The economic data for the first half of the year exceeded expectations, particularly in the export industry chain. From January to May, the value of goods exports increased by 2.7% year-on-year in U.S. dollar terms, a significant improvement from last year's -4.6%; due to negative growth in the Producer Price Index (PPI) and export price index, the quantity of exports increased by nearly 13% year-on-year. External demand has driven industrial production and capital expenditure, with industrial value added and manufacturing investment increasing by 6.2% and 9.6% year-on-year respectively from January to May, both significantly higher than the GDP growth rate. Looking ahead, we anticipate that the export momentum can be sustained into the second half of the year and even next year. However, external demand cannot replace internal demand; only by truly strengthening the domestic cycle can we effectively withstand the long-term uncertainty of external trade policies.

I. Export Outlook Without Immediate Worries

Looking at the second half of the year and next year, we maintain a cautious optimism about the export situation. We forecast that exports will grow by about 5% this year and around 4.5% next year. Despite the risks of protectionism, we still see some favorable factors:

(1) New opportunities from the Global South. The total demand from developed economies is declining, but it is still transitioning from service expenditure to goods demand, which provides some support for Chinese product exports. At the same time, China's external demand structure is shifting from a focus on developed markets to emerging markets or the Global South. Although we predict that the U.S. economy will slow down significantly in the second half of the year, ASEAN, Latin America, BRICS countries, and other Southern trade partners are expected to fill this gap.

Advertisement

(2) New exports still have structural growth. China's export sector has honed its skills in industrial upgrading and open competition, forming a clear cost advantage. The European Union's imposition of temporary tariffs on Chinese electric vehicles is generally in line with market expectations. We calculate that even considering the temporary tariffs, Chinese electric vehicles still have a cost-performance advantage, which will not change the overall momentum of China's automobile export growth. At the same time, the global technology upcycle will continue to benefit China's semiconductor and electronic product exports. From January to May, the export of integrated circuits increased by 19.5% year-on-year, and the shipment of computers increased by 5.2%; this momentum should not reverse abruptly in the short term.

The export outlook for 2025 is still unclear, especially depending on the results of the U.S. elections. According to our Citi base forecast, global nominal GDP growth excluding China will rise from 3.7% this year to 5.4% next year. The warming of external demand is obviously beneficial to China's export sector, but the trade policies of developed economies are the main source of future uncertainty, which we need to closely monitor.

II. Growth Layout Requires Long-term Consideration

China is already the world's largest exporter, with a market share of nearly 15%; last year's exports were $3.4 trillion, almost equal to the GDP size of India ($3.7 trillion). In some industries, our country's production capacity has indeed approached the limit that the global market can bear. In traditional industries, such as crude steel production, China accounts for 55% of the global total; in emerging industries, China's photovoltaic capacity accounts for nearly 90% of the global total, lithium battery capacity is about 80%, and electric vehicle production accounts for 65% of global sales. Now the "overcapacity theory" is gradually becoming the mainstream narrative in the West, which also requires us to consider the export prospects and future economic growth model from a long-term perspective.

Firstly, there is greater uncertainty in U.S. trade policy. Although this round of tariffs is high-profile, it only targets $18 billion or about 4% of Chinese exports to the United States. We calculate that its impact on the weighted average tariff rate of Chinese products is no more than 1.5 percentage points, while the average tariff increase during the last trade dispute reached 18 percentage points. What is more important is that it sends a signal: the U.S. market is closed to China's new exports. For example, if the current 100% tariff on electric vehicle tariffs cannot prevent China's exports to the United States, it will be further increased in the future.

The academic community has conducted a lot of research on the last trade dispute, and I will cite two important empirical conclusions here: one is almost complete tariff pass-through, that is, the new tariffs lead to an almost same magnitude increase in the prices of products imported by the United States from China; the second is the demand elasticity of the United States for Chinese products of about 4, that is, for every 1% increase in price, the United States imports from China decrease by 4.2%. If we apply these two parameters for linear extrapolation, in the face of a 60% universal tariff and no trade transfer is allowed, the theoretical value of the United States' imports from China will be zero or more, and Chinese products will be completely squeezed out of the U.S. market. Of course, this is based on a strong assumption (such as the demand elasticity may not be linear), but it does indicate that imposing a 60% universal tariff is almost "decoupling," not "risk reduction." Considering the current inflation environment in the United States and its dependence on China's industrial chain, we tend to believe that imposing a 60% universal tariff is just a negotiation strategy and may not be a new equilibrium. A more realistic scenario is an average tariff increase of about 15%, similar to the tariff increase in the last round. It depends on whether the United States blocks the trade transfer channel, which will lead to a reduction in China's exports by 9.2% or 2.8%, affecting GDP by 1.5% or 0.5%. These scenarios all imply a substantial escalation of the China-U.S. tariff dispute, and we expect the renminbi to depreciate to varying degrees but significantly.Secondly, we must consider the backlash from Europe and the Global South. The temporary tariffs imposed by the European Union in this round may not prevent Chinese electric vehicles from entering the European market. China has the sincerity and leverage to resolve disputes through negotiations. However, we must also view this issue dynamically: even if China and Europe reach a phased settlement, with the continued expansion of Chinese automobiles and green technologies in the European market share and the rotation of political parties within Europe, Sino-European trade frictions will still be repeatedly raised and even escalated in the future, introducing new uncertainties. In addition, Turkey has announced a 40% tariff increase on Chinese cars starting in July, and Brazil is also about to raise tariffs on imported electric vehicles. China's strong exports may also face backlash in the Global South in the future.

Furthermore, over-reliance on external demand will amplify economic fluctuations. Exports have been stable at around 20% of China's GDP in recent years. The impact of external demand fluctuations on China's economic cycle is not low—although this year it is a positive fluctuation. The once-popular "German model" is losing its luster in the context of global economic fluctuations and structural downward trends in external demand (especially the decline in exports to China), which is instructive for considering China's economic transformation.

In summary, exports are cyclical and face increasing geopolitical resistance. As China's economic size and global trade share grow, the potential for future growth driven by exports is inevitably limited and unsustainable. China's economic data consistently exceeds expectations, but market and public expectations have not significantly improved. One important reason is that the unexpected part lies in the export chain, and strong exports cannot effectively transmit to income and asset prices (such as exchange rates) that residents can directly perceive under the condition of a depreciating exchange rate, failing to drive the domestic cycle. At the same time, the market also questions whether the growth surprises brought by exports are sustainable. In other words, short-term data exceeding expectations has not changed the market's long-term narrative. In this sense, stimulating consumption and smoothing the domestic cycle are necessary conditions for the long-term sustainable growth of the Chinese economy. I believe that the more significant meaning of today's discussion on trade lies beyond trade itself.