TRADE TENSIONS between China and major global economies, particularly the United States, cast a long shadow over the world’s second-largest economy. While headlines often focus on the latest negotiation twists and turns, understanding the potential long-term impacts requires a deeper dive into various possible outcomes.

What does the future hold for China’s real GDP (distinct from official government figures), unemployment, inflation, and key industrial sectors? Here are three back-of-the-envelope scenarios, without numbers, to help you start your scenario-planning process. As always, reach out to me at [email protected], and I will put you in touch with our analytics consulting team if you need to further shape these scenarios and of course add data on GDP, unemployment and inflation etc. and what these numbers mean for petrochemicals demand growth.

Imagine a world where diplomacy prevails. This best-case scenario envisions a formal, multi-faceted trade agreement between the US and China. This deal wouldn’t just reduce tariffs significantly; it would lay out a clear roadmap for addressing contentious issues like intellectual property protection and market access. Crucially, this positive momentum would spill over, fostering improved trade relations with the EU and other major economies.

Even in this optimistic scenario, however, it’s vital to acknowledge that China’s economy faces significant structural challenges independent of the trade war. The end of the property bubble, marked by the Evergrande turning point in August 2021, will continue to be a considerable drag. Furthermore, China’s rapidly ageing population will exert increasing downward pressure on economic growth. These fundamental shifts mean that while trade peace would offer significant relief, China’s growth cannot return to levels observed during the 1992-2021 Chemicals Supercycle.

What Scenario 1 would mean for China’s Economy:
• Robust Growth, but with Caveats: China’s GDP growth would see a strong rebound from trade war pressures, accelerating to a solid pace in the coming years, driven by renewed confidence in its export sector. However, this growth would remain moderated by structural headwinds.
• Job Market Stability: Overall unemployment would remain stable. Crucially, the persistent challenge of youth unemployment would ease noticeably as export-oriented industries expand, absorbing more graduates.
• Inflationary Recovery: Consumer prices (CPI) would steadily move into positive territory. Producer prices (PPI) would also exit their long deflationary spell, indicating a recovery in industrial demand and pricing power.
• Export-Driven Momentum: Export growth would see a strong rebound into the mid-single digits annually, once again becoming a significant positive contributor to GDP growth.
• Calm Geopolitical Waters: Tensions would de-escalate, allowing Beijing to pursue targeted fiscal stimulus (focused on boosting domestic consumption and developing “new quality productive forces”) with a manageable fiscal deficit.

Implications for Petrochemical Industry:
There would be increased stability in global petrochemical trade as the US maintained its advantages in China. China wouldn’t attempt to diversify from reliance on US feedstocks – i.e. LPG and ethane. Margins might well rebound, initially on sentiment followed perhaps by a long-term recovery, depending on the pace of consolidation. The chart on the above slide, showing Northeast average PE margins, indicates the extent to which margins have declined since the end of the Chemicals Supercycle. I believe that most, if not all, of this decline is not related to the trade war.

This scenario represents a continuation of the current “muddle through” approach. Intermittent talks and temporary tariff pauses persist, but a comprehensive US-China agreement remains elusive. Some higher tariffs would likely remain in place, and negotiations with other partners would proceed slowly and fragmentedly, offering limited systemic relief.

What this would mean for China’s Economy:
• Moderate Slowdown: GDP growth would continue its moderate slowdown, remaining in a subdued range in the coming years. The ongoing trade friction would act as a constant drag on the economy, partially offsetting domestic stimulus.
• Lingering Job Pressures: Overall unemployment would remain stable but with underlying pressure. Youth unemployment would remain elevated due to limited job creation in advanced sectors hampered by trade uncertainty.
• Deflationary Environment: CPI would remain subdued, reflecting weak domestic demand. Producer prices (PPI) would largely stay in deflationary territory due to persistent industrial overcapacity.
• Sluggish Exports: Export growth would be sluggish, showing low single-digit growth or even slight contraction, thereby diminishing its contribution to GDP.
• Intensified Domestic Focus: Beijing would intensify its “dual circulation” strategy, emphasising domestic demand and technological self-reliance. Fiscal stimulus (infrastructure, consumption subsidies) and monetary easing would become even more crucial, potentially leading to a rising fiscal deficit.
Implications for the Petrochemical Industry:
There would be a continued shift in trade routes, with China diversifying away from US suppliers towards the Middle East and SEA. The US would in turn need to export to markets outside China, increasing competition. There would be no major potential for margin recovery from a better trading outlook. Everything would depend on the pace of consolidation to turn around margins such as the ones on this second chart, showing the collapse of NEA naphtha and PDH-based margins. China would push a little harder towards petrochemicals self-sufficiency because of continued trading pressures.

This is the most pessimistic outlook, where negotiations completely break down. We’d see a significant escalation of tariffs across a broader range of goods, coupled with comprehensive export controls on high-value technologies. Global trade blocs would adopt explicitly protectionist stances against China, leading to a deep economic “decoupling.”

What this would mean for China’s Economy:
• Sharp Contraction: GDP growth would experience a sharp decline, potentially falling to significantly lower levels in the coming years. This would be a direct consequence of collapsing exports and severe technological isolation.
• Unemployment Crisis: Overall unemployment would rise notably. Youth unemployment would become a full-blown crisis, potentially surging dramatically as key manufacturing and high-tech sectors contract sharply.
• Entrenched Deflation: The economy would face a significant risk of entrenched deflation. CPI could fall further into negative territory, while PPI would see even steeper declines due to collapsing demand and widespread overcapacity.
• Export Collapse: Export growth would experience a sharp contraction, turning a historical strength into a major drag on the economy.
• Heightened Tensions & Aggressive Stimulus: Geopolitical tensions would be high. Beijing would implement aggressive, large-scale fiscal and monetary stimulus. The fiscal deficit could surge substantially as the government prioritizes maintaining social stability amidst severe economic hardship, likely leading to increased state control.
Implications for the Petrochemical Industry:
There would be a severe disruption and fragmentation of global petrochemical trade, including a near-cessation of US-China trade. China would stop buying US LPG with ethane purchases in question, despite the 100% reliance of China’s ethane-based crackers on US supplies. Margins would deteriorate further even with major shutdowns, making profitability in say Southeast Asian PE, featured in today’s final chart, even worse. China would push for full petrochemical self-sufficiency, prioritising national security.
Source: ICIS by John Richardson, https://www.icis.com/asian-chemical-connections/2025/07/china-three-scenarios-for-the-trade-war-its-economy-and-petrochemicals/