China’s Export-Led Growth Exposes Economy to Steeper Tariff Hit

China's stronger-than-expected growth in the first quarter masks a key vulnerability: a growing dependence on foreign demand, which increases the threat of a sharper economic hit as trade tensions soar.

Nearly 40% of first-quarter GDP expansion — which came in at 5.4% — was driven by net exports, the highest share for this period in over a decade. That's also up from last year, when trade accounted for almost a third of overall growth.

That heavy dependence on foreign demand comes at a precarious time. With the US ramping up tariffs on Chinese goods and global demand weakening amid the broader fallout from President Donald Trump's chaotic trade policies, the export engine helping power China's recovery may be at risk of stalling.

The strong contribution from trade also shows how fragile the domestic economy remains as it faces pressure from deflation, sluggish consumer demand and a prolonged property slump. Economists including from Citigroup Inc. and UBS Group AG have cut their 2025 growth forecasts to around 4% or lower, calling for more stimulus to stabilize the economy.

China's trade surplus with the US totaled $77 billion in the first quarter, accounting for 28% of its overall goods trade surplus, and that figure is expected to shrink as tariffs hit. Bloomberg Economics warned the new US duties will “crush” exports as it cut its forecast for GDP growth this year to 4.2%. 

What Bloomberg Economics Says...“President Donald Trump's barrage of tariffs means Chinese goods now face an effective US levy of about 115%. Along with indirect impacts from decreased transshipments and a slowdown in global growth, this could knock 2.0%-2.5% off GDP.”— Eric Zhu, Chang Shu, David Qu, economistsRead full note here

The fiscal data released late last week also points to underlying weakness in the economy, with tax revenues shrinking 3.5% in the first quarter. That's well below the 4.6% growth in nominal GDP. 

Part of the revenue shortfall likely stems from increased rebates for exporters and other tax breaks, with export tax rebates rising 14% from the same period a year earlier. Export-related tax returns as a share of foreign shipments climbed to 12.3% in January-March, pointing to faster payouts to help the finances of Chinese companies. 

Land sales also continued to slump, with revenue down 16% in the first quarter after three straight years of declines.

The continued contraction in land sales and tax revenues meant total income under the two major budgets fell 2.6% to 6.9 trillion yuan ($950 billion) in the first quarter. That slowdown in revenue comes even before the full impact of the US tariffs, suggesting the government will have to go even further into debt to try and support the economy. 

While the Chinese government has pledged to counter external shocks with stronger efforts to drive domestic demand, the latest budget data shows infrastructure investment is still lagging. Expenditure in areas such as urban and rural development, water conservation and transportation under the general public budget, the government's main book, contracted 4.2% in the first quarter from a year earlier, the first drop in two years. 

That trend may need to be reversed quickly if global trade takes a bigger hit from rising tariff uncertainty. 

“Fiscal stimulus needs to do the heavy lifting to buffer the external shock and buttress domestic demand,” Bloomberg Economics wrote. “We expect the government to quicken execution of its expansive 2025 budget. But further support may be needed later in the year if there is no meaningful tariff de-escalation in coming months.”