The U.S.-China Trade War: Implications for Central and Local Budgets

Victor Shih CLM Issue 84 June 2025.pdf

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Although temporarily alleviated, the high tariff rates announced by the U.S. could have a major impact on China’s economy, although the impact will vary depending on the sector and province. Sectors like plastics, textiles, apparel, and electronic products will see a substantial impact, leading to millions of job losses. Likewise, trade-exposed provinces like Jiangsu, Zhejiang, Shanghai, and Guangdong will see downward pressures on GDP. Fiscal outlays will increase substantially in these places to pay for unemployment insurance and to finance countercyclical investments. However, the fiscal impact will be mitigated by how few taxes China collects from industrial firms and the low levels of unemployment-insurance payments. Certain provinces, especially Jiangsu and Zhejiang, which already have high debt levels, may face high fiscal pressures because of the combination of high debt service payments and new outlays for the trade war. The central government will almost certainly need to authorize the issuance of greater debt in these provinces.

Although temporarily alleviated, the high tariff rates announced by the U.S. could have a major impact on China’s economy, although the impact will vary depending on the sector and province. Sectors like plastics, textiles, apparel, and electronic products will see a substantial impact, leading to millions of job losses. Likewise, trade-exposed provinces like Jiangsu, Zhejiang, Shanghai, and Guangdong will see downward pressures on GDP. Fiscal outlays will increase substantially in these places to pay for unemployment insurance and to finance countercyclical investments. However, the fiscal impact will be mitigated by how few taxes China collects from industrial firms and the low levels of unemployment-insurance payments. Certain provinces, especially Jiangsu and Zhejiang, which already have high debt levels, may face high fiscal pressures because of the combination of high debt service payments and new outlays for the trade war. The central government will almost certainly need to authorize the issuance of greater debt in these provinces.

Since taking office, President Donald Trump has dramatically increased tariffs on Chinese imports to levels not seen since the Great Depression. The initial move came in February 2025, with a 10 percent tariff imposed on all Chinese goods, citing China's role in the fentanyl crisis. This was followed by a 20 percent tariff in March 2025. On April 3, Trump announced an additional 34 percent duty, bringing the total to 54 percent. After China retaliated with its own tariffs, Trump raised the tariffs further to 125 percent on April 9, which the White House later clarified as 145 percent after accounting for the previous levies. China responded by imposing a 34 percent tariff on all U.S. imports, later increasing it to 125 percent. Given the close to 600 billion USD in bilateral trade between the two countries, these tariffs will lead to a dramatic slowdown in the economies of the two countries. As both countries run hefty budget deficits, this trade war will also exert significant pressures on the fiscal balance of each government.  Although there is now a 90-day window for lower tariff rates, it is still revealing to estimate the fiscal impact of the full force of the trade conflict on China’s central and local budgets.

National Fiscal Impact

From a fiscal perspective, high tariffs in a major export market will mainly generate the following negative impacts: fewer tax receipts, higher outlays for unemployment benefits, indirect taxes, and unemployment impacts, leading to a fiscal stimulus to replace any loss of economic activities. Although the trade war will be catastrophic to thousands of firms and millions of workers, the combination of overall low taxes and low unemployment benefits in China will render the direct fiscal impact quite manageable for the Chinese government.

First, as one can see in Table 1, two factors limit the impact of U.S. tariffs on China’s tax receipts. First, Table 1 shows that taxes collected on sales in the industrial sector continue to be very low, in the neighborhood of 3 percent of sales of industrial output, both in 2015 and in 2024. Second, although the U.S. continues to be a major export market for Chinese industrial goods, it remains modest as a share of all industrial output, also less than 3 percent. Thus, one can see that value-added tax receipts directly related to U.S. exports are likely to be very modest, in the range of 0.7–0.8 percent. To be sure, a lot of intermediate goods go into the goods that are exported to the U.S., so VAT linked to U.S. exports likely will be 2 to 3 times the 0.7–0.8 percent impact. Even if that is the case, the VAT impact will be 2–2.5 percent of the VAT tax receipts in 2024. Although over RMB 400 billion, this impact will still be relatively modest and can be alleviated with just minor adjustments of debt issuance. Because a key focus of Chinese industrial policy has been a minimization of tax collection on export industries, even when exports fall significantly, there will be little impact on tax collection.

