China's Deflation Risk Grows as U.S. Tariffs Redirect Exports, Triggering Domestic Price Wars

China faces increased deflationary pressure as U.S. tariffs, raised to 145%, force exporters to redirect goods to the domestic market, intensifying price competition. This influx is eroding profit margins and threatening jobs in export-reliant sectors. Major e-commerce platforms like JD.com, Tencent, and Douyin are promoting domestic consumption to mitigate the impact, but this may worsen deflation. The labor market is strained, with potential job losses in export sectors. Economists predict further deflation, and while Beijing has policy tools available, the situation remains challenging.

U.S. Tariffs Trigger Export Rerouting

The latest escalation in the U.S.-China trade war has seen President Donald Trump raise tariffs on Chinese imports to a staggering 145%—the highest in a century. In retaliation, Beijing imposed 125% tariffs on U.S. goods. These prohibitive rates have effectively shut Chinese exporters out of the American market, prompting a nationwide push to redirect unsold inventory to domestic consumers.

Vice Commerce Minister Sheng Qiuping recently emphasized the importance of China’s vast domestic market as a buffer against external shocks. Local governments and businesses have been urged to support exporters in offloading goods at home. However, this redirection is not without consequences.

Price Wars and Deflationary Spiral

The sudden influx of export-grade goods into the domestic market has triggered a fierce price war among Chinese firms. “The side effect is a ferocious price war among Chinese firms,” said Yingke Zhou, senior China economist at Barclays Bank. With companies slashing prices to clear inventory, profit margins are being squeezed, and the risk of a deflationary spiral is growing.

JD.com has taken a leading role in this effort, pledging 200 billion yuan (approximately $28 billion) to support exporters. The company has launched a dedicated section on its platform for goods originally intended for U.S. buyers, offering discounts of up to 55%. Tencent and Douyin, TikTok’s sister app in China, are also promoting sales of these redirected goods to boost domestic consumption.

But the strategy is proving to be a double-edged sword. While it helps clear inventory and maintain cash flow, it also exacerbates deflationary pressures. China’s consumer price index (CPI) slipped into negative territory in February and March 2025, while the producer price index (PPI) fell for the 29th consecutive month in March, down 2.5% year-on-year—the steepest decline in four months.

Economists at Morgan Stanley expect wholesale price deflation to deepen further in April, forecasting a 2.8% drop. Goldman Sachs projects China’s CPI to fall to 0% for the full year, with PPI declining by 1.6%.

E-Commerce Giants Step In

In an effort to absorb the excess supply and stimulate demand, China’s tech giants are leveraging their platforms to promote domestic consumption. JD.com’s massive investment in discounting redirected exports is part of a broader campaign to support struggling exporters. Tencent and Douyin are also using their vast user bases to push promotional content and flash sales.

These efforts are not limited to online platforms. Local governments are coordinating with businesses to organize shopping festivals and consumption vouchers, aiming to boost spending in a climate of economic uncertainty. However, the effectiveness of these measures remains limited by weak consumer sentiment.

Weak Demand and Labor Market Strain

The deflationary trend is being compounded by weak domestic demand. Uncertain job prospects and concerns over income stability are discouraging consumers from spending. According to Shen Meng, director at Beijing-based investment bank Chanson & Co., many exporters are selling at a loss just to keep factories running. “There is little room for profits,” he said.

The labor market is already feeling the strain. Goldman Sachs estimates that 16 million jobs—over 2% of China’s labor force—are tied to the production of U.S.-bound goods. As exporters scale back or shut down operations, job losses are mounting, particularly in export-reliant regions.

Wang Dan, China director at Eurasia Group, warned that the urban unemployment rate could average 5.7% this year, exceeding the official 5.5% target. The removal of the U.S. “de minimis” exemption, which had allowed Chinese e-commerce firms like Shein and Temu to ship low-value parcels to the U.S. tariff-free, is further pressuring small and medium-sized enterprises.

Overcapacity and Manufacturing Challenges

The redirection of exports is also worsening overcapacity in several industries. Manufacturing capacity, built to serve robust U.S. demand, cannot be easily scaled down in response to sudden tariff hikes. “Prices will need to fall for domestic and other foreign buyers to help absorb the excess supply left behind by U.S. importers,” said Shan Hui, chief China economist at Goldman Sachs.

This mismatch between supply and demand is likely to persist, especially in sectors like electronics, textiles, and solar modules. Industry insiders have noted that Chinese module producers are facing growing challenges, including saturated overseas markets and rising domestic competition.

Economic Outlook

Despite Beijing’s official GDP growth target of “around 5%” for 2025, Goldman Sachs forecasts real GDP growth of just 4.0%. The dual drag of a property sector slump and collapsing export demand is weighing heavily on the economy. Nomura’s chief China economist Ting Lu warned of a “worse-than-expected demand shock” as both sectors falter simultaneously.

While some economists believe Beijing may eventually roll out more robust stimulus measures, the government has so far refrained from aggressive intervention. Authorities are framing low prices as a temporary buffer to support household savings during a period of economic transition.

Peking University professor Justin Yifu Lin suggested that China still has policy tools at its disposal, including fiscal and monetary levers, to boost purchasing power. However, he acknowledged that the current situation may take time to resolve, especially as the U.S. moves to reshore manufacturing and reduce reliance on Chinese imports.

References

• China risks a spiral into deeper deflation as it diverts U.S.-bound exports to domestic market
• Trump tariffs live updates: China says 'door is open' to trade talks with the US
• China module prices bearish, U.S. prices rise on tariff policies
• Opinion | Thanks to Trump, China has the cards it needs to win the trade war
• Soaring Import Tariffs Spark a Surprising Trend: Americans Fly to China for Bargain Shopping - FastBull