Trump Strikes Deal With Ally Japan Setting Tariff Rate at 15%
President Donald Trump reached a trade deal with Japan that will impose 15% tariffs on imports including automobiles from the key American ally, while creating a $550 billion fund to make investments in the US. (…)
Under the deal, automobiles and parts would be subjected to the same 15% rate as Japan’s other exports (…)
In return, Japan will accept cars and trucks built to US motor vehicle safety standards, without subjecting them to additional requirements — a potentially major step to selling more American-built vehicles in the country. The auto sector tariff had been one of the main sticking points in the negotiations. (…)
A centerpiece of the pact with Japan is the $550 billion investment pledge. A senior US administration official, speaking on condition of anonymity to outline the agreement, said the pledge was akin to a sovereign wealth fund under which Trump himself could steer investments inside the US.
Final terms of the agreement still need to be enshrined in a formal proclamation. Legal particulars and other details surrounding the pledge are still being hammered out, according to the official.
The investment timeline is not certain, and it’s not clear whether Trump would be able to allocate the full sum during his term. (…)
The source of the Japanese funding was also not immediately available. Ishiba said the investment sum would reach as much as $550 billion and would partly come in the form of loan guarantees. (…)
Japan agreed to provide $550 billion to invest in projects in America through vehicles returning 90% of the profits to the US. (…)
The official pointed to one hypothetical scenario of how the investments might work. The president could, for instance, select a semiconductor manufacturing project that could be built with Japanese funds, leased to operating companies and the resulting leasing profit divided 90-10 between the US and Japan.
Japan has also agreed to buy 100 Boeing Co. aircraft, boost rice purchases by 75% and buy $8 billion in agricultural and other products while hiking defense spending with American firms to $17 billion annually, from $14 billion, the senior official said.
Japan will also participate in an LNG pipeline project in Alaska, the official said, an apparent reference to a long-stalled $44 billion venture designed to export the state’s gas around the globe. Trump told lawmakers at the White House Tuesday evening that Japan is “forming a joint venture” on a proposed Alaskan LNG project. “They’re all set to make that deal now,” Trump said.
Akazawa didn’t mention those details when he outlined the deal in Washington. He said defense spending wasn’t part of the deal, an indication that some of the specifics may still be under discussion or getting characterized in different ways.
Trump also pledged to give Japan a safety clause on forthcoming sectoral tariffs, including levies expected on semiconductors and pharmaceuticals — effectively agreeing to not treat the country worse than any other nation when it comes to those goods, the official said.
In effect, that means Japan will be guaranteed whatever the lowest global rate is on those tariffs. (…)
So, Japan would guarantee loans up to $550B and get 10% of the returns on the loans for its guarantees.
ING:
Japanese Prime Minister Ishiba offered more details about the deal. He confirmed that Japan will face 15% tariffs, including on autos, and won’t be disadvantaged from any tariffs on chips. However, the 50% tariff on steel and aluminum will remain for the time being. Ishiba denied that Japan agreed to lowering import tariffs, which he claimed weren’t included in the agreement. The agreed-upon $550 billion US investment will be backed by loans from government-related organisations.
Although the specifics remain unclear, both parties called the pact deal a success. Trump appears to view it as a massive deal, while Ishiba characterised it in less grandiose terms.
Ishiba pointed out that among countries with a trade surplus with the United States, Japan negotiated the lowest tariff rate. Furthermore, for automobile exports, Japan secured a 15% tariff without any volume restrictions, in contrast to the UK’s arrangement. Regarding the politically sensitive matter of agricultural products, Ishiba stated that, while Japan will increase US rice imports within the existing quota, it won’t compromise the domestic agricultural market.
It’s expected that Japan will increase direct investment in the US, such as LNG projects in Alaska, and boost imports of US goods, including agricultural products. But, the implementation of a 15% tax on cars without a limit is a surprise. Ongoing uncertainty regarding Japanese politics — including reports Ishiba will stepping down soon — and the exclusion of defence spending from the agreement may introduce complexities to the negotiation process.