Table 1: Industrial Sales, Industrial Value-Added Taxes Collected, U.S. Exports, Estimated U.S.-related VAT, U.S.-related VAT as a Share of Tax Revenue

	Industrial Sales (RMB bln)	Industrial VAT Collected (RMB bln)	U.S. Exports as a Share of Industrial Output	Estimated U.S.-Related VAT Collected (RMB bln)	Estimated U.S. VAT as a Share of Total Tax Revenue (%)
2015	110985.297	3110	2.6%	80.9	0.7%
2024	137766.18	4132	2.7%	111.56	0.8%

Source: National Bureau of Statistics (NBS)

The largest fiscal impact at the national level likely will be the additional costs of unemployment-benefit payments. With the 500 billion USD or so in exports impacted severely, much of it in labor-intensive industrial sectors, millions of workers may lose their jobs. Industrial workers in China numbered around 215 million in 2023, and again, given the modest amount of U,S. exports as a share of total industrial production, roughly 5 million workers work in U.S. exports. In fact, when matching China Customs U.S. trade data with sectoral employment data from the 2024 economic census data produced by the NBS, one finds a rough picture of the employment impact, as shown in Table 2. As can be seen, the largest impact will be in a sector such as electrical machinery and equipment, which, with a U.S. export share of 13 percent and sectoral employment of 10.1 million, will face an estimated loss of 0.66 million jobs if U.S. exports fall by half. The plastics and rubber products sector follows, with a 16.7 percent U.S. export share and a projected job loss of 0.44 million out of 5.2 million employed. The textiles and apparel sectors are similarly vulnerable: textiles, with a 16 percent U.S. export share, risk losing 0.38 million jobs, while apparel and clothing accessories risk losing 0.36 million jobs, given their 8.1 percent U.S. export exposure.

In contrast, the heavy industry sectors, such as base metals and related articles, despite employing 10 million workers, have only 1 percent of their production tied to U.S. exports, thus limiting potential job losses to about 50,000 jobs. The chemical sector and the transport equipment sector (vehicles, aircraft, vessels) are even less exposed, with estimated job losses of just 30,000 and 40,000, respectively. Overall, sectors focusing on consumer goods and electronics are poised to bear the brunt of the employment impact from the U.S. tariffs, while foundational industries like chemicals, metals, and transport equipment will be comparatively shielded due to their lower export dependence on the U.S. market.

To be sure, one does not expect 100 percent employment losses in U.S.-exporting firms because of transshipments and other preparations that firms have made for the trade war. Assuming that 9 million workers work in U.S.-focused firms and their suppliers and that the employment impact is 50 percent, China will still be facing 4.5 million in additional unemployment.

Given that the average monthly minimum living guarantees (dibao) for the destitute was on average 110 USD per month as of early 2025, 4.5 million unemployed workers will add 495 million USD, or RMB 3.5 billion per month, to government expenses.[1] In fact, given that workers in export firms are clustered in the wealthier provinces where minimum living guarantee payments approach 200 USD per month, actual unemployment expenses may approach RMB 5.3 billion per month (1.5 times the national average), or RMB 64 billion for the year, if the trade war persists without alleviation. RMB 64 billion, if financed by additional government bond issuances, will add a deficit of 0.05 percent of GDP when the government had already planned for a substantial 8 percent deficit for 2025.

In fact, the Chinese government anticipated the possibility of this shock even in March 2025 before the “Liberation Day” tariffs, when the Ministry of Finance (MOF) budget report stated that “international trade faces a large degree of uncertainty.”[2] In the run-up to the U.S. decision to impose a total of 54 percent tariffs on China on April 3, the Chinese government had already decided to enlarge deficit spending substantially and to increase budgeted spending by RMB 3 trillion for 2025.[3] This increase in budgeted spending likely will be sufficient to pay for much of the higher unemployment living expenses. Of course, there will be additional costs if the government seeks to provide job retraining and other social services for the unemployed workers. However, the costs of such services will likely be more modest than the living expense payments themselves.

