The recent election of Donald Trump as U.S. President has cast a shadow over China’s already struggling economy. Trump’s proposal to impose a hefty 60% tariff on Chinese imports signals a stark escalation from the 7.5%-25% tariffs imposed during his previous term. This time, China may find it harder to absorb the economic shock.

In 2018, China’s economy was better positioned to withstand U.S. trade pressures. The real estate sector was booming, contributing a quarter of economic activity and supporting local government finances through land auctions. But since 2021, the real estate sector has spiraled into a downturn, saddling local governments with enormous debt burdens and limiting their capacity to manage external shocks. The International Monetary Fund reports that government debt hit 147 trillion yuan ($20.7 trillion) by the end of 2023, with household and corporate debt pushing the total beyond 350 trillion yuan—roughly three times the size of China’s economy.

Weak domestic demand further complicates matters. Youth unemployment remains high, and low wages and pensions keep household spending below 40% of GDP, far behind the global average. Reforms to redistribute income toward households and reduce inequalities have been limited, while the government has instead invested heavily in export-driven manufacturing sectors, achieving notable successes in electric vehicles, solar energy, and battery production. However, this has also triggered additional tariffs from Europe, Turkey, and the U.S.

The property crisis and debt burden have fueled deflation, with producer prices and consumer price inflation both dropping significantly since 2018. Analysts warn that if new tariffs erode external demand, China’s industrial overcapacity issues could worsen, exacerbating deflation.

Adding to China’s challenges, currency depreciation might offer limited relief. Analysts estimate that the yuan would need to drop to 8.5 per dollar—a level not seen since the Asian financial crisis in the 1990s—to offset the 60% tariffs. Yet authorities are cautious about allowing such depreciation, fearing capital outflows.

China’s manufacturing pivot has opened up new opportunities, especially in sectors like electric vehicles. Yet with U.S. tariffs on the horizon, China may face significant barriers in stabilizing its economy, which now teeters on a delicate edge of high debt, weak demand, and limited growth drivers.