China’s Economy Faces Deflation Spiral as Tariff Pressures Mount

With the U.S. imposing sky-high tariffs — now at 145% on Chinese goods — Beijing is scrambling to redirect exports originally destined for America into its domestic market. But this shift, meant as a lifeline for exporters, is threatening to worsen deflation in the world’s second-largest economy 🌏.

📦 Exporters Flood Domestic Market

To cushion the blow of plunging U.S. orders, local governments and tech giants like JD.com, Tencent, and Douyin (TikTok’s sister app) are pushing to sell discounted goods at home 🛒. JD.com has committed 200 billion yuan ($28 billion) to help exporters, offering discounts of up to 55% on products that were originally intended for American shelves.

Vice Commerce Minister Sheng Qiuping called China’s vast domestic market a “crucial buffer” against external shocks. But economists warn this strategy is sparking a fierce price war among Chinese companies, slashing profits and threatening jobs.

👉 Barclays’ Yingke Zhou explains that as discounted goods flood the market, company profits shrink, fueling layoffs and further weakening already fragile consumer confidence.

📊 Deflation Signals Flashing

China’s economic indicators are flashing warning lights 🚨:

• Consumer Price Index (CPI) slipped into negative territory in February and March.

• Producer Price Index (PPI) fell for the 29th straight month in March, down 2.5% year-over-year.

• Morgan Stanley predicts wholesale prices will fall another 2.8% in April.

Goldman Sachs forecasts 0% CPI growth for 2025, down from 0.2% in 2024, and a 1.6% PPI decline, adding to worries that China’s economy is sliding into a prolonged deflationary phase.

🔥 Trump’s Tariff Salvo

The latest hit came from U.S. President Donald Trump, who ratcheted tariffs to levels not seen in a century. In retaliation, Beijing slapped 125% tariffs on U.S. goods. These moves have choked bilateral trade and created chaos for businesses on both sides 🌪️.

China’s exporters — especially small and medium-sized enterprises — are feeling the pain. Many are operating at a loss just to keep factories running, while others are facing bankruptcy.

Shen Meng of Chanson & Co. bluntly put it: “Selling in China is just a way to clear inventory and ease short-term cash flow pressure — there’s little room for profits.”

💼 Labor Market Strains

The ripple effects are hitting the labor market hard. Goldman Sachs estimates that 16 million jobs, more than 2% of China’s labor force, are tied to U.S.-bound exports.

On top of that, Washington has eliminated the “de minimis” exemptions, which allowed Chinese platforms like Shein and Temu to ship low-value packages tariff-free. Without this loophole, many small exporters are now struggling to survive ⚙️.

Eurasia Group’s Wang Dan expects China’s urban unemployment rate to hit 5.7% this year, surpassing the government’s 5.5% target — a grim marker for an economy still trying to rebound from a real estate slump 🏚️.

🏛️ Beijing’s Cautious Approach

Despite mounting pressure, Beijing is holding back on large-scale stimulus. Nomura’s Ting Lu warns that China faces a “worse-than-expected demand shock” from the twin shocks of real estate woes and trade disruptions.

But rather than panic, policymakers are framing low prices as a positive — a way to help households save during this economic transition 💰.

Peking University’s Justin Yifu Lin remains cautiously optimistic, predicting that China has the fiscal and monetary tools to boost domestic purchasing power when necessary. And he points out a critical advantage: reshoring manufacturing to the U.S. will take years, meaning American consumers are likely to face higher prices well before China runs out of options.

🌍 What’s Next?

While a resolution to the U.S.-China trade standoff seems unlikely in the near term, both sides have incentives to dial down tensions 🤝.

For now, China’s economic future hinges on whether it can navigate the delicate balance between supporting exporters, preventing deflation, and keeping its domestic economy afloat.

As the tariff war escalates, the world is watching to see whether Beijing will step in with stronger stimulus — or if it will ride out the storm in hopes of a rebound 🌦️.

👉 Bottom Line: China’s effort to absorb export shocks at home risks pushing the country deeper into deflation. Without a breakthrough in U.S.-China trade talks or decisive government intervention, the road ahead could get bumpier.