Tariffs have been a moving target in recent months. April was a busy month with “reciprocal” tariffs set by the US on goods from a wide range of countries. These tariffs were later paused for 90 days (until July 9) so negotiations could take place. The negotiations are underway. But given the number of countries involved and the usual time it takes to come to an agreement, it is probable that work will still need to be done after July 9. Outcomes are more likely to be frameworks with possible narrow concessions to the US. But also with more delays and continued uncertainty.
There was also a sharp rise in tariffs between the US and China in April. They reached a level of 145% on Chinese exports to the US and 125% on US imports into China. In mid-May, the two countries reached an agreement that de-escalated tariffs back down to 30% for Chinese exports to US (or about 50% if consider pre-existing tariffs. And 10% for US imports to China. Later in the month, there was some back and forth on breaking the agreement. But this was later settled June 10.
Negotiations will continue around this framework. But uncertainty remains around future flare-ups and the outcome of these talks. China does seem to have some leverage in these talks because of its dominance in rare earth elements and magnets.
Resilient Chinese exports in 2025
Chinese exports are holding up relatively well thus far in 2025. They were a key driver of China’s GDP growth in 2024, rising 6% in US dollar terms. Chinese exports benefitted from frontloading and surged 10% year over year in the fourth quarter of 2024. This was with further support in March, when total exports jumped 12%, leaving them up 6% for the first quarter of 2025. Exports to the US have been hit hard since March, with year-over-year drops of 21% in April and 35% in May. Still, total Chinese exports rose 8% in April and nearly 5% in May as shipments to other regions expanded sharply.
The gain in exports to other regions is a trend that has been occurring for many years. China’s economy is a manufacturing powerhouse. And as domestic consumption growth has slowed at the same time that capacity has increased, manufacturing has increasingly relied on exports. Exports surged in 2021-22 around the post-COVID global demand shock. They only unwound modestly in 2023 before rebounding in 2024. Overall, exports rose 7% per year in 2018-24, with emerging economic regions seeing the fastest growth. These include Eastern Europe at 13% per year and Latin America at 11% per year.
Growing trade imbalances in Asian containerboard markets
Importantly, Chinese imports have not kept up with the growth in exports. And this has raised trade imbalances across all regions. The trade imbalance with the US grew 4% per year in 2018-24. The imbalance with other parts of Asia rose 22% per year with a big jump in late 2022 and 2023. The imbalance with the rest of the world increased 12% per year with a big leap in 2024. To some extent, this shift reflects the impact of the US-China trade war that unfolded in 2018-19. The Phase 1 agreement was signed in January 2020.
The expanding imbalance raises the question on how China will maintain export growth if exports to the US are held back under a new trade agreement, as other regions could become increasingly reluctant to see their imports rise and damage their own domestic manufacturing industries. For some countries, especially in Asia, it will be a tricky issue as they try to stay in China’s good graces to remain part of its supply chain. Some countries could benefit if they become an alternative location for production as companies diversify supply chains.
Mixed economic signals in China’s performance
Assessments of China’s economic performance are mixed. On the one hand, China’s economy has held up fairly well this year given the various headwinds its faces. GDP growth was 5.4% in the first quarter of 2025 and looks likely to reach 5.0% in the second quarter. This would put it well on its way to achieve the government’s target of “about 5.0%” in all of 2025. On the other hand, the economy can be considered to be underperforming given the sluggish domestic demand, still ailing property market and ongoing decline in producer prices. The producer price index has seen negative growth for 32 months.
The lackluster consumer market is being driven by several factors. These include slow income growth, high unemployment among the young and the negative wealth effect of the struggling property market. The government has implemented several policies to stimulate the economy. But the property market still is struggling (especially outside Tier 1 cities). And it is unclear what will replace it as a growth engine, especially if brakes are also put on its export engine. Consumer confidence remains down, and better wage growth and/or more policies to build confidence in the social safety net are likely needed to encourage consumers to spend from their high savings.