We think that the US aims to finalise the deal before August and encourage other trading partners to participate in negotiations. Including defence spending in the discussions could potentially extend the timeline for reaching an agreement. The US-Japan deal will put more pressure on other major Asia exporters to secure better deal. We’ve already seen trade deals with the Philippines and Indonesia. Before 1 August, there should be more deal struck with Asian exporters. (…)
Meanwhile, the deputy Bank of Japan governor, Shinichi Uchida, indicated that the BoJ isn’t in a hurry to resume raising interest rates. He reaffirmed the BoJ’s stance that if the economic outlook is realized, the BoJ will continue to adjust the policy rate accordingly. He noted downside risks to the economy and prices, but also that upward wage growth is likely to continue given businesses’ changing price-setting behaviour.
We believe that the BoJ will need more time to understand the details of the trade deal and how it affects the economy. It’s a close call, but an October rate hike remains likely in our view as US trade uncertainty eases and inflationary pressures grow. But it’s possible the BoJ to push back its rate hike towards the end of the year.
A dovish BoJ and the large investments in the US will probably weigh on the JPY. We still believe that once the Fed begins to cut its rates and the BoJ hikes, conditions will turn to favourable for the USDJPY. In the short term, though, JPY should experience depreciation pressures.
GM vs TARIFFS
By Wolf Richter for WOLF STREET.
GM, which reported earnings today, imports vehicles from Mexico, South Korea, China, and Canada, and those that it produces in the US have many imported components. So GM is more exposed to tariffs than most other major automakers.
The top foreign brands all have huge factories in the US. Most Honda/Acura models in the US are right behind Tesla models in the lineup of vehicles with the most US content – most of them of 65% and higher. These automakers are least impacted by tariffs. There are also models from Volkswagen, Kia, Jeep, and Toyota in that top group.
The US-assembled Chevy Colorado is further down, and that’s the top GM entry. So GM has to compete with automakers that are getting barely dented by the tariffs.
Today, in its quarterly earnings report and conference call, it shed some additional light on the tariff situation.
GM ate $1.1 billion in tariff-related costs in Q2, and CFO Paul Jacobson added in the conference call that Q3 “net tariff costs” will likely be higher.
The company stuck to its projection, announced on May 1, that for the whole year, net tariff costs would total $4-5 billion, of which about $2 billion is related to imports from South Korea. Or it might be a little less if tariff rates are reduced, CEO Mary Barra said.
“Over time, we remain confident that our total tariff expense will come down as bilateral trade deals emerge, and our sourcing and production adjustments are implemented,” Jacobson said.
GM’s tariff “mitigation efforts” are largely focused on upgrading existing US factories to bring more production of vehicles, batteries, and components to the US.
Adjusted automotive free cash flow plunged by nearly in half, by $2.5 billion year-over-year, to $2.8 billion, “primarily driven by tariff payments as well as headwinds from working capital and lower dealer inventory levels,” Jacobson explained during the conference call (transcript via Seeking Alpha).
For GM North America (GMNA), earnings before interest and taxes (EBIT) plunged by 45% year-over-year in Q2, or by $2.0 billion, to $2.41 billion. And compared to Q2 2023, North America EBIT plunged by 24%.
Tariff a tax on gross profits: GMNA’s EBIT margin was 6.1%, but “excluding the impact of tariffs, our margin would have been approximately 9%,” CFO Paul Jacobson explained during the conference call. (…)
CEO Barra outlined one of the projects for bringing production to already existing plants in the US as part of the tariff mitigation efforts:
“For example, the $4 billion of new investment in our U.S. assembly plants will add 300,000 units of U.S. capacity for high-margin light-duty pickups, full-size SUVs, and crossovers to help us greatly reduce our tariff exposure, satisfy unmet customer demand, and capture upside opportunities as we launch new models.
