"Liberation Day" tariffs have sent shockwaves through global markets. However, one country on the current Administration’s tariff list is familiar: China.

China is the only country that has been in this situation before, as it was targeted during Trump’s first term. Now, China has a tested playbook for handling US tariffs.

As we examine the implications of these new trade measures, several factors suggest resilience for China's internet companies despite the heightened tensions:

1. When trade tensions between the U.S. and China began to escalate in 2018, China's strategy was to demonstrate resilience through strong rhetoric. In June 2019, the state-run People's Daily wrote that "China has the strength and patience to withstand the trade war and will fight to the end if the U.S. administration persists."¹ A few months later, in January 2020, the U.S. and China signed the Phase 1 trade deal.² The rhetoric in 2025 is using the same playbook to address recent trade conflicts with the U.S.³
2. The proportion of China's exports to the US has significantly decreased in recent years as China has successfully diversified its trade relationships to reduce dependency on American consumers.
3. China's internet sector, represented by the KraneShares CSI China Internet UCITS ETF (Ticker: KWEB), maintains minimal revenue exposure to the US (less than 2%), insulating these companies from direct US trade pressures.⁴
4. The current round of tariffs represents a broader trade policy shift, with punitive measures being applied to multiple trading partners rather than targeting China exclusively.
5. Industrial competitors such as Vietnam, Thailand, and other manufacturing hubs are facing severe tariffs just like China, potentially preserving China's competitive position in U.S. supply chains.

1. China's Tariff Playbook

This isn't China's first encounter with US tariffs. Having weathered multiple rounds of trade tensions since 2018, the country has developed a sophisticated playbook for handling such challenges. Chinese policymakers have demonstrated their ability to implement targeted stimulus measures, currency management strategies, and diplomatic negotiations to mitigate economic impacts.

China's experience from previous tariff cycles has equipped its government and businesses with valuable insights into managing trade disruptions. The country has consistently shown pragmatism in its approach, balancing assertive responses with a willingness to negotiate practical solutions. This experience provides a strong foundation for navigating the current tariff landscape.

2. Declining US Export Dependence

A significant trend working in China's favor is its decreasing reliance on the US export market.  The percentage of China's total exports destined for US markets has steadily declined, reflecting a strategic pivot toward multiple trading partners.

Initiatives like the Regional Comprehensive Economic Partnership (RCEP) and the Belt and Road Initiative have accelerated this diversification strategy, expanding China's economic integration with Asian, European, and African markets. By reducing its dependence on any single export destination, China has created natural buffers against US-specific trade actions.

The reduced export vulnerability comes at a time when domestic consumption is continuing to play an increasingly important role in China's economic growth model. This structural shift toward internal demand provides additional insulation from external trade pressures.

3. KWEB's Limited US Exposure

The KraneShares CSI China Internet UCITS ETF (Ticker: KWEB) derives less than 2% of its total weighted revenues from US sources, creating a significant buffer against direct tariff impacts.⁴

This minimal US revenue exposure reflects the domestic focus of China's internet giants. Companies including Tencent (10.85% of KWEB assets as of 3/31/2025), Alibaba (12.16%), JD.com (3.87%), and Meituan (6.66%), have built their business models primarily around serving China's massive consumer market of 1.4 billion people, which is worth $2 trillion annually.⁵ Their services—spanning E-Commerce, digital payments, cloud computing, gaming, and social media—are predominantly consumed within China's digital ecosystem.

The limited US exposure extends beyond revenues to supply chains as well. Unlike hardware manufacturers that might rely heavily on US components, China's internet companies have developed largely self-sufficient technology stacks. This technological independence further shields them from potential supply chain disruptions that might affect other sectors.

An important contextual factor is that the current tariff regime is not exclusively targeting China. The Trump administration has implemented a broad spectrum of tariffs affecting numerous countries and trading partners. This global approach to trade barriers creates a more level landscape for Chinese exporters relative to their international counterparts. China has numerous regional trading partners with growing consumer economies that it can rely on for its exports. Asia represents 60% of the world’s population and continues to be one of the fastest-growing regions globally.⁶

The widespread nature of these tariffs means that China is not facing punitive trade measures alone. While Chinese goods face significant tariffs, so do products from many other exporting nations. This universal application of trade barriers somewhat neutralizes the competitive disadvantage that might otherwise disproportionately affect Chinese companies.

