China's Achilles Heel
China's growth model is based on exports and those have just taken a massive hit
Everyone has an Achilles heel. The US’ Achilles heel is irresponsibly wide budget deficits, which - in the ongoing tariff confrontation - create large vulnerabilities that China very skillfully exploited earlier this year. China has an Achilles heel too, which is that its growth model is almost entirely predicated on exports. This year’s sharp rise in US tariffs is undermining this growth model meaningfully.
You wouldn’t know this from looking at China’s export numbers, which were just published yesterday for July. The left chart above shows overall exports (black line) and breaks those down into goods going to the US (red bars) and those going to any other country (blue bars). Exports to the US have fallen sharply, with exports to the rest of the world almost completely offsetting this drop. The right chart zeros in on this dynamic. It shows year-over-year growth in exports to the US (red line) versus exports to everywhere else (blue line). In July 2025, China’s exports to the US were down a stunning 22 percent from a year before, while exports to everywhere else were up 12 percent year-over-year, a higher-than-normal growth rate.
A couple of points are worth making. First, while it’s true that export growth to the US was similarly weak in late 2022 and early 2023, that episode followed a massive boom in Chinese exports during COVID, when US households shifted demand from services to goods. There was no such boom in the run-up to the current drop in exports, which means things look much more dire for China. Second, the rise in exports to places other than the US is a deflationary shock for China, which is either transshipping goods to the US (weighing on exporters’ profits) or discounting goods to boost demand for Chinese goods outside the US (also weighing on exporters’ profits).
In short, the latest trade data suggest that China’s export sector and thus the country’s entire growth model are really struggling under the weight of US tariffs.
Given US restrictions on imports from China, China needs to shift a bit toward the domestic market although the US import restrictions generally will on balance shift some global demand toward China.
The US Achilles Heal is not just the deficit, but the deportations, discouragement of high-earning immigrants and students, defunding of scinece, and import restrictions in general
No struggle here in China. I already vacationed for 10 days; the trains were full, and I paid standard rates at hotels. On Monday, I will go on another 10-day vacation, and we booked at the standard price. The economy is solid.