“The capacity begins coming online in just 18 months after which we project building more than 2 million vehicles in the U.S. each year as we scale.” (…)
The company is “still tracking to offset at least 30% of the $4-5 billion full year 2025 tariff impact through strategic actions such as manufacturing adjustments, targeted cost initiatives, and consistent pricing,” he said.
“As far as the other aspects of the tariffs, we talked about the $4 billion, which will bring us, when all that is implemented, to producing over 2 million vehicles here in the U.S. That will take care of a large part of the other remaining tariffs that are out there,” he said.
For refence, GM sold 2.7 million vehicles in the US in 2024:
“We’re still working through supply chain and other indirect tariffs, but we’re not speculating on what it will be. But I expect that it is likely lower than the current run rate of what you would see just as things shake out. Remember, we’re only 90 days into this,” he said. (…)
On the news that GM and suppliers are eating the tariffs, rather than consumers, and that GM is investing in the US to cut the costs of those tariffs – all good news for the US economy and for the precarious US fiscal situation, but not for shareholders – GM’s shares tanked 8.1% to close at $48.89.
Goldman Sachs Sees Trump’s Baseline Tariff Rate Rising to 15%
Economists at Goldman Sachs Group Inc. expect the US baseline “reciprocal” tariff rate will rise from 10% to 15%, with a 50% levy on copper and critical minerals — an outcome that threatens to fuel inflation and weigh on economic growth.
The investment bank also revised forecasts for US inflation and gross domestic product growth to reflect the new tariff assumption and to factor in “early lessons” about the impact of the import levies, Chief US Economist David Mericle wrote in a weekly update.
“The main lesson about tariffs so far is that passthrough to consumer prices is tracking somewhat lower than in 2019,” Mericle wrote. “While it is still very early to estimate passthrough, surveys that ask businesses how much they intend to raise prices eventually also indicate lower passthrough than last time.”
As a result, Goldman now forecasts core inflation of 3.3% in 2025 from a year ago, compared to a previous estimate of 3.4%. The rate will slow to 2.7% next year and then 2.4% in 2027 — both higher than previous estimates of 2.6% and 2.0%. Cumulatively, tariffs are seen boosting core prices by 1.7% over 2-3 years, Mericle said.
Tariffs will weigh on GDP growth by 1 percentage point this year, 0.4 point in 2026 and 0.3 point in 2027, he added. As a result, Goldman now forecasts 1% GDP growth in 2025.
Goldman expects sectoral tariffs on heavy trucks and aircraft in 2026 as well as a delayed increase in tariffs on pharmaceuticals after the 2026 midterm elections.
On a weighted-average basis, the US effective tariff rate is now assumed to rise by 16 percentage points this year, Mericle said.
“This implies that the tariff risks to inflation are tilted slightly to the upside and the risks to growth are tilted slightly to the downside,” he wrote in the note to clients.
U.S. Mid-Atlantic Factory Activity Contracts at Fastest Rate This Year The Fifth District Survey of Manufacturing Activity’s index for July sank sharply to minus 20 from minus 8 in June
The Fifth District Survey of Manufacturing Activity’s index for July sank sharply to minus 20 from minus 8 in June, the Federal Reserve Bank of Richmond said Tuesday. A consensus of economists polled by The Wall Street Journal expected it instead to inch up to minus 6.5. (…)
All three component indexes for the survey—shipments, new orders and employment—declined compared with June, the Richmond Fed said. The index for new orders faced the most pronounced downturn.
However, future indexes for shipments and new orders ticked higher, though for future employment it decreased.
Average growth rates of prices paid and received also fell a little in July, pointing to lighter inflationary pressures this month.
Services are also weak with employment at a standstill:
Goldman Sachs’ Jan Hatzius agrees with my reading of the economy:
One reason why President Trump might raise tariffs further is that the costs of the trade war have been smaller than anticipated so far. At least as far as inflation is concerned, however, we think this mostly reflects lags related to large-scale inventory building before the tariffs hit.
