With U.S. tariffs on Chinese goods soaring to historic highs, China is increasingly redirecting its export inventory to its domestic market—a move analysts warn could spiral into deeper deflation and worsen economic challenges for the world’s second-largest economy.
The 145% tariff imposed by the Trump administration has crippled trade flows between the U.S. and China, leading to a flood of surplus goods being redirected to Chinese consumers through platforms like JD.com, Tencent, and Douyin, the Chinese sister app of TikTok.
1. Domestic Market Absorbs Export Overflow, Triggering Price Wars
Vice Commerce Minister Sheng Qiuping recently promoted China’s domestic market as a vital buffer against global trade shocks. However, analysts say this redirection is triggering intense price wars that may do more harm than good.
“The side effect is a ferocious price war among Chinese firms,” said Yingke Zhou, senior China economist at Barclays.
E-commerce giants like JD.com have responded by launching massive discount campaigns—offering up to 55% off on goods originally destined for the U.S.—and pledging 200 billion yuan ($28 billion) in support for exporters.
2. Profit Margins and Jobs Under Pressure
The price-slashing strategies may help reduce excess inventory, but they are also eroding corporate profits and threatening employment in export-reliant sectors. Weak consumer sentiment, combined with rising unemployment risks, creates a grim backdrop.
“Selling in China is merely a way to clear inventory and ease cash-flow pressure,” said Shen Meng, director at Chanson & Co.
As more companies operate at a loss or shut down completely, job losses are expected to rise. Goldman Sachs estimates that 16 million Chinese jobs—over 2% of the labor force—are tied to exports bound for the U.S.
3. Data Points to Worsening Deflation
China’s Consumer Price Index (CPI) turned negative in February and March 2025, while the Producer Price Index (PPI) has declined for 29 straight months, with March seeing a 2.5% year-over-year drop.
Economists at Morgan Stanley project that wholesale deflation will worsen to 2.8% in April, as the trade war reduces export volumes further. Goldman Sachs forecasts 0% CPI growth for the full year and a 1.6% decline in PPI.
“Prices will need to fall to absorb the excess supply left behind by U.S. importers,” said Shan Hui, Chief China Economist at Goldman Sachs.
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4. U.S. Ends Tariff Exemptions, Hurting SMEs
Further compounding the crisis, the Trump administration recently removed “de minimis” exemptions that previously allowed platforms like Shein and Temu to avoid tariffs on low-value U.S. shipments.
“Small and medium-sized enterprises are heading toward insolvency,” said Wang Dan of Eurasia Group. She projects urban unemployment to average 5.7% in 2025, exceeding the official target of 5.5%.
5. Beijing Resists Major Stimulus
Despite growing economic pressures, Beijing has been cautious about rolling out aggressive fiscal stimulus. Economists suggest that the government views current deflationary trends as manageable, preferring to monitor conditions before acting decisively.
“Authorities do not view deflation as a crisis,” said Wang Dan, adding that low prices are being framed as a temporary buffer for household savings.
6. Dual Economic Drags and Global Repercussions
Economists warn that China now faces dual drags: a battered property sector and collapsing export demand due to U.S. tariffs. Nomura's Ting Lu warns of a “worse-than-expected demand shock.”
Justin Yifu Lin, economist and professor at Peking University, believes China has the tools—fiscal and monetary—to boost demand but cautions that U.S. consumers will feel the pinch as they await reshoring efforts.
“It will take one to two years for the U.S. to rebuild manufacturing,” Lin said. “In the meantime, American consumers will face higher prices.”
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