China's annual session opens amidst trade war and economic uncertainty

China’s parliament opens its annual session on Wednesday, with authorities under pressure to direct more budgetary resources towards consumers in order to strengthen the economy in the face of growing US trade tariffs and deflationary pressures.

Premier Li Qiang is likely to put out a similarly high, but even more difficult-to-attain objective for 2025 in front of the National People’s Congress (NPC), after barely meeting last year’s economic growth target of around 5% thanks to a late stimulus push.

An escalating trade war with the United States, led by President Donald Trump, is threatening to crimp China’s economic jewel, its sprawling industrial complex, at a time when persistently low household demand and the unravelling of the debt-laden property sector are making the economy more vulnerable.

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Trump has also dangled tariffs at a long list of countries, including some which would consider themselves staunch U.S. allies, threatening a decades-old global trade order that Beijing has built its economic model around.

Pressure is mounting on Chinese policymakers to implement measures that put more money in consumers’ wallets while reducing the world’s second-largest economy’s reliance on exports and investment for development.

Li is likely to unveil a larger budget deficit of 4% of GDP and record debt issuance.  Some of these funds will go towards funding a recently expanded consumer subsidy program for electric automobiles, appliances, and other items.

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But economists have been urging Beijing to engineer a long-term restructuring of resource allocation in the economy with more profound measures that reimagine its taxation, land and financial systems to weave a stronger social safety net.

“With deflationary pressures becoming entrenched against the background of an unfavourable external environment … boosting domestic household consumption demand is a key priority,” said Eswar Prasad, trade policy professor at Cornell University and a former China director at the International Monetary Fund.

“One-off schemes might help at the margin, but durable measures to provide income support and strengthen the safety net are essential.”

China’s 5% growth rate last year was among the world’s fastest, but it was hardly felt at street level.

While China runs a trillion dollar annual trade surplus, many of its people are complaining of unstable jobs and incomes as their employers cut prices - and business costs - to stay competitive in external markets.

Chinese producers, facing weak demand at home and harsher conditions in the United States, where they sell more than $400 billion worth of goods annually, have no choice but to rush to alternative export markets all at the same time.

They fear this would intensify price wars, squeeze their profitability, and raise the risk that politicians in those new markets will feel compelled to erect higher trade barriers against Chinese goods to protect domestic industries.

Since Trump took office in January, his administration has so far added an extra 20 percentage points on existing import tariffs for Chinese goods, with the latest 10-point increment having kicked in on Tuesday.

“We worry that they will add another 10% and then another 10%,” said Dave Fong, who manufactures school bags, talking teddy bears, stationery and consumer electronics in China. “That’s a big problem.”

China on Tuesday swiftly retaliated against the fresh U.S. tariffs, announcing 10%-15% hikes to import levies covering a range of American agricultural and food products, and placing twenty-five U.S. firms under export and investment restrictions.

Since the pandemic, China has primarily placed its future growth bets on what it calls “new productive forces” rather than on its 1.4 billion consumers, pouring resources into advanced manufacturing, hoping to close the technological gap with geopolitical rivals.

Electric vehicle makers such as BYD and AI platform Deepseek have taken to the world stage with plenty of pizzazz.

But Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis, says technological aspirations and consumer demand growth are “competing priorities” and finding a balance between them “will be crucial for China to avoid the prolonged stagnation experienced by Japan.”

“The tangible impact of this innovation drive on growth, specifically through increased productivity, is not yet visible,” she said.

“While industrial policy and technological advancement are important, China must address its fundamental imbalances.”