For the earliest Trump tariffs, these lags have now run their course. Our estimates for June imply that 60% of the tariffs implemented in February have passed through, raising the core PCE price index by a cumulative 0.2%. With an estimated 1.2% price level increase yet to come, we expect the year-on-year core PCE inflation rate to rise back above 3% in H2, even assuming continued benign trends in rents, healthcare, and other services. We still think this is a one-time price level shift akin to a VAT hike.
Even a one-time price increase will eat into real income, at a time when consumer spending trends already look shaky. Although nominal core retail sales rebounded in June, we estimate that real personal consumption has now stagnated on net for six months, which rarely happens outside of recession.
Housing activity has also slowed sharply, with overall construction spending falling faster over the past year than at any time since the post-2008 housing bust. The weakness in consumption and housing has pushed down our tracking estimate for H1 real GDP growth to 1.1%, about a percentage point below potential. We expect a similar pace in H2, as the growing real income drag from tariff-related price increases offsets the boost from easier financial conditions.
The pace of hiring is likewise slowing. Private payrolls grew only 74k in June according to the Labor Department and contracted outright according to ADP. On a similar note, the payroll diffusion index has fallen to levels indicating that there are now just as many industries cutting as adding jobs.
So far, the consequences of slowing employment growth have been limited for most workers, as layoffs remain muted and the drop in net immigration has kept the unemployment rate at 4.1%. But if GDP growth remains sluggish, the labor market might soon hit “stall speed”—a pace of job creation weak enough to trigger a self-reinforcing rise in unemployment. Our 12-month recession risk estimate remains at 30%, double the unconditional historical average.
The slowdown has strengthened the case for earlier monetary policy easing, as noted by Fed Governor Waller in a speech last week. Both Waller and Vice Chair for Supervision Bowman are likely to dissent in favor of lower rates at the July 29-30 FOMC meeting, but other committee members will want to wait for confirmation that the tariff impact really is a one-time price level shock and/or evidence of more labor market softening.
Starting in September, however, we expect three consecutive 25bp cuts that take the funds rate down to 3½-3¾% at yearend 2025, followed by two more 25bp cuts in the first half of 2026. Our forecast remains modestly below market pricing. (…)
Market participants seem to agree that the risk to Fed independence is rising, as 5-year 5-year forward inflation swaps have recently decoupled higher from their prior close relationship with the 2-year note yield. A further increase could make Fed officials more reluctant to cut. (…)
The Impact of Immigration Restrictions and Deportations
If 3,000 people are deported every day, the labor supply will decline by about 1 million in total in 2025.
Combined with additional immigration restrictions, job growth is slowing down.
If legal immigration continues at current levels and illegal immigration declines to zero, the new level of monthly nonfarm payrolls will be 72,000.
Deportations and immigration restrictions are likely to increase wage growth in agriculture, construction, and leisure & hospitality.
Deportations and immigration restrictions lower demand for housing.
The bottom line is that immigration policy has implications for labor supply, nonfarm payrolls, wages, and housing demand. To better understand these effects, we have compiled a chart book, which is available here.
Meanwhile, job openings keep declining (Indeed Job Postings through July 17)
- “US net immigration decreased slightly from an annualized pace of 0.6mn in April to 0.5mn in June. This aligns with our forecast that immigration will stabilize at around 0.5mn annually, a rate moderately below the pre-pandemic trend of 1.0mn per year. (…) Looking ahead, we expect the gradual slowdown in immigration to bring the breakeven rate—the rate of payroll job growth needed to keep the unemployment rate stable—down to 70k per month by the end of 2025 from our 90k estimate of the current pace.” (GS)
How is China being impacted by tariffs so far? (ING)
(…) It remains too early to fully understand the longer-term implications, especially with another round of new tariff developments expected in August. But with a few months of post-tariff data now in the books, we can begin to assess how China has actually been impacted by tariffs so far. (…)
Despite tariff-driven headwinds through the first half of the year, China’s exports have held up well. They grew at 5.9% year-over-year, year to date, at the same pace we saw in 2024. China’s trade surplus reached $586 bn in 1H25, a new record high for any semi-annual period. Net exports contributed 1.7pp to GDP growth in the first half of the year, accelerating from the 1.5pp contribution seen in 2024.
