On August 12, U.S. President Trump extended the trade truce with China for another 90 days until November 10, preventing the return of tit-for-tat tariffs and various export restrictions. This move removed short-term tail risks, but many issues are unresolved, such as fentanyl, China’s purchases of Russian oil, and trade of rare earths, soybeans, and semiconductors.

China was widely expected to be the main target of U.S tariffs given the sizeable trade deficit. However, with broad reciprocal tariffs implemented since August 7 (outlined in our last publication), many economies now face noticeably higher tariffs, causing the tariff differential between China and the rest of the world (ROW) to narrow. Under this context, what is the outlook for Chinese exports and broader trade dynamics?

Chinese exports? Resilient so far.

Early in the year, significant front-loading led to strong export growth. So far, the payback effect has been mild—exports continued to grow at 5.9% and 7.2% year-over-year (y/y) in June and July, respectively, with the largest contributors being integrated circuits and autos.

From an export destination perspective, there is a clear divergence (Exhibit 1). Exports to the U.S. fell 21.7% y/y in July but were offset by strong growth in exports to ROW due to demand from both new markets and transshipments. J.P. Morgan Economic Research estimates that ~60% of the recent surge in China’s exports to ASEAN will be transshipments to the U.S. However, with tighter U.S. enforcement on transshipments and the narrowing of China-ROW tariff differentials, this trend will likely start to reverse in the coming months—the share of exports to the U.S. could rise at the expense of ASEAN.

Overall, China’s exports will likely remain resilient in the next three months if China-ROW tariff differentials remain stable, with risks of mild slowing due to lower global demand and front-loading coming to an end. However, the longer-term outlook for China trade involves a more complex picture of transshipments, shifting trade patterns, and deflationary pressures.

Complex trade dynamics ahead 

The future of transshipments, or lack thereof

Transshipments involve exporting goods to a third economy before reaching the U.S. market to evade tariffs.

To crack down on this, the U.S.-Vietnam trade agreement introduced a 40% transshipment tariff. In Exhibit 2, the close relationship between Vietnam’s imports from China and Vietnam’s exports to the U.S. illustrate the significant extent of transshipments on an aggregate level. However, looking at HS 4-digit product codes, they are not as similar. Growth in Vietnam’s imports from China was mainly in integrated circuits (HS8542) and displays (HS8524), but exports to the U.S. are mainly in computers (HS8471) and smartphones (HS8517), suggesting considerable transformation and value-add by manufacturers in Vietnam. Thus, it is challenging to differentiate between transshipments and legitimate supply chain shifts, and transshipment is not clearly defined in the U.S.-Vietnam trade deal.

Implementation details are also unclear. Law enforcers could use “rules of origin” and measure products against a specific regional value content requirement (e.g. >40%) or attempt to match the 4-digit HTS product codes between imports and exports, which are both costly and complex to enforce. Alternatively, they can use a “surveillance list” of products (e.g. what Thailand is doing) but risk not being comprehensive enough.

The transshipment of goods through Vietnam is now less attractive to Chinese exporters. Chinese goods transshipped via Vietnam now face a 71% tariff (11% existing + 20% fentanyl + 40% transshipment), significantly higher than the 41% tariff on direct Chinese exports. If the U.S.-Vietnam trade deal becomes the blueprint for other ASEAN economies, it could negatively impact Chinese exports in the short term. It also means Chinese exporters have to more actively seek organic demand growth in new markets, rather than rely on them as a transit market.

Expanding new markets – not without challenges

As Chinese exporters seek to reorient trade amidst high U.S. tariffs, they could face another issue: concerns about a disinflationary spillover from China. In other words, other economies worry that the “export” of China’s excess capacity and cheap goods could impact their domestic industries, potentially placing anti-dumping duties on Chinese goods (e.g. European Union’s duties on Chinese electric vehicles).

China’s producer prices have been in deflationary territory for three  years. However, after an intense slide in export prices since 2023 from manufacturing overcapacity, in recent months, China’s overall export prices (in CNY) have actually increased (Exhibit 3). This means that Chinese exporters have maintained their margins by not having to lower prices to gain market share in foreign markets. This is likely because:

• CNY has depreciated 6.9% year-to-date on a trade-weighted basis, enhancing export competitiveness.
• Ex-U.S. demand for Chinese exports remained resilient. Moreover, policymakers are starting to enhance anti-involution measures to curb price competition and deflation.

All in all, so far, global spillovers from Chinese deflation have been mild; foreigners’ lower import prices have been due to currency movements instead of active exporter price cuts. However, as currency impact dissipates and if U.S.-China trade tensions escalate, such spillovers could intensify in the medium term.

So, what is China’s long-term trade outlook?

Although China’s share of U.S. imports has fallen from a peak of 21% to the current 9%, China’s share of global trade has been resilient (Exhibit 4). Apart from trade, China has also maintained its manufacturing dominance, accounting for 30% of global manufacturing value-add currently.

In the long term, supply chain de-risking will continue, but not de-coupling. Manufacturers will continue pursuing a “China+N” strategy to diversify supply chains, but U.S. tariffs are unlikely to trigger a significant shift away from the Chinese manufacturing base. The current China-ROW tariff differential might not be high enough to justify high relocation costs to non-Chinese suppliers. Meanwhile, China’s strong competitive advantage remains. From a cost perspective, China offers cheap but skilled labor, low-cost capital, affordable industrial land (significantly cheaper than residential), undervalued currency, etc. Moreover, China’s large domestic market, scaled infrastructure, and well-established supply chains enable economies of scale, further reducing per unit costs. Thus, China’s dominance in manufacturing and trade will likely remain.

Investment implications

In 2025, market sentiment towards Chinese equities recovered. Real gross domestic product growth has been resilient at 5.3% in 1H25 despite external challenges, supported by strong exports and trade-in stimulus. Ongoing artificial intelligence developments also brought back interest in China’s tech sector.

Looking ahead, peak tension between the U.S. and China has likely passed, removing tail risks. While policy stimulus will likely remain piecemeal in 2H25, a supportive stance continues to provide a floor for markets. Anti-involution measures could introduce short-term pain but can reinvigorate corporate margins in the medium term. Moreover, Federal Reserve easing and the weakening of the U.S. dollar could provide additional support. China’s long-standing manufacturing competitiveness and policy support for advanced technologies continue to  provide room for active stock selection.

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