Business
China is trying to fix its economy. Trump could derail those plans
ReutersChina is expected to unveil new measures to boost its flagging economy, as it braces for a second Donald Trump presidency.
Trump won the election on a platform that promised steep import taxes, including tariffs as high as 60% on Chinese-made goods.
His victory is now likely to hinder Xi Jinping’s plans to transform the country into a technology powerhouse – and further strain relations between the world’s two biggest economies.
A property slump, rising government debt and unemployment, and low consumption have slowed down Chinese growth since the pandemic.
So the stakes are higher than ever for the latest announcement from the Standing Committee of the National People’s Congress (NPC), the executive body of China’s legislature.
During his first term in office Trump hit Chinese goods with tariffs of as much as 25%.
China analyst Bill Bishop says Trump should be taken at his word about his new tariff plans.
“I think we should believe that he means it when [he] talks about tariffs, that he sees China as having reneged on his trade deal, that he thinks China and Covid cost him the 2020 election”.
The pressure from Washington did not ease after Trump left the White House in 2021. The Biden administration kept the measures in place and in some cases widened them.
While the first wave of Trump tariffs were painful for China, the country is now in a much more vulnerable position.
The economy has been struggling to return to pre-pandemic levels of growth since abruptly abandoning its tight Covid restrictions two years ago.
Instead of delivering a widely expected fast-paced recovery, China became a regular source of disappointing economic news.
Even before Trump’s election victory and after China began rolling out measures to support its economy in September, the International Monetary Fund (IMF) lowered its annual growth target for the country.
The IMF now expects the Chinese economy to expand by 4.8% in 2024, at the lower end of Beijing’s “about 5%” target. Next year, it projects China’s annual growth rate will drop further to 4.5%.
But the country’s leaders were not caught entirely off guard by the end to decades of super-fast growth.
Speaking in 2017, President Xi said his country planned to transition from “rapid growth to a stage of high-quality development.”
The term has since been used repeatedly by Chinese officials to describe a shift to an economy driven by advanced manufacturing and green industries.
But some economists say China cannot simply export itself out of trouble.
China risks falling into the type of decades-long stagnation that Japan endured after a stock and property bubble burst in the 1990s, Morgan Stanley Asia’s former chairman, Stephen Roach, says.
To avoid that fate, he says China should draw “on untapped consumer demand” and move away from “export and investment-led growth”.
That would not only encourage more sustainable growth but also lower “trade tensions and [China’s] vulnerability to external shocks,” he says.
This more robust economic model could help China fend off the kind of threats posed by Trump’s return to power.
New economy, old problems
But China, which has long been the world’s factory for low-cost goods, is trying to replicate that success with high-tech exports.
It is already a world leader in solar panels, electric vehicles (EVs) and lithium ion batteries.
According to the International Energy Agency (IEA) China now accounts for at least 80% of solar panel production. It is also the biggest maker of EVs and the batteries that power them.
The IEA said last year that China’s investments in clean energy accounted for a third of the world’s total, as the country continued to show “remarkable progress in adding renewable capacity.”
“For sure there is an overall effort to support high-tech manufacturing in China,” says David Lubin, a senior research fellow at London based-think tank, Chatham House.
“This has been very successful”, he adds.
Exports of electric vehicles, lithium ion batteries and solar panels jumped 30% in 2023, surpassing one trillion yuan ($139bn; £108bn) for the first time as China continued to strengthen its global dominance in each of those industries.
That export growth has helped soften the blow to China’s economy of the ongoing property crisis.
“China’s overcapacity will increase, there is not doubt about it. They have no other source of growth,” said Alicia Garcia-Herrero, chief economist for the Asia Pacific region at investment bank Natixis.
But along with those increased exports, there has been a rise in resistance from Western countries, and not just the US.
Just last month, the European Union increased tariffs on Chinese-built EVs to as much as 45%.
“The problem right now is that large recipients of those goods including Europe and the US are increasingly reluctant to receive them,” said Katrina Ell, research director at Moody’s Analytics.
Today, as Trump is set to head back to the Oval Office with a pledge to hammer Chinese imports, Beijing will have to ask itself whether its latest measures to boost its slowing economy will be enough.
Nasdaq-listed software firm Freshworks announced its plans to restructure its operations across all locations, including India and the US, by laying off 13 per cent of its workforce. On Wednesday, the company posted lacklustre third quarterly results, with operating loss widening to USD 38.9 million from USD 38.7 million in the same period a year ago.
