Is Trump’s tariff war crushing China’s economy? Factory activity hits record low

China’s factory activity contracted sharply in April 2025 as President Donald Trump’s latest round of tariffs severely disrupted trade. Official data released by China’s National Bureau of Statistics (NBS) on April 30 showed the Purchasing Managers’ Index (PMI) dropped to 49.0 from 50.5 in March, marking the steepest decline in 16 months and indicating significant contraction in manufacturing output.

The sharp fall in factory activity occurred in the wake of the Trump administration’s recent imposition of hefty 145% tariffs on a wide range of Chinese exports, intensifying a long-running trade conflict that had initially begun during Trump’s first term in office.

What Caused China’s Manufacturing Slowdown?

The significant drop in China’s PMI was largely attributed to reduced export orders caused by the new tariffs. According to the NBS data, new export orders plummeted to 44.7, their lowest point since December 2022, highlighting severe demand contraction. Chinese authorities confirmed that many American companies had either cancelled existing orders or delayed planned expansions due to higher import duties, according to the Wall Street Journal.

These unprecedented tariffs are the latest move in an ongoing economic dispute between Washington and Beijing, which originally started in 2018 under Trump’s first presidency. The current phase of escalations has reignited market uncertainty after a period of fragile truce established by the Phase One Trade Deal in January 2020.

How is China Responding to Trump’s Tariffs?

In direct retaliation to Trump’s trade policies, China imposed its own tariffs of up to 125% on select American-made goods and enacted export restrictions on key strategic minerals vital to U.S. tech and automotive industries. Officials in Beijing have described these measures as necessary countermeasures, arguing that the U.S. tariffs violated international trade norms, according to Associated Press (AP).

Chinese authorities maintain that their economic strategy will help mitigate long-term damage. However, economic analysts have expressed concern, suggesting these latest moves may further weaken China’s position in global trade dynamics, potentially dragging down broader economic indicators.

What are Analysts Forecasting for China’s Economy?

Economists from Goldman Sachs and Capital Economics have significantly downgraded their growth forecasts for China’s economy in 2025. Official government targets have aimed for around 5% growth, but recent trade tensions have caused several financial institutions to lower their forecasts sharply. Analysts from Capital Economics now predict China’s GDP growth could slow to around 3.5% for the current year, largely influenced by declining exports and rising geopolitical tensions.

Despite the manufacturing slump, China’s non-manufacturing PMI, which tracks services and construction sectors, has remained above 50, indicating slight expansion and providing some relief to overall economic conditions. This resilience in domestic demand and services has prevented an immediate economic crisis, although concerns persist over sustainability.

Historical Context: U.S.-China Trade Dispute Escalates Again

The recent tariff escalation by Trump mirrors earlier conflicts dating back to 2018, when Washington accused Beijing of unfair trade practices and intellectual property violations. These accusations led to extensive tariff implementations, triggering global economic uncertainties that lasted through the initial trade war period from 2018 to early 2020.

Following the Phase One Trade Deal, tensions had somewhat subsided, but underlying issues remained unresolved, periodically resurfacing in diplomatic confrontations and trade disruptions. The current aggressive posture from the U.S. administration signals a significant breakdown in previously maintained economic dialogues, raising questions about future bilateral negotiations.

How Have U.S. Markets Responded?

U.S. financial markets have also reacted negatively to the escalating trade tensions. In the first quarter of 2025, the U.S. economy contracted by 0.3% annually, according to recent figures from the U.S. Department of Commerce. This contraction—attributed largely to businesses stockpiling inventory ahead of tariff implementation—marked the first negative growth quarter since early 2022.

The International Monetary Fund (IMF) expressed concern about global economic stability, calling on both Washington and Beijing to resolve trade disputes amicably to prevent further damage to global trade flows and economic recovery.

How Have Investor Sentiments Shifted in Response?

Investor sentiment towards Chinese equities and ETFs, including iShares China Large-Cap ETF (FXI), iShares MSCI China ETF (MCHI), and Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), has weakened following these developments. On April 30, FXI traded down 0.46% to USD 33.645, while MCHI fell 0.58% to USD 51.38, and ASHR declined by 0.39% to USD 25.78. This reflects cautious institutional flows, as investors grow increasingly wary of further economic deterioration amid heightened tariffs.

Institutional investor activity, both from Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs), has trended towards a defensive posture, selectively reducing exposure to sectors most impacted by trade restrictions. Analysts have predominantly advised a “Hold” strategy for Chinese ETFs, awaiting clearer signals regarding future U.S.-China trade policy developments.

Will the Trade War Further Escalate?

Currently, neither Beijing nor Washington appears ready to de-escalate tensions swiftly. Statements from both sides suggest preparations for sustained economic confrontation. The U.S. administration under President Trump remains committed to maintaining aggressive tariff levels, citing strategic economic interests, national security, and competition in advanced technology sectors as justification.

Simultaneously, China’s response—particularly restrictions on strategic minerals critical to U.S. industries—demonstrates readiness for prolonged conflict. The IMF and other international bodies have repeatedly urged dialogue, emphasizing that continued economic hostilities could lead to significant, long-lasting disruptions in global trade and economic recovery.

What to Watch Next?

In the coming weeks, analysts and investors will closely monitor any signs of diplomatic engagement between China and the United States. Economic data, particularly upcoming PMI figures, GDP estimates, and trade balance reports from both nations, will provide critical insights into the broader impact of these tariffs.

For now, the economic landscape remains volatile, with both China and the U.S. facing heightened risk scenarios. The trajectory of this trade conflict in the immediate future will significantly influence global market sentiment, investor strategies, and the stability of international economic growth.