than the ones that Trump had imposed tariffs on, the overall trade deficit didn't change that much.

It actually rose from $375 billion in 2017 to $418 billion in 2018, before falling a bit to $340 billion in 2019.

Trump tried to close the trade deficit further by signing the so-called Phase 1 trade deal with China in January 2020, which actively required China to import a certain amount of goods from the US.

But this didn't work, because, well, China just didn't stick to it.

The overall trade deficit did fall to a low of $308 billion in 2020, but this drop was probably mostly to do with the pandemic, and the deficit increased again in the next few years, reaching $382 billion in 2022.

While it fell a bit in 2023, it's risen by nearly 5% so far this year, compared to the same period last year, and China's overall trade surplus is due to reach a record $953 billion this year.

For his part, Biden actually kept all of Trump's China tariffs, and even introduced new ones on a range of apparently strategic items earlier this year, including electric vehicles, solar equipment and batteries.

This shouldn't come as a total surprise, given Obama and Biden were actually pretty active critics of China's trade policies during their time in office.

Obama made an unprecedented 23 formal complaints to the WTO about China, and introduced anti-dumping tariffs on Chinese tyre imports way back in 2009.

Anyway, true to form, Trump has promised to take things to the next level.

He wants to expand on Biden's so-called strategic tariffs, including apparently a 200% tariff on Chinese electric vehicles, as well as a flat tariff on all Chinese goods.

The precise rate for this is currently unclear.

The Washington Post originally reported that it was going to be 60%, but Trump has since denied it twice, once in a Bloomberg interview where he said it would be 50%, and once on Fox News, where he confusingly said it would be more than 60%.

Assuming that China responds with tariffs of their own, this would probably be bad news for both economies, at least in the short term.

LSE research suggests that a flat 60% tariff on all Chinese imports could reduce both US and Chinese GDP by about 0.7%.

Anyway, while 0.7% might not sound that bad, it comes at a terrible time for the Chinese economy.

For context, China is currently struggling through a long-running economic crisis, characterised by weak domestic demand and low consumer confidence.

To make up for this weak domestic demand, the Chinese economy has had to rely more and more on foreign demand, i.e. exports, which is why their trade surplus is currently surging.

Trump's tariffs would therefore adversely affect the Chinese economy in two ways.

First, unless China can find new markets to replace the US, the tariffs would mean less demand for Chinese exports, which is currently the only thing keeping the Chinese economy ticking along.

And second, it would exacerbate the confidence problem, as Chinese businesses and households hunker down in preparation for any Trump-related turbulence, which would mean even weaker domestic demand and possibly deflation.

This leaves the CCP with a more acute version of the dilemma they were already facing.

Whether or not they should use fiscal stimulus, in other words, government spending, to restart the domestic economy.

So far, the answer has been no, because the CCP worry that stimulus would reflate China's dangerously large housing bubble.

But Trump's incoming tariffs, and the associated risk of a Japan-style deflationary crisis, makes this decision more difficult.

The CCP have, so far, tried to chart a middle ground.

On Friday, just two days after Trump's election, they announced a new stimulus package that basically lent local governments 10 trillion yuan, equivalent to about 1.4 trillion dollars, to restructure their hidden debts.

This was supposed to boost confidence without inflating any dangerous debt bubbles, but it was met with a lukewarm reaction from investors, and Hong Kong's Hang Seng Index fell by 1.5% on Monday.

So what happens next?

Well, there are two ways of reading this.

The first is that the CCP is still more worried about the risk of re-inflating its various bubbles than it is about Trump's tariffs, and will therefore avoid further stimulus.

The second, however, is that the CCP are essentially saving up their fiscal firepower for when Trump actually imposes his tariffs, so that they can immediately jolt the economy out of any Trump-induced slump.

So we'll just have to wait and see.

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