China’s way forward with unlikely trade allies

Extraordinary times call for extraordinary measures, and this includes the escalating trade war waged by the US against the rest of the world. While China bears the brunt of President Donald Trump’s sky-high tariffs, all other countries trading with the US are facing higher duties on their exports.

A major difference between Trump’s first and second terms in the White House is how he wants to penalize every trading partner for essentially out-exporting them, which is captured by the mega duties announced during Trump’s 2 April “Liberation Day” policy. The new tariffs are historic in magnitude, which merited an equally heavy-handed response. Apart from slapping a 125 per cent duty on US-made goods against Washington’s 145 per cent tariff – which has since been slashed to 30 per cent after two-day negotiations – China responded by accelerating negotiations with its East Asian neighbours, Japan and South Korea, to form a trilateral free trade deal.

This is historic: China, Japan, and South Korea are looking beyond deep-seated historical differences to work towards a trade alliance. Negotiations started in 2012 and have stalled for years until the three East Asian economies revived the discussions in March, with an agreement to speed up conversations towards a free trade agreement. This may be the impetus they need to finally see this agreement through, with Trump standing as their common “enemy”.

Although South Korea’s 25 per cent tariff and Japan’s 24 per cent duty are much lower than what the US initially set for China, all three will surely suffer from global supply chain disruptions and shrinking international trade. Now, their goal is to open alternative, barrier-free markets for their goods as they shift away from the US market. Global trade will never be the same.

Inroads in Asia

The US remains to be the largest single export destination for Chinese products, as seen in Graph 1. Hong Kong, an independent economy which China identifies as its special administrative region, is a far second.

The US has been China’s biggest single-country market over the past five years, although its share has declined from 17 per cent in 2020 to 15 per cent last year. On a per-region basis, however, East Asia (composed of Japan, South Korea, Hong Kong, and Taiwan) accounted for 19 per cent of total Chinese exports in 2024, against North America’s (US and Canada) 16 per cent share.

Should the China-Japan-Korea trade alliance result in easier cross-border trade among the three countries, this would be a formidable alternative market for Chinese manufacturers. Apart from avoiding the US’ mega tariffs, trade routes are also much closer which would further reduce the cost of the products. Further, the three nations jointly account for nearly 22 per cent of world GDP, just behind the US’ share, as shown in Graph 2. This demonstrates their collective might in the global stage, especially if they work and act as a team.

China, Japan, and South Korea do not have to start from scratch in talking economic cooperation – after all, the three countries already collaborate through the ASEAN Plus Three, which has been in place since 1997. This is likewise proof that the three countries can work together on trade and investments, and this means that reaching a trilateral agreement is not impossible.

Growth from within

Pivoting large shipments from the US to alternative markets will take some time, although work has begun with a direct shipping route between Guangzhou, the largest port in southern China, to Chancay in Peru. This is a clear signal of Beijing’s attempt to deepen trade ties with Latin America. In contrast, a 35 per cent drop is anticipated in cargo volumes from China to the US West Coast as American companies drastically reduce their imports due to the steep tariffs.

For China, a parallel response that would deliver quicker results would be to reinvigorate domestic demand after two years of weak consumer appetite. Trump’s double-the-price tariffs aside, we believe China now has a stronger domestic market to keep GDP growth robust as fiscal stimulus programs provided since late 2024 continue to support household consumption.

Among corporates, advancements in technology, notably in the spaces of electric vehicles (EV) and artificial intelligence, provide an edge for Chinese firms versus their global counterparts. BYD, a privately held Chinese company, beat its American rival Tesla in global EV sales revenue in 2024 and is also racing ahead in innovation. The EV manufacturer recently announced that its new models come with batteries that can run 400 kilometres from a five-minute charge, which is roughly as fast as getting a full tank refill at a gas station.

Within the Mainland, gadget and car trade-in programs have perked up consumer spending. This will help boost sales while the US market remains tentative. President Xi Jinping’s latest pronouncements about the central government being less restrictive to the private sector is also a plus, as this would unlock another internal source of growth. Chinese economic officials have also hinted willingness to extend additional stimulus measures where needed.

Taken together, these conditions reinforce our confidence that the Chinese economy is on its way to a sustained recovery after the 5 per cent growth recorded in 2024. There are more clouds in China’s horizon for 2025, but driving growth from within and cultivating new markets can help counter the ill effects of the tariff war.