China’s economy grew before tariffs kicked in

SINGAPORE—Economic growth in China held steady in the first quarter, helped by government stimulus and a rush of exports to the U.S. ahead of stiff new tariffs, though the economy is set to slow as the trade war between Washington and Beijing heats up.

How serious that slowdown gets depends on how successful Chinese exporters are at finding new markets for goods shut out of the U.S. by sky-high new tariffs. It also depends on how big a boost to spending Beijing can generate at home to offset weakness overseas.

Some economists expect Chinese growth to slow to 4% or less this year, which would mark its slowest expansion in decades, outside of the pandemic years 2020 and 2022. In 2018, when President Trump first hit China with tariffs, its economy shrugged it off to report growth of 6.7% that year.

The Trump administration plans to use tariff negotiations to pressure U.S. trading partners to limit their dealings with China, The Wall Street Journal reported, an effort to put a dent in China’s economy and reduce Beijing’s leverage in potential trade negotiations between Trump and Chinese leader Xi Jinping.

U.S. officials plan to use negotiations with more than 70 nations to ask them to disallow China to ship goods through their countries, prevent Chinese firms from locating in their territories to avoid U.S. tariffs, and not absorb China’s cheap industrial goods into their economies.

The U.S. is also facing a tariff-induced slowdown—with some economists anticipating an outright recession as higher prices squeeze consumption and uncertainty over trade pinches business investment and hiring. Trump argues that some short-term pain is necessary as he uses tariffs to push companies to bring manufacturing jobs back to the U.S.

China’s economy expanded 5.4% in the first quarter compared with the same period a year earlier, matching the pace notched in the final three months of last year, China’s National Bureau of Statistics said.

Growth was driven by industrial production, infrastructure investment and exports, which rocketed in February and March as U.S. importers raced to bring in orders ahead of anticipated new tariffs. Following a series of tit-for-tat exchanges last week, Washington and Beijing raised tariffs on each others’ products to more than 100%, potentially crippling U.S.-China trade in all but the most essential items. The two countries’ bilateral trade was $582 billion last year, according to data from the U.S. Census Bureau.

Already, there are signs that those levies are starting to pinch commerce between the world’s two largest economies. Container traffic at Chinese ports fell 6% last week compared with the previous seven days, according to China’s Ministry of Transport, while an index of freight rates for shipping goods to the U.S. West Coast from China tumbled 18%. Chinese wholesalers say orders from the U.S. have dried up.

Retail sales also rose in March, jumping 5.9% on the year, suggesting government efforts to pump up consumption by offering shoppers discounts on new consumer goods if they trade in old ones are bearing fruit.

Nonetheless, economists have cut their forecasts for Chinese growth as the trade war escalates.

UBS chief China economist Tao Wang said she expects Chinese exports to the U.S. to fall by two-thirds this year and for Chinese exports overall to decline 10% year-over-year thanks to the knock-on effect of trade conflict on the global economy.

Even with extra government spending, UBS said it expects growth in China to crumble to 3.4% this year and just 3% next year. Annual growth in 2024 was 5%, though many economists say actual growth in China was probably weaker than the reported figure.

Julian Evans-Pritchard, head of China economics at Capital Economics, said he expects Chinese firms should be able to offset at least some lost sales to the U.S. by finding buyers in new markets—though many governments are wary that a flood of cheap Chinese imports might overwhelm key domestic industries.

Sarah Zhang, a Fuzhou-based trader of LED clocks, said about 20% of her company’s orders come from the U.S., with buyers including Walmart and Amazon. Still, more than 70% of orders come from Europe, Japan and South Korea, with the rest from China domestically.

“The U.S. market is still important, but it’s not like we can’t live without it,” Zhang said, adding that they have halted taking new orders from the U.S. One big U.S. customer wanted a 20% to 30% discount following the tariffs but she refused, she said.

Economists and executives also expect supply-chain shifts will allow some Chinese firms to keep selling into the U.S. by moving production to third countries. Trump has signaled he intends to crack down on that, but his plans aren’t clear.

Cassie Yu, who sells aluminum desk-stands for cellphones and laptops, said her husband has been in Southeast Asia since Trump announced his slate of tariffs on China and other U.S. trading partners, trying to find factories in countries that haven’t been hit as hard by new U.S. tariffs.

“Our partners in the U.S. started panicking and calling us, so he booked the first flight the next day to Vietnam, and now he’s in Malaysia,” Yu said. “Hopefully, we can nail down some ways to avoid the tariffs.”

China’s other big option for shoring up growth is boosting the domestic economy, parts of which have been struggling thanks to a drawn-out property crunch and tepid consumer spending.

Beijing has signaled plans to boost borrowing and spending to counteract the headwinds from overseas. Most of that extra spending will likely go to investment, especially in infrastructure, though Beijing has also said it wants to pump up consumption, perhaps by expanding trade-in programs that let households upgrade cars and home appliances for newer models at a discount.

Goldman Sachs economists said in a research report that they expect their broadest measure of the government budget deficit in China—which includes borrowing by central and local governments, state-run lenders and a planned step-up in bond sales—to reach 14.5% of gross domestic product this year, from 10.4% in 2024.

That level of support isn’t far off the fiscal expansion China pursued in the wake of Covid-19 lockdowns in 2020, the report said. Even so, that won’t fully offset the drag from weaker trade and a slowdown in global growth, the bank said.

Wednesday’s data showed industrial production expanded at a 7.7% annual rate in March, China’s National Bureau of Statistics said, while exports rose 12.4%. Real estate continues to drag on the economy, with average sale prices in 70 major cities falling 5% on the year.

Write to Jason Douglas at jason.douglas@wsj.com