How China can hit back in a long, grinding trade war with the United States

Safety inspections, consumer boycotts and approval delays are just some of the ways that Beijing can respond to action from Washington

PUBLISHED : Monday, 18 June, 2018, 1:45pm
UPDATED : Monday, 18 June, 2018, 10:18pm

The first punches in a trade fight that China did not want have been thrown, and now Chinese President Xi Jinping is poised to match his US counterpart Donald Trump blow for blow.

The next flurry of jabs may be imminent. In his announcement of tariffs on Chinese goods on Friday, Trump vowed additional duties if China retaliated – which Beijing immediately did. An announcement on US restrictions on investments from China will follow in the next two weeks, according to Trade Representative Robert Lighthizer.

Analysts increasingly expect the confrontation to be a war of attrition as the two sides confront the chasm between them. While China has shown a willingness to make a deal on shrinking its trade surplus with the United States, it has made clear it will not bow to demands to abandon its industrial policy aimed at dominating the technology of the future.

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“The Chinese view this as an exercise in self-flagellation, meaning that the country that wins a trade war is the country that can endure most pain,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. “[China] thinks it can outlast the US. They don’t have to worry about an election in November, let alone two years from now.”

The two nations moved to the brink of a trade war on Friday after the Trump administration announced new tariffs on imports would take effect from July 6.

A 25 per cent tariff will be imposed on US$34 billion in goods imports, with further duties on another US$16 billion in imports under consideration.

In response, China said it would charge tariffs of the “same scale and intensity” on goods from the US, adding that all trade commitments made during the previous weeks of negotiations were off the table.

“We could be dangerously approaching such a trade war,” Jack Reed, the ranking Democrat on the Senate Armed Services Committee, told Fox News on Sunday.

S&P 500 Index futures dropped 0.5 per cent and the yen strengthened in early Asian trading on Monday as concern about the trade spat sapped risk appetite.

While equity markets in mainland China, Hong Kong and Taiwan were shut for a holiday, shares across the rest of the region fell. South Korean chipmakers, which make parts used in Chinese products, retreated.

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“China does not want the trade war, but facing a capricious Washington, China has no choice but to fight back vigorously in defence of its national interests, the trend of globalisation and the world’s multilateral trading system,” according to an unsigned commentary by Xinhua.

Aside from slapping tariffs on American products, China’s arsenal of potential retaliatory measures is formidable, and it could inflict heavy punishment on the more than US$200 billion of investment by American companies in China.

Increased safety inspections and delays in approving imports are possible tools, as are consumer boycotts of American goods sold in China’s rapidly growing retail market, or stemming a flow of free-spending tourists to the US.

China’s punishment of South Korea for allowing the US to station a missile defence system on the peninsula cost that nation billions of dollars, and it has used similar tactics against the Philippines and Japan as well.

China also has a pivotal role in Trump’s goal of disarming North Korea because without its participation, sanctions have little chance of success.

“We have very legitimate reasons to be concerned about China’s trade practices,” Susan Rice, former national security adviser to president Barack Obama, told CNN’s Fareed Zakaria GPS on Sunday.

“But the way to resolve this is not at the expense of American workers and manufacturers and farmers, by getting into a trade war that has potential, real global ramifications.”

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In a longer-term, worst-case scenario, there also are actions such as selling down its massive stockpile of US Treasuries or devaluing the yuan, moves that would send shock waves through global markets.

“The next several weeks will be critical for determining how bad the tit-for-tat gets, which will rest crucially on the relationship between the two leaders, and how they perceive their advantages,” said economists including Michael Hirson, Asia director at Eurasia Group in New York.

“Xi is not looking to escalate the trade dispute, but is not afraid to climb the escalation ladder with Trump.”

Watch for Beijing to ramp up threats of informal retaliation against US businesses in China, Hirson said, adding that it was likely American firms would see some delays in various approvals in coming days.

Tougher measures such as disruptive regulatory actions would follow, especially if Trump appeared headed towards a second round of tariffs, he said.

Trade is just a way to contain China from moving up the technology ladder, according to Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis in Hong Kong.

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She said Trump’s “America first” policy was against every nation, but it included a tech arms race against China, and Beijing would respond by trying to build ties with other nations, and buying technology from wherever it could.

In a story early on Monday, state-run China Daily said the nation’s response with tariffs would show the US the price of its actions. “China’s stance has been consistent: it welcomes dialogue but is not afraid of a trade war,” it said.