Total revenue for the quarter improved 22 per cent to USD 186.6 million, but it did not arrest the loss. In an effort to improve operations, the software-as-a-service (SaaS) company founded by then-Chennai-based Girish Mathrubootham plans to cut around 660 jobs.
According to Freshworks CEO Dennis Woodside, the job cuts are expected to incur costs of around USD 11 million to USD 13 million for the upcoming quarter, which will include severance payments and other expenses.
Layoff season is back
The Salesforce competitor joins accounting big-four KPMG as a major brand to announce layoff this week. Reports on Monday said that KPMG was looking to cut at least 330 jobs, or 4 per cent, of its audit workforce in the US.
Last week, the maker of the open-source browser, Mozilla Foundation, announced the layoff of 30 per cent of its workforce.
More job cuts circled the tech sector, with Elon Musk’s X laying off an undisclosed number of people, according to The Verge.
Reports in October also revealed that Samsung cut around 10 per cent of the workforce in Southeast Asia and Australia, and TikTok laid off at least 100 people, mostly in Malaysia.
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Edutech firm Coursera also cut 10 per cent of its roles. However, last month’s major shocker was aircraft maker Boeing, slashing 10 per cent of its massive workforce, impacting at least 17,000 people.
The layoff trend, which was triggered during the Ukraine war scare, has been in full swing for the past two years. While it showed signs of slowing in the middle of 2024, the latest trends since October paint a gloomy picture for professionals working in the tech sector.
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With majority of business for the Indian IT sector coming in from the US market, there is both concern and joy for the sector because of the US presidential elections result. One thing is sure: the new Donald Trump regime in the US is expected to remain vocal about ‘America First’. Its policies around visa regulations and offshore IT engagements are likely to reflect on the Indian IT services in the short term.
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During Trump administration’s first term, Indian IT sector reshaped itself, fostering resilience and adaptability. H-1B visa restrictions led Indian IT companies to pivot to US hiring, creating over 1,75,000 jobs by 2019 and expanding local investments. This shift, though challenging, strengthened the Indian IT sector’s ability to meet client needs onshore, while growing demand for digital transformation in North America provided opportunities for Indian IT firms to lead in modernisation and innovation efforts.
“We may see mixed effects on India’s economy. Stricter visa rules could impact Indian IT professionals in the US, but his push to reduce reliance on China might open doors for Indian industries like tech, pharma, and manufacturing. Meanwhile, the growth of American Global Capability Centers (GCCs) in India is likely to continue, as US companies increasingly invest here for skilled talent and strategic offshore operations,” said Neeti Sharma, CEO, TeamLease.
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Of late, the Indian IT industry has been investing significantly on building local delivery capabilities in the US, hiring locals and diversifying its client portfolio by going beyond North America. While the dependence on H-1B is not going to go away, they are better-prepared for the nuanced policy shifts that might take place.
“The good news is that Trump’s new administration is likely to bring in a significant focus on its economy and show changes on the ground. Businesses need cost advantages to remain competitive and talent for deploying the latest technologies. India is extremely well-poised to fulfil these two needs. Hence, I can imagine many more GCCs being set up in India by the US companies to leverage the talent pool available in India and leverage the cost advantages,” said Aditya Narayan Mishra CEO and MD, CIEL HR.
“Secondly, we expect the CIOs (Chief Information Officers) and the boards of many large and mid-sized companies in the US untie their purse strings to deploy the latest tech and thus, a quick pick-up in new orders for our IT services companies. This shift could drive accelerated development of tech hubs in India, fueling growth in emerging tech fields like artificial intelligence, machine learning, cyber security, and cloud solutions.”
Experts with whom THE WEEK spoke to further pointed out that Trump’s win is expected to strengthen the US economy and the dollar, both of which are very beneficial to the IT industry in India. “The possible tax cuts by Trump for domestic production or services would ease pressure on pricing as well as budgets. H-1B visas and the likelihood of dwindling numbers on that will not hurt the IT services given the wide acceptance of remote delivery and that of GCC growth in India. Hence, Trump’s win is certainly more favourable to India on IT industry or Services,” said Subramanian S., founder, president and CEO of Ascent HR.
Many industry stake holders are also positive about the business intent that Trump is known for, the impact for IT industry, which could be a benign regime, particularly for higher value-added skills. Besides, Trump regime needs India to open up some of the sectors that are not open for trade, and so, India might have to open those sectors as well.
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