To be sure, lost revenue and unemployment insurance are not the only potential costs of the trade war for the central government. In order to maintain growth at the targeted 5 percent, the central government will need to boost investment and domestic consumption, which might require additional subsidies. For one, the MOF announced the issuance of RMB 300 billion in special ultra-long-term government bonds to support the "old-for-new" initiative, encouraging the replacement of consumer durables such as appliances and vehicles. This allocation marks a 100 percent increase compared to the previous year, signaling a much stronger push to drive domestic demand at a time when external demand is coming under pressure.[4] In parallel, China is intensifying efforts to stabilize foreign trade and attract foreign investments by refining import-export tax policies, expanding the availability of export credit insurance and export financing, and promoting the development of new trade channels, including subsidizing overseas warehousing.

In addition to trade and consumption measures, the MOF has intensified support for new industrialization. Particular emphasis is placed on strengthening technological innovation within the manufacturing sector and deepening the integration of industrial upgrading with technological breakthroughs. To this end, the 2025 budget allocates RMB 11.9 billion in special funding to subsidize advanced manufacturing, a 14.5 percent increase over the last year. Complementing these subsidies, China will issue an additional RMB 200 billion in special ultra-long-term bonds to help firms finance equipment renewal, representing a 30 percent increase from 2024. The actual amount of funds available for equipment upgrading may well be several folds higher than the RMB 200 billion figure because government funds are typically used as downpayments and interest payments for bank loans.[5] The real figure of subsidized government funding for equipment upgrading may well surpass RMB 1 trillion in 2025.

We already know that the banks will play a major role in maintaining growth in 2025 because the central government authorized the issuance of RMB 500 billion in special bonds to recapitalize the state-owned banks, thus enabling them to issue trillions of RMB in new loans to help with any stimulus programs to maintain growth.[6] Given the enormous resources the Chinese government has already authorized, if the U.S. maintains the high tariffs on China but begins to reduce tariff rates for most other parts of the world, especially the Southeast Asian countries, the fiscal impact likely will be manageable, although unemployment likely will increase significantly. This means that retail sales growth in major export hubs like Shanghai, Zhejiang, and Jiangsu may fall into negative territory.

Table 2: Estimated U.S. Share of Employment in Major Sectors Exporting to the U.S. and a Hypothetical 50 percent Employment Loss*

Sector	U.S. Share	Sector Employment 2023 (mn)	U.S.–Related Employment (mn)	50 percent Job Loss (mn)
Products of the Chemical or Allied Industries	1.4%	4.73	0.07	0.03
Plastics and Articles Thereof; Rubber and Articles Thereof	16.7%	5.2	0.87	0.44
Textiles and Textile Articles	16.0%	4.717	0.76	0.38
Articles of Apparel and Clothing Accessories, not Knitted or Crocheted	8.1%	9	0.73	0.36
Articles of Stone, Plaster, Cement, Asbestos, Mica, or Similar Materials; Ceramic Glass and Glassware	2.5%	7.271	0.18	0.09
Base Metals and Articles of Base Metal	1.0%	10	0.10	0.05
Electrical Machinery and Equipment and Parts Thereof;	13.0%	10.1	1.32	0.66
Vehicles, Aircraft, Vessels, and Associated Transport Equipment	1.4%	5.5	0.08	0.04
Machinery and Mechanical Appliances; Electrical Equipment; Parts	5.4%	7.3	0.39	0.20
Total			4.48	2.24

Sources: Trade data based on NBS trade data; employment data based on 2018 economic census

Local Fiscal Impact

Although the trade war likely will only have a modest impact on the overall fiscal situation, some provinces may face extraordinary hardships because of high trade exposure and high existing debt levels that already require onerous debt servicing. As of the end of 2023, local government debt in China already surpassed RMB 110 trillion, or close to 100 percent of GDP.[7] This already required provinces to spend over RMB 1 trillion to service debt in some months throughout the year.