Additionally, the global nature of these tariffs has prompted discussions about collective responses and potential trade alliances that could benefit China's negotiating position. As other affected nations seek to address these barriers, China may find opportunities for strategic partnerships in trade negotiations.

5. Potential Market Share Gains

Perhaps most surprisingly, the new tariff regime might actually create opportunities for certain Chinese exporters. Some of China's key industrial competitors are facing similar tariff rates. Vietnam (46%), Thailand (36%), and other Southeast Asian manufacturing hubs are also set to experience high US import tariffs.⁷

This tariff differential could potentially reverse some of the supply chain diversification that occurred during previous trade tensions. Given the new tariff landscape, manufacturers who had shifted production from China to Southeast Asian alternatives might now reconsider those decisions. This could potentially open doors for Chinese manufacturers to reclaim market share in certain export sectors.

The competitive advantage extends beyond tariff rates. China's manufacturing ecosystem offers scale, efficiency, and infrastructure that other production locations cannot match. China's manufacturing sector might find unexpected opportunities in this new trade environment.

Conclusion

President Trump's tariff strategy appears to be a negotiation tactic straight from his "Art of the Deal" playbook, designed to bring China to the bargaining table from a position of strength. The back-and-forth between the U.S. and China so far shows that both countries are attempting to gain leverage before the negotiations start. Nonetheless, we believe it would benefit both countries to strike a deal, but it is impossible to predict the timeline for a potential breakthrough.

While the new "Liberation Day" tariffs present challenges for global trade, China's internet sector appears well-positioned to weather the storm. The combination of China's experienced approach to trade tensions, decreasing reliance on US exports, and the internet sector's minimal US revenue exposure suggests resilience in the face of these new trade barriers.

The fundamental investment thesis for China’s internet sector remains intact. The long-term growth drivers for China's internet economy—including increasing digital adoption, rising middle-class consumption, and technological innovation—continue to provide a strong foundation for the sector's development.

We believe the KraneShares CSI China Internet UCITS ETF (Ticker: KWEB) presents a compelling growth and diversification opportunity for global investors, given recent trade developments. China's Internet sector, as an asset class, is one of the least exposed to the US economy and China’s trade with the US.

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Diversification does not ensure a profit or guarantee against a loss.

Holdings are subject to change.

Citations:

1. Data from Bloomberg, "China Would Fight Trade War to the End, State Media Says," 22/June/2019. Retrieved 8/April/2025.
2. Data from Office of the United States Trade Representative, retrieved 8/April/2025.
3. Data from "China vows retaliation and a 'fight to the end' after Trump's latest tariff threat," NPR, 8/April/2025.
4. Data from FactSet as of 31/Mar/2025.
5. Data from Bloomberg as of 31/Mar/2025.
6. Data from UNFPA Asia and the Pacific. Retrieved 31/Mar/2025.
7. Data from The White House as of April 2025.

Definitions:

Regional Comprehensive Economic Partnership (RCEP): The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement signed in 2020 between 15 Asia-Pacific nations, including ASEAN members plus China, Japan, South Korea, Australia, and New Zealand, creating the world's largest trading bloc covering approximately 30% of global GDP. RCEP reduces tariffs, establishes common rules for trade, investment, and intellectual property, and aims to strengthen economic integration across the Asia-Pacific region while countering U.S. economic influence.

Belt and Road Initiative (BRI): The Belt and Road Initiative is China's ambitious global infrastructure development strategy launched in 2013 that aims to connect Asia with Africa and Europe via land and maritime networks to improve regional integration, increase trade, and stimulate economic growth. The initiative spans more than 150 countries with projects including railways, highways, ports, energy facilities, and digital infrastructure, representing over $1 trillion in planned investments while extending China's economic and geopolitical influence worldwide.