Business / Economy | ANALYSIS

China's arsenal limited in the trade war against the United States


Beijing’s latest retaliation against U.S. tariff hikes — an increase on $60 billion of U.S. imports from June 1 — could leave China running low on ammunition in the trade war.

After China’s retaliatory move was announced late Monday, the Office of the U.S. Trade Representative prepared to hit China with new tariffs, releasing a list of about $300 billion worth of Chinese goods, including children’s clothing, toys, mobile phones and laptops, that Trump has threatened to hit with a 25 percent tariff.

If Trump proceeds with the tariffs, it would see almost all imports from China covered by punitive import duties. Under a process outlined by U.S. officials, the new tariffs would not take effect until late June at the earliest. But that could come just as Trump meets with Xi on the sidelines of a Group of 20 leaders meeting June 28 and 29 in Osaka, raising the stakes in an already escalating trade war.

China imports almost four times less than it exports to the United States, and Beijing already levies punitive charges on almost all U.S. goods arriving in China — $110 billion out of an annual total of $120 billion.

So if Beijing does up its tariffs to as high as 25 percent on a range of U.S. products, including liquefied natural gas, chemicals, fruit, vegetables and seafood, it may limit its room for maneuver.

China has a variety of options, including tariffs.

“Tariffs are a self-inflicted wound. You are raising the import costs of your own producers,” said Robert Lawrence, a professor of trade and investment at Harvard University.

However, in the middle of a trade war “economic considerations are secondary,” he said, because “it is much more about posturing, bargaining and politics. Can China be seen to be passively accepting these measures from the United States?”

Cars and auto parts from the U.S. face the prospect of a 25 percent hike in duties.

Announced by Beijing in December, the measure was suspended at the beginning of the year but can easily be reactivated.

The sector, crucial for the U.S. economy, also represents an important electoral base for President Donald Trump.

Another option would be devaluing the yuan. Trump regularly accuses the Chinese central bank of lowering its currency rate to support exporting firms, but is it an option?

Rajiv Biswas, Asia-Pacific chief economist for IHS Markit, says no.

“It is not a realistic strategy for China to try to mitigate a 25 percent tariff by allowing further declines in the yuan,” he said.

“A key priority for the Chinese government since 2015 has been to stabilize the exchange rate and prevent large capital outflows, in order to protect its foreign exchange reserves.

“Therefore the Chinese government is unlikely to want any potentially destabilizing decline in the yuan, which could trigger renewed large capital outflows.”

Beijing could also aim to penalize businesses. That could make life difficult for U.S. companies in the country in the form of regulatory requirements or customs blockages.

These measures “will get a lot of support in China, but will further undermine business confidence” abroad, said Jake Parker of the U.S.-China Business Council.

If Beijing goes for that option, it would constitute an “escalation,” according to Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics.

“If you do that, then you run the risk that the Trump administration decides to do a ‘ZTE,'” referring to when Washington last year banned all sales of electronic components to the Chinese telecom giant, jeopardizing its very existence.

The White House accused the firm of violating embargoes against Iran and North Korea. Trump finally agreed to reconsider the decision.

Another option would be calling for product boycotts. The Chinese could be encouraged not to buy American flagship products, such as the iPhone.

Amid frosty relations with Japan in 2012 or South Korea in 2017, boycott campaigns led to a 50 percent collapse in sales for both countries’ car brands in one month.

However, such a measure would also penalize the millions of Chinese employed by American companies and their local partners.

Yet another tool would be a snub of Boeing. China is key to Boeing, to whom it sells a quarter of its planes.

The editor of the nationalist newspaper Global Times — controlled by the Chinese government — pondered the possibility that the country would reduce its Boeing orders, although the U.S. aircraft manufacturer said it was “confident.”

At the end of March, Beijing nevertheless finalized a firm order for 300 aircraft from European giant Airbus when President Xi Jinping visited France.

Finally, Beijing could make moves on debt. China is the largest holder of U.S. debt (about $1.2 trillion), but selling a big part of it would be risky because any destabilization of the markets could undermine the value of Treasury bonds held by Beijing.