Local government debt in China has expanded rapidly over the past decade, reaching levels that pose significant fiscal and macroeconomic risks. During periods of an economic downturn, notably the 2008–9 global financial crisis and the COVID-19 pandemic, local governments were tasked with delivering a counter-cyclical fiscal stimulus. Given the limited tax collection authority of the local governments, they could only build additional infrastructure if it were to be financed by credit expansion through state-owned banks.[8] 

In response to the 2008–9 global recession, the State Council allowed local governments to extensively use local government financing vehicles (LGFVs) to borrow funds from banks to finance infrastructure. LGFVs, quasi-public entities, issued bonds and secured bank loans with implicit local government guarantees, resulting in an opaque accumulation of contingent liabilities. By the end of 2012, local debt approached RMB 24 trillion, or around 50 percent of GDP.[9] Although regulatory reforms have sought to bring more debt onto the balance sheets via the municipal bond market, a large stock of legacy LGFV debt remains unresolved. In theory, this debt can be repaid through land sales receipts because LGFVs are often given land as initial capital by the local governments. The softening of the property market and the tightening regulatory environment have exposed the vulnerability of this financing model, however, pressuring local governments into borrowing through expensive financing channels such as trust products. In recent years, high debt and dramatically slowing land sales have coincided to cause tremendous fiscal pressures for some local governments, thus finally forcing the central government to expand its own debt issuance.[10] 

Based on a database of 70,000 scraped bond records, Shih and Elkobi are able to calculate provincial-level local debt by month.[11] Table 3 shows that all but a small handful of Chinese provinces had high levels of debt by the end of 2023. Provinces like Jiangsu and Zhejiang stand out with the highest absolute levels of debt, reaching RMB 5.8 trillion and RMB 4.8 trillion, respectively. These figures reflect the economic scale and development levels of these provinces, which perhaps can support higher debt levels due to their robust economies. In contrast, Qinghai and Ningxia have some of the lowest absolute debt levels, at RMB 348 billion and RMB 239 billion, respectively, but they may have very high levels of debt compared to their modest economies.

When examining debt as a share of provincial GDP, the problem of high debt in the majority of Chinese provinces becomes clearer. Provinces like Tianjin, Guizhou, and Qinghai have exceptionally high debt-to-GDP ratios, at 93.44 percent, 91.49 percent, and 91.62 percent, respectively. These high-debt provinces are shaded on Table 3. Others, like Jilin (72.4 percent), Chongqing (65.91 percent), and Gansu (65.01 percent), also have above-average debt-to-GDP ratios, pointing to a similar degree of high fiscal pressures. These high ratios suggest significant fiscal stress because a substantial portion of their economic output is tied up in servicing debt. In contrast, economic powerhouses like Shanghai and Guangdong have much lower debt-to-GDP ratios of 24.28 percent and 20.89 percent, respectively, reflecting their stronger fiscal positions and ability to manage debt.

The last column on the right of Table 3 contains estimates of the provinces’ exposure to exports to the U.S. This is calculated by the NBS figures on exports as a share of GDP by province, multiplied by the U.S. share of overall Chinese exports in 2023 across all provinces. This is a rough estimate because it assumes that the national U.S. share of exports applies to every province equally, but in reality, the east coast provinces have higher exposure to exports to the U.S. than the national ratio. Shanghai, Zhejiang, Jiangsu, and Guangdong have the highest trade exposure to the U.S., each with exports to the U.S. above 4 percent of their provincial GDP.

For Shanghai and Guangdong, which have lower debt levels, this shock, although potentially severe, likely will not cause a serious fiscal problem because these provinces have a greater ability to respond with locally financed fiscal measures, such as subsidies to firms or higher unemployment payments. Jiangsu and Zhejiang, however, already need to devote close to or even above 100 percent of their monthly fiscal income to debt servicing. A sizable employment shock that demands substantially higher fiscal outlays may create severe fiscal pressures for these provinces. Other less-exposed provinces like Guangxi, Tianjin, or Chongqing may likewise face a dramatically worsening fiscal situation because of their high debt servicing needs in the first place. In these provinces, which are moderately exposed to U.S. trade at around 2 percent of provincial GDP, additional fiscal outlays will need to be financed by greater central transfers or more debt issuance. Most likely, these provinces will be authorized to issue even more debt, which will worsen their medium-term debt trajectories.

