What 'weapons' does China have for trade war 2.0 with the US?

Photo caption — Mr. Donald Trump has pledged to impose tariffs of up to 60% on goods imported from China. Photo: REUTERS/TTXVN

In the summer of 2018, when former President Donald Trump launched his trade war with Beijing, China's economy was on a tear. There were even rumors that it could soon surpass the United States as the world's largest economy.

Now, with two months to go before Mr Trump returns to the White House, what once seemed like a huge challenge to Beijing has shrunk considerably. Faced with challenges in real estate, debt and deflation, China seems ill-prepared for another trade war. But appearances can be deceiving.

Better preparation

In fact, thanks to a better understanding of how the US president-elect operates, China’s leaders are better equipped to deal with the real possibility that Mr Trump will follow through on his pledge to impose tariffs of up to 60% on goods imported into the US. Beijing’s countermeasures, economists and analysts say, are being built through a combination of trade diversification, targeted retaliation against US companies and support for domestic consumption.

“China has been preparing for this day for quite some time,” said Dexter Roberts, author of the Trade War Bulletin and a senior fellow at the Atlantic Council. “The United States is now much less important to their trade network (than it used to be).”

Partly as the first trade war continues under President Joe Biden, Beijing and Chinese companies have begun to actively reduce their trade dependence on the US. The impact is evident in trade data and has come at a rapid pace.

As recently as 2022, bilateral trade between the US and China hit a record high. But last year, Mexico surpassed China as the top exporter of goods to the US. China had held that position for 20 years before exports to the US fell 20% to $427 billion last year.

According to Matthews Asia, just under 30% of China’s exports went to the rich G7 countries last year, down from 48% in 2000. That’s why, despite selling less to the US, China’s share of global exports now stands at 14%, up from 13% before Mr Trump first imposed tariffs.

“We have the ability to deal with and resist the impact of external shocks,” Wang Shouwen, China’s international trade negotiator and vice minister of commerce, told reporters at a press conference on November 22.

What is unlikely to be in China's retaliatory arsenal, analysts say, are big moves like selling US Treasury bonds (of which China is the world's second-largest holder) or sharply devaluing the yuan, which has lost 12% of its value against the US dollar over the past three years as growth has slowed.

Targeted retaliation

Liza Tobin, senior director of economics at the Project for Exceptional Competitiveness, a US research group, said that there would be more than just simple tariff retaliation. Instead, Beijing’s response would likely be more targeted and asymmetric.

“They have been putting pressure on foreign companies operating in China, and they can increase the pressure on American companies, picking and choosing which targets they want to push out of the Chinese market,” Ms. Tobin said.

In September, Beijing said it was investigating fashion retailer PVH Corp, owner of Calvin Klein and Tommy Hilfiger, for refusing to source cotton from the Xinjiang region, in a move that could lead to sanctions against a U.S. company with major business interests in China.

Last year, Chinese police raided the Shanghai office of Bain & Company, an American management consulting firm. Chinese state media later revealed that security agencies had raided multiple offices of international consulting firm Capvision, which is based in Shanghai and New York.

Economists say the likelihood of retaliation against U.S. companies or the U.S. agricultural sector would be much higher than China selling its large holdings of U.S. Treasury bonds in response, because the market for such bonds is deep and liquid, with no shortage of buyers. Selling them could also hurt Beijing’s own interests.

A weaker yuan could also help Chinese exports if Mr Trump imposes new tariffs, but analysts do not believe that move is on the cards either.

“Policymakers are unlikely to see devaluation as merited and will instead opt for other steps,” said Sean Callow, senior foreign exchange analyst at ITC Markets.

A sudden devaluation in August 2015 caused turmoil in the stock market, he said. In recent months, the Chinese government has indicated that it wants to boost confidence in its stock market, both among domestic investors and to present China to the world as an attractive investment destination.

China also wants the yuan to be seen as a credible alternative to the US dollar by central bank reserve managers, especially those worried about the freeze on Russian assets in the US and Europe from 2022, according to Callow.

Inland focus

At a 60% tariff, some economists have calculated that tariffs on US imports could cut China's economic growth rate in half (according to a separate analysis from the Peterson Institute, Trump's proposed tariffs would also cost the typical US household an additional $2,600 a year.)

But China, a country of 1.4 billion people, also has a huge domestic consumer market that they can target.

“The best response Beijing can offer to tariffs is to reorganize itself domestically, by restoring the confidence of Chinese entrepreneurs, who account for 90% of urban jobs and most of the innovation,” Rothman said. “This would boost consumer confidence, leading to stronger domestic consumption, which would help offset the impact of weaker exports to the US.”

China’s economy is struggling with a host of problems. After a summer of dismal data, President Xi Jinping finally decided to roll out a much-needed stimulus package, largely focused on monetary measures, in the last week of September. Further measures were announced earlier this month.