Introduction
In 2025, China finds itself grappling with a serious economic dilemma: as the United States raises tariffs on Chinese imports to historic highs, Chinese exporters are being urged to divert unsold goods to the domestic market. While this policy offers short-term relief, it risks plunging the economy further into deflation. Economists warn that this approach may intensify price wars, suppress consumer demand, and spark rising unemployment. Here are seven key reasons why China’s export redirection strategy could backfire.
1. Weak Domestic Demand Meets Oversupply
China’s domestic consumption has been tepid for several years, hampered by income uncertainty and a prolonged property sector slump. Redirecting a flood of discounted U.S.-bound products to local markets only worsens the supply-demand imbalance, pushing prices down further. As Goldman Sachs projects, retail inflation could fall to 0% in 2025, highlighting a deepening deflationary spiral.
2. Escalating Price Wars Among Firms
Fierce competition is driving retailers like JD.com to offer discounts of up to 55% on products originally intended for U.S. buyers. This aggressive pricing, while appealing to consumers, erodes profit margins and threatens long-term business viability.
3. Shrinking Profit Margins and Rising Insolvencies
Exporters accustomed to premium U.S. prices are now forced to accept razor-thin margins—or worse, operate at a loss—to avoid warehouse pileups. According to Shen Meng of Chanson & Co., many firms are using the domestic shift merely to clear unsold inventory, not to turn a profit.
4. Surging Unemployment in Export-Dependent Regions
The ripple effects are already evident in the labor market. Goldman Sachs estimates that over 16 million jobs, more than 2% of China’s workforce, are tied to U.S.-bound goods. With factories downsizing or closing, the urban unemployment rate is expected to climb above the official 5.5% target, reaching 5.7% in 2025.
5. Collapsing Producer Prices
China’s Producer Price Index (PPI) fell for the 29th consecutive month in March 2025, declining 2.5% year-on-year. Morgan Stanley predicts this could deepen to a 2.8% drop in April. As exporters offload goods at lower prices, upstream sectors also feel the squeeze.
6. Delayed Fiscal Stimulus from Beijing
Despite calls for robust stimulus, Beijing has refrained from unleashing major fiscal interventions, preferring a wait-and-see approach. Economists argue that the economy could face a “worse-than-expected demand shock” unless stronger policy support is introduced soon.
7. The End of the ‘De Minimis’ Loophole
The Trump administration recently ended the “de minimis” rule, a tax exemption that allowed Chinese platforms like Shein and Temu to ship goods into the U.S. without tariffs. The change further restricts access to the U.S. market, putting additional pressure on China’s already stressed export sector.
“Authorities do not view deflation as a crisis, instead, [they are] framing low prices as a buffer to support household savings during a period of economic transition,” Eurasia Group’s Wang said.
When asked about the potential impact of increased competition within China’s market, Peking University professor Justin Yifu Lin said Beijing can use fiscal, monetary and other targeted policies to boost purchasing power.
“The challenge the U.S. faces is larger than China’s,” he told reporters on April 21 in Mandarin, translated by CNBC. Lin is dean of the Institute of New Structural Economics.
He expects the current tariff situation would be resolved soon, but did not share a specific timeframe. While China retains production capabilities, Lin said it would take at least a year or two for the U.S. to reshore manufacturing, meaning American consumers would be hit by higher prices in the interim.
Conclusion
China’s strategy of absorbing U.S.-bound exports into its domestic economy may offer a short-term lifeline, but the underlying consequences are severe. Deflation is setting in deeper, businesses are undercutting each other, and jobs are being lost. Without decisive fiscal support or a thaw in U.S.-China trade relations, the world’s second-largest economy may face a turbulent road ahead.
For more analysis on international economic trends, see our article on U.S. Tariffs and Their Global Economic Impact.
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