Will Tariffs Crush Chinese Export Competitiveness?

by Nicholas Borst of Seafarer Capital Partners, 11/25/25

Since the U.S.-China trade war first broke out in 2017, Chinese companies have faced rising tariffs and trade barriers around the world. Even after the modest détente in October between President Trump and President Xi, the average tariff on Chinese exports to the U.S. is still more than 47%.1 Given the ongoing trade investigations by the U.S. government and volatility in relations between the two countries, tariffs could rise even higher. China’s trade challenges are not limited to the U.S. The European Union, Canada, Japan, Brazil, and other major markets have also increased tariffs and imposed additional restrictions on Chinese goods, though not to the same extent as the U.S.

The surprising fact is that despite these trade headwinds, Chinese exports have continued to grow. Since the start of the trade war in 2017, China’s exports have expanded dramatically. As shown in Figure 1, total exports have risen by 58%, reaching a staggering $3.58 trillion per year. China has accomplished this by roughly maintaining export levels to the U.S. while sharply increasing exports to other global markets.

figure 1

Despite the intense trade conflict between China and the U.S. this year – which shut down trade in many goods during April and May – China’s total exports are still up 6% year to date.2 While some of this increase may reflect frontloading orders to get ahead of new tariffs, Chinese exports are still performing much better than many analysts expected given the severity of the trade conflict.

What are Companies Doing?

How should we understand the fact that Chinese companies have so far managed to sustain export growth despite rising tariffs and other barriers? First, it’s important to remember that Chinese exports are produced primarily by private domestic firms and foreign companies operating in China, which tend to be the most profit-oriented and efficient firms in China. While other parts of the Chinese economy are weighed down by inefficient state-owned enterprises, trade is where competitive forces in China are at their sharpest. As shown in Figure 2, Chinese private firms have further increased their share of total exports since the start of the trade war. In contrast, state-owned firms remain relatively minor players in China’s overall exports.

figure 2

Second, Chinese companies are highly motivated to maintain and expand their overseas revenues. Many industries in China are struggling with low profitability and race-to-the-bottom competition. In some sectors, conditions have become so difficult that overseas markets are among the few remaining sources of growth. In this context, Chinese companies have proactively adopted a variety of strategies to maintain their international competitiveness:

Export Market Diversification: Some companies have shifted their focus to markets with lower tariffs and fewer political or regulatory barriers for Chinese firms. In recent years, Chinese exporters have experienced faster growth in Asia and Latin America than in the U.S. and Europe.3 Huawei is perhaps the most striking example of this approach. Having been largely banned from selling equipment in the U.S. and many European countries, the company has had no choice but to turn its focus to Asia, Latin America, and the Middle East.

Relocating Production: In other cases, Chinese companies are moving production to third countries such as Vietnam, India, and Mexico to take advantage of the lower U.S. tariffs those markets face. In line with this trend, the stock of Chinese foreign direct investment (FDI) into Vietnam has more than doubled over the past five years.4 Chinese companies like power tool and outdoor equipment maker Chervon Group have explicitly stated their expansions in Vietnam are a reaction to U.S. tariffs.5 It is important to note that this approach depends on these countries facing significantly lower tariffs from the U.S. and Europe than China, and on production within these countries being sufficiently localized to meet rules of origin requirements.

Price Adjustments: Where possible, certain Chinese companies have been able to pass tariff costs on to their customers. This is more feasible when a company holds a particularly strong competitive position and customers have limited alternatives. For example, Chinese drone and electronics maker DJI sharply increased prices on several of its products sold in the U.S. shortly after the tariffs went into effect.6 When higher prices cannot be passed on due to competitive pressures, some Chinese companies have agreed to price cuts to preserve volumes at the expense of margins.

Focusing on Higher-Margin Products: Another response has been for Chinese companies to concentrate on exporting higher-margin products to the U.S. By moving up the value chain toward more profitable goods, these firms have greater room to absorb tariff costs. Chinese home appliance maker Midea has leaned into its higher margin products and more premium brands as a method to offset the impact of tariffs.7

Cost-Cutting to Offset Tariff Impact: A final strategy is cutting costs to remain competitive. Chinese firms are working to drive down domestic production costs to offset the impact of tariffs. This can be done by utilizing technology to reduce labor costs, such as through the use of industrial robots, or through measures such as squeezing upstream suppliers for lower costs. BYD, China’s leading EV and hybrid manufacturer, is notorious for its relentless efforts to drive costs lower by pressuring suppliers to cut their prices and accept extended repayment terms.8