Table 3: Provincial-level Debt at the End of 2023 and Estimated U.S. Exports as a Share of GDP

Province	Total Outstanding Debt 2023 (bln RMB)	Total Debt as a Share of Provincial GDP	Est. U.S. Exports as a Share of GDP
Beijing	1358.541	31.04%	2.1%
Tianjin	1563.94	93.44%	3.5%
Hebei	2048.562	46.62%	1.3%
Shanxi	837.581	32.59%	0.6%
Inner Mongolia	1025.275	41.63%	0.5%
Liaoning	1345.175	34.53%	1.9%
Jilin	979.69	72.40%	0.8%
Heilongjiang	906.21	57.05%	0.8%
Shanghai	1146.526	24.28%	5.8%
Jiangsu	5817.059	45.37%	4.3%
Zhejiang	4803.694	48.52%	7.1%
Anhui	2325.742	49.43%	1.8%
Fujian	1908.729	30.58%	3.4%
Jiangxi	2086.535	64.80%	1.4%
Shandong	4090.312	37.93%	3.4%
Henan	2299.642	38.89%	1.3%
Hubei	2491.121	44.64%	1.3%
Hunan	2963.489	59.25%	1.0%
Guangdong	3557.956	20.89%	6.5%
Guangxi	1418.26	52.14%	2.4%
Hainan	431.1	57.09%	2.1%
Chongqing	1986.944	65.91%	2.5%
Sichuan	3281.607	54.57%	1.5%
Guizhou	1913.261	91.49%	0.4%
Yunnan	1593.843	53.09%	0.5%
Tibet	95.376	39.70%	0.7%
Shaanxi	1452.342	42.99%	1.4%
Gansu	771.279	65.01%	0.2%
Qinghai	348.05	91.62%	0.2%
Ningxia	239.72	45.10%	0.4%
Xinjiang	1197.389	62.61%	2.9%

 Figure 1: YoY YTD Change in Tax Revenue Collected in Shanghai, Jiangsu, Zhejiang, and Guangdong: January 2024–January 2025

To obtain a rough estimate of the fiscal gap potentially induced by tariffs in trade-exposed provinces, one should conduct a detailed analysis of fiscal revenue data. In the provinces most impacted by the U.S. tariffs, Shanghai, Jiangsu, Zhejiang, and Guangdong, fiscal trends were already weakening even before implementation of the tariffs. As seen in Figure 1, compared to early 2024, the growth of local revenue had already slowed down. Revenue collection growth in Zhejiang and Guangdong had fallen into negative territory for much of 2024, with Shanghai and Jiangsu registering anemic growth of 0–2 percent. For some reason, Jiangsu stopped publishing its revenue collection data in early 2025. One can imagine that given a sizable shock to corporate income in these provinces due to the U.S. tariffs, revenue collection will fall further, while the need to provide unemployment insurance and a counter-cyclical boost will increase. This potentially will leave a fiscal gap of 4–7 percent of fiscal income in the second half of 2025. For fiscally stressed provinces like Jiangsu and Zhejiang, such a gap will have to be financed by more central transfers or greater debt issuance.

Implications

The high tariff rates announced by the U.S. will have a major impact on China’s economy, although the impact will vary depending on the sector and province. Sectors like plastics, textiles, apparel, and electronic products will see a substantial impact, leading to millions of newly unemployed. Likewise, trade-exposed provinces like Jiangsu, Zhejiang, Shanghai, and Guangdong will see downward pressures on GDP. Fiscal outlays will increase substantially in these places to pay for unemployment insurance and to finance counter-cyclical investments. However, the fiscal impact will be mitigated by two factors. First, China was collecting very few taxes from industrial firms in the first place, so if thousands of industrial firms were to stop paying taxes because of bankruptcy, it would not have a major impact on overall revenue intake. Second, because the basic level of unemployment-insurance payments is less than 200 USD per month, even in wealthy provinces, paying the unemployment insurance for millions of newly unemployed workers will not be a huge burden on China’s overall budget. Certain provinces, especially Jiangsu and Zhejiang, which already have high debt levels, may face high fiscal pressures because of the combination of high debt service payments and new outlays for the trade war. The central government will almost certainly need to authorize greater debt issuances in these provinces.

As the trade war evolves, U.S. policymakers should realize that the negative impact of the tariffs, although painful for China, will not be catastrophic from an economic or fiscal perspective. The labor market will worsen but likely will not worsen as much as it did in 2022, when the Covid-19 lockdown led to mass unemployment. Fiscally, the Chinese government seems to have anticipated the trade war by announcing greater deficit spending in 2025, which may be mostly sufficient to deal with the fallout from the tariffs. China may need to increase deficit spending by 0.5–1 percent of GDP later in the year. Although this will lead to medium-term consequences, such as higher inflation and greater capital flight, this is a deficit level that can easily be sustained in the next two to three years. But depending on the negative consequences of the trade war for the U.S., this may not be a time horizon that the White House can accept. As trade negotiations begin between the U.S. and China, U.S. policymakers will need to have a clear idea about the desired objectives of these trade talks as well as an estimate of what China is willing to concede and the economic pain that the U.S. side is willing to experience to gain credibility.

