Just how disruptive are Trump’s tariffs to China's economic plan?

China is counting on its 1.4 billion consumers to help cushion the blow from Donald Trump’s tariffs. But that strategy is running into a wall of uncertainty, with millions of factory jobs at risk.

Beijing has made expanding consumption a key pillar of its policy agenda this year, rolling out a 30-point action plan that includes subsidies for home goods, financial aid for childcare and improved access to paid leave.

But on the ground, business owners, office workers and migrant laborers are tightening their belts, worried about job security and future income. Many say they’re holding off on non-essential purchases and saving more for what they fear could be harder times ahead.

“I won’t be willing to spend if the US continues to impose tariffs,” said Annie Chan, a saleswoman at a porcelain company in Guangdong, speaking from her booth at last month’s Canton Fair. “I’d rather save money in case I need it when things get worse.”

The hesitation reflects a deeper problem for Chinese policymakers. Unless they can shore up confidence in jobs and wages, the consumer may not be able to carry the weight of China’s economic shift away from exports, making it harder for Beijing to hit its growth target of around 5% this year without more aggressive support.

Trump has imposed 145% tariffs on Chinese exports and Beijing has responded with its own 125% duties on US goods. Tariffs at those levels threaten to severely disrupt trade between the world’s two biggest economies. The fallout is already starting to show, with China’s factory activity slipping into its sharpest contraction since December 2023 last month.

With the outlook growing more uncertain, China’s central bank on Wednesday announced a slew of support measures, including rate cuts, long-term cash injections, and help for exporters and small businesses. The move follows Beijing’s pledge that it has “ample” room to ease policy, likely boosting its hand ahead of trade talks later this week led by Vice Premier He Lifeng, Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer.

Gordon Gao, who runs a bamboo crafts business in Anhui province, said US orders — once a third of his revenue — have dried up completely since the tariffs kicked in. To cope, he stopped replacing departing staff and trimmed employee bonuses. “I may have to keep shrinking and cut more jobs,” he said.

Economists warn that the tariff shock could ripple widely. Nomura Holdings Inc. estimates that if exports to the US are halved, as many as 15.8 million jobs could be at risk. Goldman Sachs Group Inc. puts the number of vulnerable positions at 16 million, especially in sectors producing communication equipment, apparel and chemicals. The loss of “de minimis” tariff exemptions is also expected to weigh on retail and logistics jobs. 

While official data shows a slight dip in urban unemployment, many workers say conditions feel far worse.

Li Yifeng, 29, a production planner at a Shenzhen-based medical equipment firm, said he’s worried about losing his job less than a year after joining the company, as new orders slow. His family — including his wife who’s recently laid off from her kindergarten job, and elderly parents who rely on modest pensions — depends on his monthly wage of 7,500 yuan ($1,031).

“I’d make very careful calculations of every penny we spend,” said the father of a one-year-old boy. The household now spends less than 3,000 yuan a month on basic needs like groceries, baby formula and electricity, and saves the rest.

About a dozen consumers surveyed by Bloomberg last month identified stable income as their top consideration when making spending decisions, followed by shopping and childcare subsidies, and reliable access to paid annual leave.

Policymakers acknowledge the growing pressure on jobs. At a key meeting last month, the Communist Party’s Politburo listed stabilizing employment as a priority. Authorities pledged to expand hiring in tech, infrastructure and services, and are rolling out tax breaks, subsidies and training to help firms keep workers and support vulnerable groups like new graduates and migrants.

Maintaining employment is crucial to President Xi Jinping’s broader push to shift China’s growth model away from one driven by investment and exports and toward domestic consumption. But that transformation is proving difficult. The economy is still grappling with a prolonged property slump, weak consumer and business confidence, and persistent deflation.

In the latest sign of fragile consumer sentiment, retail and catering sales during the Labor Day holiday grew more slowly than last year, while box office revenue more than halved. Although more people traveled during the break, average spending per tourist remained 10% below the same period in 2019, before the pandemic.

A move away from supply-side policies would mark a major change in how China’s economy works. Consumption makes up about 40% of gross domestic product, compared with 50% to 70% in more developed economies. Investment, much of it in manufacturing, makes up another 40% — roughly double the US share and unusually high by global standards.

Analysts say short-term measures won’t be enough to turn things around. To unlock consumer spending, people need to feel secure about their long-term income, said Lu Feng, an emeritus professor of economics at Peking University’s National School of Development, one of the country’s top state think tanks.

“Given the insufficient consumer confidence, household permanent income has to increase to reduce people’s desire to save,” Lu said. He pointed to regular, substantial increases in pension payouts for farmers and unemployed urban seniors as examples of changes that could support consumer confidence.

Lu believes that the trade shock could be the jolt needed for China to push through long-overdue reforms in how it distributes income. The public sector controls funding worth an estimated 45% of GDP — most of which still flows into investment-heavy, supply-side initiatives. Redirecting even 10% of that toward households, pensions and public goods could help build a stronger safety net and more balanced economy, he said.

Still, others remain doubtful that Beijing will embrace such sweeping changes anytime soon. Logan Wright, director of China markets research at Rhodium Group, said the real test of China’s commitment to a consumption-driven model lies in its willingness to overhaul its tax system. 

Trump’s tariffs, he added, could make reform harder by cutting trade revenues and straining government finances. 

“China collects tax on the investment-led growth model. They do not collect tax based on domestic consumption, services activity or individual income tax,” Wright said. Until that changes, a real pivot to consumption-led growth is unlikely, he added.

Copyright Bloomberg News