As a result, we’ve seen that manufacturing activity continues to grow at a respectable pace. Industrial production grew by 6.4% YoY ytd, with manufacturing advancing 7.0% YoY in the first half of the year.
The main reason China’s growth beat forecasts in 1H25: surprisingly resilient external demand supporting industrial activity, which is also why China is on track to reach its “around 5%” growth target this year despite tariffs. (…)
In the first half of the year, exports to the US were down -10.7% YoY, or $25.9bn. However, China’s retaliation against the US resulted in a -9.2% YoY, or $7.5bn, slump in imports over the same period. As such, China’s net exports to the US of $141.7bn in 1H25 have fallen $18.4bn compared with 1H24, denting GDP by approximately 0.2%.
As a proportion of China’s total exports, the US has fallen from 14.6% in 2024 to 11.9% in 1H25. This is quite a sharp drop. Yet the trend itself has been in place since the first trade war in 2018, when the US’s share of China’s exports began falling after peaking at 19% in 2017.
Fortunately for Chinese exporters, external demand from other economies has helped offset much of the drag from the US. In 1H25, China’s exports saw the fastest growth in the EU, Africa, Vietnam, Hong Kong, Thailand, and India. Although exports to the United States declined by $25.7 billion, this was fully offset by increased exports to other countries. This resulted in a net year-over-year increase of $101.5 bn, or growth of 5.9%.
Comparing China’s 1H25 export growth to 2024 export growth:
- Exports to ASEAN accelerated to 13.0% YoY from 12.0% YoY.
- The two main bright points were in Thailand and Vietnam, which grew by 22.1% YoY and 19.4% YoY, respectively.
- Exports to Asia ex-ASEAN accelerated to 7.6% YoY from 4.2% YoY.
- Within the region, the acceleration was tied to an uptick in export growth to India (14.0%) and Japan (4.9%), though exports to Korea (-2.5%) continued to slump.
- Exports to the EU rose to 6.9% YoY from 3.0% YoY, despite the tariff hikes against Chinese EVs.
- Strong exports to Germany (11.9%) and France (8.6%) helped offset slower growth to the Netherlands (3.2%) and Italy (4.5%).
- Exports to Africa rose to 21.4% YoY from 3.5% YoY.
- Upticks of exports to Nigeria (34.5%) and Egypt (13.9%) helped offset continuingly sluggish exports to South Africa (2.0%).
- Exports to Latin America slowed to 7.3% YoY, down from 13.0% YoY but nonetheless continuing to outpace headline growth.
- A slowdown of exports to Brazil (-2.1%) and Mexico (-2.1%) were the main culprits dragging Latin American exports.
Exports to other regions have helped offset the drop to the US
The importance of re-exports to China’s relative export resilience is worth exploring. Re-exports have played a role in helping businesses circumvent tariffs since 2018. Increasingly, these will be under more pressure as the Trump administration hikes tariffs on other regions and includes special clauses specifically targeting re-exports via transshipments.
There’s limited research on the scale of China’s re-exports. Other than notable port economies such as Hong Kong and Singapore, few countries publish such data. Generally speaking, higher margin categories may be more suitable for re-exports, as products with very thin margins may be unable to absorb the extra costs incurred.
However, looking at specific country data and drawing upon some assumptions, we can make some key inferences. We will primarily focus on Vietnam and Mexico as our case studies for this report.
Vietnam has been in focus as one of China’s main re-export channels and a notable destination for Chinese outward direct investment in manufacturing.
Between 2017 and 2024, China’s exports to Vietnam rose from $72.4bn to $162.3bn. In this timeframe, Vietnam’s share of China’s total exports rose from 3.2% to 4.5%.
Reports on Vietnam’s trade deal framework with the US drew attention in China, particularly the special clause adding a higher 40% tariff rate on transshipments. Given the grey area in identifying transshipments and no official data on this front, we can instead look at changes in China’s exports to Vietnam and Vietnam’s exports to the US between 2017 (prior to the first trade war) and 2024.