Challenges and outlook for China’s economy in 2025
There are many reasons for concern for China’s economy in the second half of 2025. Exports will be facing several sources of headwinds beyond the trade war itself. First, levels will be compared with a higher base. Second, there has been a lot of frontloading, so future orders may be more muted than normal. Third, demand for exports could moderate if global economic growth slows.
As for the domestic side of the economy, local Chinese consumption is likely to remain dampened with no signs yet of a strengthening in wage growth or job security. Also, the effects of the appliance and equipment trade-in programs are waning and would need more funds and/or to encompass a wider breadth of products to continue to have a positive impact on consumer spending.
Economic growth trends across Asia
Economic growth in the rest of Asia has been mixed as well. Across the rest of the region, growth in many countries performed well in the first quarter. But we expect it to moderate during the rest of the year as trade uncertainty continues. In Southeast Asia, first-quarter industrial production figures came in relatively healthy in Vietnam, Malaysia and Singapore. However, they were weak in Indonesia and Thailand. Retail sales performed well across the region.
In East Asia, industrial production was firm in Japan, South Korea and Taiwan. But only Japan saw good growth on the retail side. Those countries with data available for April and May mostly saw some softening in retail sales and industrial production growth levels. Our most recent GDP forecast has lowered growth by 0.5 to 1.0 percentage points for 2025 relative to our previous pre-trade war outlook.
Trade war uncertainty and its impact on Asian containerboard markets
The trade war is a major source of uncertainty. And drag on global growth and is expected to contribute to slower global economic growth over the second half of 2025. It is important to consider what is happening to economic growth across the rest of the world. This will be important in terms of whether demand is even there for Chinese (and Asian) export goods. There was a time that we believed that the second half of 2025 would be better than the first. But this is no longer the case.
Conditions look likely to worsen as trade softens, consumers become more cautious and investment decisions are put on hold due to uncertainty. Inflation has not resurfaced yet in the US. But there are expectations of a resurgence over the next few months as the impacts of the tariffs start to kick in. The Fed in its most recent discussion left interest rates unchanged, still fearing higher inflation, predicting it will rise to 3.0% from 2.4% now.
Higher prices may not have hit yet. But are expected to shortly, as inventories that were bought before the tariffs are drawn down. For the US, most forecasts put annual growth at 1.5% or less for the year, with the Fed now expecting 1.4% growth in 2025 but no recession. In Europe, there is also pessimism about the state of its economies.
Persistent overcapacity challenges in Asian containerboard markets
Asian containerboard markets are weak and are expected to remain so. Broadly, overcapacity plagues containerboard markets in China and in the rest of the region. In China, recycled containerboard prices slid over the first quarter due to lackluster demand (partly seasonal). The softness continued into April and early May until there was a brief rally when demand rose following the mid-May trade-war truce. This generated some boost in orders to package export shipments that had been delayed when the tariffs had skyrocketed. But this impact faded by the end of May. And with new export orders weak, prices started to fall again in June.
Similarly, prices in Southeast Asia are low, although mostly flat thus far this year due to the already poor margins in the market. Overcapacity has been a dominant factor in Southeast Asia as well because capacity has expanded sharply over the last several years, rising 7.4% per year in 2020-24. Output from this capacity was intended to feed into China’s growing demand. But instead it has backed up into Southeast Asia’s markets because of the soft Chinese import levels in 2024 and 2025.
Forecasts for containerboard demand and capacity
This weakness will keep Asian containerboard markets in a poor position for the second half of the year and as we move into 2026. We are predicting that containerboard demand growth will slow to 2.2% in 2025 from 4.2% in 2024. Operating rates will remain down as capacity growth remains steady at 5.8% in 2025 (and this assumes some closures and delays). Operating rates will average just 69%.
We predict demand conditions will improve in 2026, with a gradual recovery over the course of the year, putting demand growth at 3.8%. Operating rates will edge higher as capacity investment decelerates. But the overcapacity situation will continue to weigh on the market unless major capacity reductions occur.
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