China’s running out of US goods to tax, so what other ways can it hit back in the trade war?

Debate starts to focus on alternative ways to hurt America, ranging from targeting specific imports with higher tariffs to making the exports the US wants the most more expensive

PUBLISHED : Thursday, 20 September, 2018, 12:01pm
UPDATED : Thursday, 20 September, 2018, 10:38pm

Fresh ideas about how to fight the trade war with the US have begun to fly in China after Beijing was unable to respond in full to the latest escalation in the dispute because it is rapidly running out of room to use tariffs as a weapon.

US President Donald Trump announced on Monday that he would impose 10 per cent tariffs on US$200 billion worth of Chinese imports on September 24, with the tariff rate rising to 25 per cent on January 1 if Beijing does not make concessions.

Combined with the previous US$50 billion tariffs on Chinese imports, about half of all Chinese exports will be effected by the measures. Trump has further threatened to target to all Chinese imports unless China agrees to settle the dispute.

The Chinese response to Trump’s latest move was on a far smaller scale – tariffs of between 5 per cent and 10 per cent on US$60 billion of American goods and it is now running out of leeway to target US imports further.

When the latest levy goes into force on Monday, US$110 billion of the total US$150 billion in American imports to China will be affected.

Tariffs on the remaining US$40 billion – including key manufacturing components such as semiconductors – would hamstring Chinese manufacturers.

It is becoming increasingly clear to Chinese officials that the chances of a swift end to the trade war are diminishing rapidly, forcing them to explore new ways to respond.

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Arthur Kroeber, research head and co-founder of the financial services company Gavekal, said Chinese leaders’ previous tactics – including “a few buying missions” to Washington, a red-carpet welcome for Trump in Beijing and an attempt to cut a deal with Treasury Secretary Steven Mnuchin – had all failed.

“China will respond with its own tariffs, start squeezing US companies where it can, and dig in for a war of attrition,” Kroeber said.

The focus of debate in China is shifting to finding new ways of hurting the US.

Government officials and state media are proposing, among other things, embargoing exports of certain important components to the US and levying “asymmetrical” tariffs on US products – putting different tariff rates on different products.

An opinion piece published on the official social media account of People’s Daily, the Chinese Communist Party’s official mouthpiece, argued on Wednesday that China must go beyond the dollar-for-dollar tariff tactics, since China cannot match Washington in a tit-for-tat battle.

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But the opinion piece, published under a pen name, said China could not “seek revenge” in terms of quantity, but could “pick its own battles” and fight on in its own way.

The piece argued that China could impose relatively low tariffs on imported US materials for which it is “hard to find alternatives” and charge much higher tariffs on products such as “raw materials with easy alternatives, luxury items and discretionary consumer product and manufactured products that are in direct competition with China’s own manufacturers”.

Lou Jiwei, China’s former finance minister and now chairman of the National Council for Social Security Fund, told the China Development Forum on Sunday that the country could move beyond tariffs and impose export embargoes on certain materials and components that are sold to the US.

He said it was not hard to spot the Chinese products that matter most to the US.

“We can pick some of those products being excluded from the US list [of new tariffs] or those items being dropped after loud complaints from US businesses,” he said.

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Nearly 300 Chinese products were fully or partially removed from the original tariffs list after lobbying by US businesses.

One of the items dropped was rare earth metals – a vital mineral for hi-tech manufacturers of which China is the world’s biggest exporter.

Smart watches and Bluetooth gadgets were also exempted, partly at the urging of tech giant Apple, along with health and safety products like bicycle helmets and high chairs for children.

“There will be no winner in the trade war, but regarding these [exported] products, China’s marginal loss will be small but US’s marginal loss will be big,” Lou said.

The People’s Daily article also said that China could take advantage of the trade war by replacing imported products with home-made ones.

Much of China’s retaliatory tariffs have been aimed at US agriculture and energy products, many of which come from states that strongly supported Trump in the 2016 presidential election.

The US president has expressed fury that China is targeting his supporters, tweeting on Monday: “China has openly stated that they are actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me.”

He threatened that “there will be great and fast economic retaliation” if they continued to be targeted.