China, the world’s second largest economy, is no longer the first choice of Western companies. The companies, which have been making high profits from the Chinese economy for years, are experiencing major losses in their revenues. After the trade war between the European Union and the US with China, the Western companies have begun to re-evaluate their operations in China.
The recent deterioration in the Chinese economy has led to questions about how advantageous the operations carried out by Western companies in China are. The loss of momentum in economic growth, the growing real estate crisis, increasing customs duties and youth unemployment have become the biggest factors straining the country’s economy. Moreover, the automotive and luxury sectors in particular have begun to be seriously affected by the falling demand in China.
After the Chinese Communist Party failed to fulfill its promise of liberalizing the economy and targeted companies operating in China, foreign companies began to suspend their operations in China. As a result of China’s zero-tolerance policies during the Covid-19 outbreak, many foreign companies’ factories were closed. In addition, while other countries around the world have lifted restrictions and returned to normal, the Chinese government has continued to impose restrictions, bringing foreign companies to a standstill.

China-dependent companies are looking for new places to produce
The EU’s decision to impose additional customs duties on electric vehicles imported from China has escalated trade tensions between China and the EU. In response to the tax decision, China has announced that it is considering imposing additional taxes on cognac products imported from Europe and a new tax on large-engine vehicles. Considering that 99 percent of China’s cognac imports come from France, this decision is expected to put great pressure on French beverage producers. Following the Chinese government’s announcement, shares of European automobile manufacturers and beverage companies, which export to China in particular, have declined. A bill envisaging an additional customs duty of up to 45 percent on vehicles imported from China was passed in the European Parliament on October 4. Germany voted against the bill, while 12 members, including Sweden and Spain, abstained. The EU, which traded with China for 739 billion euros ($815 billion) last year, is divided on whether it wants to move forward with the taxes.
With the latest application, an additional tax of 7.8 percent is expected for Tesla models produced in China, 17 percent for BYD, 18.8 percent for Geely, 20.7 percent for manufacturers that cooperate in the investigation but are not listed, and 35.3 percent for SAIC and other companies that do not cooperate.
The latest tax rates are expected to be added to the current 10 percent. Also, the collection of taxes of up to 45 percent is on the agenda at the beginning of November.
If Chinese electric car manufacturers have difficulty covering the taxes imposed by the EU, they may change their strategy regarding production. For example, Chinese automotive companies may take steps to invest in factories in Europe to avoid taxes.
On the other hand, the possibility of China retaliating against the EU has started to cause concern among European automotive manufacturers. The possibility of China imposing additional taxes on imported cars may affect countries such as Germany and Slovakia the most.

The economic downturn in China has hit the luxury and chip sectors the hardest
Due to the decline in consumer spending in China, the world’s largest luxury brands such as LVMH, Hugo Boss and Burberry have begun to experience a decline in profitability. LVMH announced that its sales in the region, including China, fell by 14 percent in the second quarter, worse than the 6 percent decline in the first quarter.
British brand Burberry also announced that its sales in China fell by more than 20 percent compared to last year.
In addition, Dutch chip manufacturing technology company ASML has not been able to export its chip machines to China for a while due to concerns about trade restrictions.
What is the situation for US companies? Following the trade war between the US and China, US companies have decided to continue their activities in countries such as Mexico, India and Japan.
In the first half of 2023, Mexico received approximately $30 billion in foreign investment, $13.6 billion of which came from US companies. That same year, Mexico surpassed China as the country that exported the most goods to the U.S.
India has been one of the countries that has attracted U.S. companies in recent years. Apple’s largest supplier, Foxconn, announced in February that it would open a factory in India. Apple, which has manufactured most of its products in China since 2001, has spent $16 billion in recent years to relocate its factories to other countries.
Japan, is a boon to U.S. companies for critical supply chains, new artificial intelligence industries and advanced semiconductors. For instance, Microsoft recently announced that it will invest $2.9 billion in Japan over two years to develop artificial intelligence and cybersecurity.

How will Trump’s presidency affect the Chinese economy?
China will be one of the countries that will be most negatively affected during Trump’s second term. Based on Trump’s election promises, we predict that trade wars will flare up again.
A 25 percent customs duty was imposed on US-China trade during Trump’s first term, but the high tariffs and quotas did not have much impact on macro data. Trump’s promise to impose a 60 percent customs duty on China and a 20 percent customs duty on other countries in his second term will cause major changes in trade relations On the other hand, Trump claimed that Chinese automakers had established factories in Mexico and stated that he would impose a 200 percent customs duty on vehicles sent from these factories to the US when he was elected. When we take these statements into account, we conclude that Trump is also preparing to impose customs duties on the automobile industry during his presidency.
We have already started to see the first reactions to Trump’s election promises. According to the data of the General Administration of Customs of China, exports increased by 12.7 percent on an annual basis in October, reaching $309 billion. The increase in exports reached the highest level in the last 27 months, well above the 2.4 percent increase in September.
According to analysts, the increase was due to exporters in China making large advance shipments in anticipation of Trump winning the US presidential election and tariffs increasing under his presidency.
What moves is China making to win back companies it has lost?
The People’s Bank of China (PBoC) announced on September 27 that reserve requirement ratios have been reduced by 0.5 percent. The decision, which aims to provide sufficient cash to the market, is expected to release 1 trillion yuan (approximately $140 billion) in cash assets. The People’s Bank of China last reduced reserve requirement ratios by 50 basis points on February 5. The bank made two 25 basis point reductions in 2022 and 2023.
Central Bank Governor Pan Gongsheng announced on September 24 that reserve requirement ratios would be reduced by 50 basis points as part of measures to stimulate the economy. Pan also emphasized that additional reductions of 25 to 50 basis points could be made in reserve requirement ratios during the year, depending on the liquidity situation in the market.
On the other hand, the PBoC lowered the 7-day reverse repo rate, the most important tool for transferring short-term cash to the market, from 1.7 percent to 1.5 percent and announced that interest rates on housing loans in the payment process will be reduced by 0.5 percent.
In short, these mutual customs duties between the EU and China are interpreted as a sign of a trade war. While the EU’s decision on electric vehicles directly targets China, China’s desire to impose taxes on more European products in return indicates that the war will intensify even further. European automotive manufacturers, already affected by the slowdown in China, will also be affected by the EU’s additional customs duty decision.
It remains uncertain how long the trade tension will last and in which areas it will expand. This trade tension between China, the US and the EU increases the economic pressures between the parties and points to a new era in the global trade balance. How the EU responds to this tension and whether the parties can reach an agreement will determine the direction of world trade in the coming period.