In early 2025, China’s economic recovery faced significant hurdles as imports unexpectedly declined and exports slowed down, amidst a renewed trade conflict with the United States. The latest trade figures reveal a concerning picture: imports plummeted by 8.4% year-on-year over January and February, contrary to economists’ expectations of a 1% increase. Meanwhile, exports grew by a mere 2.3%, far below the anticipated 5%. Despite these challenges, China maintained a substantial trade surplus of $170.52 billion.

The Renewed Trade Conflict

The trouble began with the resurgence of U.S.-China trade tensions. In January, President Donald Trump imposed an additional 10% tariff on Chinese goods, citing Beijing’s failure to curb fentanyl imports into the U.S. This move disrupted exporters’ efforts to expedite shipments before the tariffs took effect. The Lunar New Year, which spanned January 28 to February 4, further complicated production as workers took time off, leading to a slowdown in economic activity. China typically combines trade data for these two months to account for the holiday’s variable dates.

The situation escalated on March 4 when Trump doubled tariffs to 20%, prompting Beijing to retaliate with 10%-15% levies on U.S. agricultural exports and restrictions on 25 American firms. This escalation has significant implications for both economies and global trade dynamics.

Strategic Import Reductions

Analysts interpret the import slump as a strategic move by Beijing. Xu Tianchen of the Economist Intelligence Unit noted that the decline spans key commodities like grains, iron ore, and crude oil. This could be linked to China’s efforts to build strategic reserves ahead of tougher trade tensions with the U.S. under the second Trump administration. Additionally, heavy imports in 2024, particularly of iron ore, may have exceeded demand, necessitating a pullback. State-owned firms bore the brunt, with imports down 20.6%, while private firms experienced a modest 2.7% increase, suggesting a shift towards stockpiling.

Impact on Specific Commodities

The decline in imports is evident across several commodities:

• Crude Oil: Imports fell by 5%, partly due to stricter U.S. sanctions on ships carrying Russian and Iranian oil.
• Rare Earths: Imports plummeted by 24.1%, reflecting China’s strategic adjustments.
• Copper: Imports dropped by 7.2%, influenced by global market trends.
• Iron Ore: Imports declined by 8.4%, partly due to weather-related disruptions in Australia.

Export Challenges

Exports, previously a strong sector, slowed down as the rush to beat tariffs faded. Zhang Zhiwei of Pinpoint Asset Management highlighted weak domestic demand and a decline in processing trade as significant drags on imports. The export sector faces challenges from both internal and external factors, including the ongoing trade war and domestic economic uncertainties.

Future Outlook and Policy Responses

The bigger concern is that these trends may signal tougher times ahead. Zhang warned that the impact of higher U.S. tariffs will likely become more apparent in the coming months. With external support waning after driving growth in 2024, China’s 5% growth target for 2025 appears ambitious. Premier Li Qiang has acknowledged that domestic demand is “insufficient” and “weak,” emphasizing the need for robust policy interventions.

In response, Beijing is considering interest rate cuts and lower bank reserve requirements to boost liquidity. These measures aim to stimulate household spending and stabilize the property sector, which remains under pressure. Finding new export markets for China’s vast industrial base is critical to avoid deflationary pressures. The GDP deflator is forecast to be -0.1% for 2025, marking a third consecutive negative year—the longest such streak since the Great Leap Forward in the 1960s.

Conclusion

China’s economic situation has become increasingly precarious as it navigates the intensifying trade war with the U.S. Beijing must strike a delicate balance between strategic caution and domestic stimulus to keep economic growth on track. The world watches with anticipation as China’s policymakers face the daunting task of stabilizing the economy while addressing the challenges posed by external trade tensions. For now, the path forward remains uncertain, with much depending on how effectively China can adapt to these evolving circumstances.