About the Contributor

Victor C. Shih is Director of the 21st Century China Center and Ho Miu Lam Chair Professor in China and Pacific Relations at the School of Global Policy and Strategy of the University of California, San Diego, specializing on China. He is the author of Factions and Finance in China: Elite Conflict and Inflation (Cambridge University Press) and also a new book Coalitions of the Weak: Elite Politics in China from Mao’s Stratagem to the Rise of Xi (Cambridge University Press). He is also editor of Economic Shocks and Authoritarian Stability: Duration, Institutions and Financial Conditions (University of Michigan Press). Additionally, he is the author of numerous articles appearing in academic and business journals, including The Proceedings of the National Academy of Sciences, The American Political Science Review, Comparative Political Studies, Journal of Politics, and The Wall Street Journal. Shih served as principal in The Carlyle Group’s global market strategy group and continues to advise the financial community on China-related issues. Shih graduated summa cum laude from the George Washington University and received his Ph.D. in government from Harvard University.

Notes

[1] Ministry of Civil Affairs, "民政部举行2025年第二季度例行新闻发布会” [Ministry of Civil Affairs Convenes a Press Conference for the 2nd Quarter of 2025], April 14, 2025, at http://www.scio.gov.cn/xwfb/bwxwfb/gbwfbh/mzb/202504/t20250415_890716.html, accessed May 9, 2025.

[2] Ministry of Finance,  “关于2024年中央和地方预算执行情况与2025年中央和地方预算草案的报告” [Report on the Implementation of the Central and Local Budgets in 2024 and the Draft of the 2025 Central and Local Budgets] (Beijing: Ministry of Finance), March 13, 2025, at https://www.gov.cn/yaowen/liebiao/202503/content_7013431.htm, accessed May 9, 2025.

[3] Ibid.

[4] Ibid.

[5] Bureau of Economic Prediction, State Information Center, "Yong caizheng tixi zhichi zhongdian jishu gaizao” [Using Fiscal Interest Rate Subsidies to Support Key-point Technical Innovation], Zhongguo hongguan jingji xinxi [Chinese Macroeconomic Signals], no. 39 (1999).

[6] Ministry of Finance, 关于2024年中央和地方预算执行情况与2025年中央和地方预算草案的报告” [Report on the Implementation of the Central and Local Budgets in 2024 and the Draft of the 2025 Central and Local Budgets] (Beijing, Ministry of Finance), March 13, 2025, at https://www.gov.cn/yaowen/liebiao/202503/content_7013431.htm, accessed May 9, 2025

[7] Victor Shih, and Jonathan Elkobi, “Local Government Debt Dynamics in China: An Exploration Through the Lens of Local Government Debt and LGFV Debt,” 21st Century China Center Policy Report (La Jolla, CA: 21st Century China Center, 2023).

[8] Christine Wong, “Paying for Urbanization: Challenges for China’s  Municipal  Finance in the 21st Century,” in R.W. Bahl, J.  F. Linn, and D. L. Wetzel, eds., Financing Metropolitan Government in Developing Countries (Cambridge, MA, Lincoln Institute for Land Policy, 2013).

[9] Victor Shih, "Local Government Debt: Big Rock Candy Mountain," China Economic Quarterly  (June 2010): 26–32.

[10] Victor Shih, “Financial Repression Still: Policy Concerns and Stagnation in China’s Corporate Bond Market,” in Jacques Delisle and Avery Goldstein, eds., To Get Rich is Glorious: Challenges Facing China’s Economic Reform and Opening at Forty (Washington, DC: Brookings Institution Press, 2019).

[11] Shih and Elkobi,  “Local Government Debt Dynamics in China: An Exploration Through the Lens of Local Government Debt and LGFV Debt.” 

Photo credit: Alexander Mischenkov, CC BY 4.0 <https://creativecommons.org/licenses/by/4.0>, via Wikimedia Commons