Digging through industry-level data, the most striking change was in machinery equipment and electrical products.
- In 2017, China’s exports of machinery and electrical equipment to Vietnam were $26.9bn and accounted for approximately 16.6% of China’s total exports to Vietnam. By 2024, this had almost tripled to $77.2bn and represented 47.6% of China’s total exports to Vietnam.
- In 2017, Vietnam’s exports of machinery and electrical equipment to the US were $5.9bn and accounted for approximately 5.3% of total exports to the US. By 2024, this had surged to $45.3bn, representing 40.9% of Vietnam’s total exports to the US.
In essence, China’s machinery and electrical equipment exports to Vietnam rose around $50bn while Vietnam’s similar exports to the US rose just under $40bn. While certainly some of this change could be attributed to Vietnam’s own domestic production and demand, it’s likely that the rapid surge reflects significant transshipment activity.
Machinery and electrical equipment have likely been a major re-export category through Vietnam
Between 2017 and 2024, China’s exports to Mexico rose from $35.9bn to $90.2bn. In the same timeframe, Mexico’s share of China’s total exports rose from 1.6% to 2.5%.
- Looking at the similar machinery and electrical equipment categories that we tracked for Vietnam, Mexico doesn’t feature the same trends. While exports from this category to Mexico rose 145% from 2017 to 2024, this was in line with broader trends, staying around 44-45% of total exports.
- We did, however, see a bit of a shift in autos and auto parts, which more than tripled from 2017 to reach $12.3bn by 2024, and rising from 7.7% of total exports to 13.6%.
- With growth continuing at 9.3% YoY ytd in 1H25, this may be more tied to Mexico’s own domestic demand or auto parts used in Mexico’s supply chain rather than direct re-exports. In any case, China’s auto exports to Mexico are relatively minor compared to Mexico’s total auto exports ($194bn in 2024).
- Much has been made of China purportedly selling fentanyl precursor chemicals to Mexico, where fentanyl is then manufactured and smuggled across the border to the US. While further granular data is unavailable, China exported $1.7bn of chemicals to Mexico in 2024, or around 2% of its total exports to Mexico.
Unlike Vietnam, which has continued to be a source of rapid export growth for China, shipments to Mexico have slowed to -2.1% YoY year to date. It’s possible that some re-exports may have slowed after Mexico was hit with high tariffs. Mexico’s overall import growth was up around 4% YoY through the first five months of 2025, though sector-level trade data doesn’t let us draw any strong conclusions.
Fewer obvious signs of re-export concentration in Mexico
Unsurprisingly, China’s recent dominance of the electric vehicle market continued to translate in the related categories, with rapid growth in lithium-ion battery (25.1%) and electric vehicle (21.9%) exports for 1H25. Machine parts (17.7%) and semiconductors (18.0%) have also fared well, given the difficulty of sourcing replacement products.
On the flip side, we see some generally lower value-added sectors under heavier pressure so far this year. Footwear (-7.6%), furniture (-7.3%), and toys (-2.8%) are among the categories in negative YoY growth, likely due to the drag from the US. We saw export growth to the US of these respective categories at -18.9%, -13.8%, and -2.8%.
The tariff environment also has varying levels of influence on each category. While in certain cases it’s a major determinant, in other categories the impact is relatively negligible. We take a look at two case studies — furniture and autos — to illustrate this in greater depth.
Fast growing export products are relatively insulated from US tariffs
Furniture exports have been one of the underperformers year-to-date, with a year-on-year decline of -5.0% in 1H25. This can be attributed to a steep -13.8% YoY drop of exports to the US. The US is China’s largest export destination for furniture, representing around 25% of total mainland furniture exports in 2024.
While furniture products can vary significantly in terms of value added, China’s furniture exports tend to compete on the cheaper and lower-value-added side, and have proven to be vulnerable to tariff impacts.
We saw a similar -17.1% drop of China’s furniture exports to the US in 2019, when China’s furniture exports were hit with a 10-25% tariff. Yet China’s overall furniture exports still managed 3.8% YoY growth on the year.
The key differences between the first trade war and the current environment lie in a falloff of demand to the EU and ASEAN, which could partially be explained by reduced re-exports and supply chain shift.
- During 2019, despite the sharp decline in direct exports to the US, China’s furniture exports to East Asia (Japan (3.7%), Korea (15.3%), ASEAN (42.2%), and the EU (9.0%) accelerated and offset the drag.
- Vietnam likely served as a major re-export hub for Chinese furniture companies in the first trade war. China’s furniture exports to Vietnam surged 51.4% YoY growth in 2019, coinciding with Vietnam’s own furniture exports to the US surging 41.3% YoY. In 2018, Vietnam accounted for only 7.6% of total US furniture imports. This figure rose to 19.8% by 2024. As far, as Chinese furnituremakers are concerned, the story in Vietnam could be shifting from re-exports to reshoring, as Vietnam’s domestic furniture manufacturing has grown in double digits in recent years.
However, this pattern did not repeat in 1H 2025. China’s furniture exports to non-US destinations have also been soft year-to-date, including notable contractions in ASEAN (-1.1%) and EU (-1.4%). With EU’s final anti-dumping ruling in July against multilayered wood flooring originating from China, the contraction in furniture exports could worsen in the coming months.
China’s automobile exports grew by 8.1% YoY in 1H25. This outperformed headline growth, but it’s nonetheless notably slower compared to the past few years, when growth was in double or even triple digits.
First, it should be noted that the scale of auto exports has increased over sevenfold from $15.7bn in 2020 to $117.4bn in 2024. As such, it now takes a lot more to maintain a rapid growth rate.
Second, at this stage, the most significant auto tariffs are from the US and the EU, which impose 100% and 27.4-48.1%, respectively, on China EVs.
While a -32.3% YoY drop of auto exports to the US in 1H25 certainly suggests a shock, the US is not a major destination for China’s car exports, representing just 2.1% of total auto exports in 2024. For EVs in particular, a combination of exorbitant tariffs and security-related restrictions represents a de facto embargo on EV imports. We didn’t see a single BYD on the road in our trip across the country in June.
The EU, on the other hand, is a more sizeable market, with the EU 27 representing around 14.6% of China’s total auto exports in 2024. Auto exports to the EU 27 fell by -5.2% YoY in 1H25, led by a slowdown from major importers such as Belgium (-27.4%) and Germany (-19.5%) after tariffs on Chinese EVs rose last October. However, this was not an EU-wide trend. We did see auto exports to Italy (55.1%) and Spain (20.0%) accelerate in 1H25.
While the drop in exports to the EU certainly contributes to the slowdown, the bigger culprit is likely the sharp decline in auto exports to the Russian market. They fell a staggering -65.9% YoY, amounting to around $6bn.
This is likely tied to a broader slowdown in the Russian auto market, with the volume of sales down -23.2% YoY in 1H25. It’s likely that this is tied to a policy change from October 2024, when Russia raised its vehicle scrappage fee by 70%–85%. It’s a de facto tax on both imported and domestic vehicles collected to fund future disposal and recycling. As a result, Russian importers frontloaded imports before the policy took effect, leading to a reduction in imports this year.
Compared to 2024, the share of the Russian market in China’s motor vehicle exports has shrunk significantly—from 18.2% to just 5.2% in 1H25.
Conclusion: Tariff drag may intensify, but China’s export competitiveness should limit the downside
We’re already starting to see a clear impact of tariffs across various pockets of trade, as well as noticeable effects on new investment and sentiment. Numerous corporates and investors are taking a a “wait-and-see” stance this year amid continued uncertainty.
That said, the overall impact so far has fallen well short of doom-and-gloom forecasts that prevailed at the start of the year. Through the first half, the direct drag from US trade has been something in the area of -0.2pp on GDP. This has been more than offset by trade with other economies, with total net exports contributing 1.7pp to GDP growth in 1H25. As a result, we’ve seen the market generally revise China GDP forecasts higher in recent months.
The main question is whether or not China’s export resilience can last?
Barring further de-escalation, China’s exports will continue to be affected by tariffs. The drag from the US could worsen in 2H25, particularly as we’re not seeing another round of frontloading which helped boost exports in 1Q25. The current levels of 50-55% are already quite restrictive and have greatly hindered the price competitiveness of many exports.
We expect China’s total export growth to slow further in the second half, but full year export growth should remain in low-to-mid single-digit growth range barring additional shocks.
However, we do see some reasons not to fall into the trap of excessive pessimism.
- China’s fastest-growing exports are not reliant on the US.
- China’s biggest export outperformers over the past year have been ships, semiconductors, and autos. Customs data shows that the exports of these products to the US represented only around 1-2% of China’s total in 2024.
- Amid China’s Great Transition, China’s move up the value added ladder has resulted in many Chinese champions producing very competitive products, and even in the case of US tariffs or restrictions, these products will continue to do well in other economies.
- Exports to the US have proven to be stickier than expected. Despite the rapid escalation of tariffs to 145% in April, we saw a significant slowdown of exports but far from the “de facto embargo” that the tariffs purportedly represented.
- The biggest monthly YoY decline of China’s exports to the US was in May, when growth cratered to -34.5% YoY, but this rebounded to -16.1% YoY in June.
- By subcategory, copper products (135.8%), toys (-2.8%), and the optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments category (-1.6%) have all fared relatively well in 1H25 despite the major tariff shock.
A wildcard will no doubt be on how the August tariff developments play out. Obviously, the biggest and most direct catalyst will be what happens once the 12 August tariff ceasefire between China and the US is set to end.
Given the unpredictability we’ve seen so far this year, estimating tariff hikes is a bit of a dart throw. Our base case is that we won’t see tariffs reverting back to the April peaks. Following the test of endurance earlier this year, it was clear that such high tariffs are a lose-lose proposition for both parties.
That said, we also cannot rule out tariffs moving higher either, with a further 10% hike well within expectations. With tariffs already at 50-55%, the marginal impact of a further small-scale tariff hike could be relatively manageable. However, as the April episode proved, politics tends to trump economics. A more aggressive than expected re-escalation could lead to a bigger hit to the trade outlook.
Direct tariffs aside, another downside risk in recent months has been other countries signing explicit or implied “anti-China” clauses targeting China’s re-exports and foreign entities in their trade deals with the US. The impact will depend on how many economies agree to these clauses, and how strictly they are enforced. This trend certainly represents another downside risk moving forward.
At the same time, the direction of tariffs globally will play a big role in gauging the impact moving forward. The setup of the financial services industry often leads to economists looking at the tariff issue from the perspective of their country alone, with the rest of the world seen as a static variable.
In our view, this can lead to some overestimation of the tariff impact, as seen in the numerous estimates on China’s GDP at the start of the year. Arguably, the biggest element when considering the tariff impact is the risk of losing out on exports to competitors via substitution products. If tariffs rise significantly across the board, but not enough to make US-manufactured products viable, this could help mitigate part of the impact compared to if only China and a few other economies are hit. Given the currently speculated tariff rates of 15-20% on most of the key global economies, we could well be seeing this sort of scenario unfold.
An outsized external demand shock was seen as one of the main risk factors for China this year. The resilience of external demand so far is one of the key reasons for China’s outperformance in 1H25. We expect exports will likely moderate in the second half of the year, but nonetheless continue to be a growth contributor. This should help China stay on track to reach its growth target of “around 5%” this year.
WEALTH EFFECT PLOTTED
There’s a growing sentiment gap between rich and poor Americans
While overall unemployment still seems low, lower-earning adults are increasingly reporting a loss of pay or income in Morning Consult data, says chief economist John Leer.
Data: Morning Consult; Chart: Axios Visuals
