When last week US President Donald Trump threatened to slap tariffs on an additional US$200 billion of imports from China, on top of the US$50 billion already targeted, the Chinese government immediately promised to retaliate in full proportion. The trouble is that retaliating will be a lot more difficult and painful than Beijing’s counter-threats make it sound.
So far, responding to the US trade actions hasn’t been a great problem. The first round of US tariffs targeted specifically at China is due to go into effect on July 6. On that day, the US will begin to levy a 25 per cent tariff on 818 imports from China, worth US$34 billion annually. When it does, Beijing will immediately impose equivalent tariffs on US$34 billion of goods imported from the US.
And when the US follows up with tariffs on another US$16 billion of imports from China, Beijing will again respond in kind.
But Trump’s threat last week to slap tariffs of 10 per cent on a further US$200 billion of imports from China, and possibly on another US$200 billion after that, massively raises the stakes and completely changes the game. The most obvious point is that while the US imported goods worth US$505 billion from China last year, China only bought stuff worth US$130 billion from the US. As a result, if the US does put tariffs on US$200 billion of Chinese goods, China will find itself unable to retaliate in kind and proportion. It just doesn’t buy enough from the US.
This inability to launch equal and opposite trade actions against the US has led to some fanciful and ill-conceived ideas about other ways China might respond. Some observers have suggested that China could retaliate by devaluing its currency, others that it could dump its holdings of US Treasury debt.
Neither would work. Nor would boycotts of US companies operating in China.
To offset the effects of the proposed tariffs on US$250 billion of its shipments, China would have to devalue the yuan by 6-10 per cent. It could do that, but the expectation of further devaluations to counter future rounds of US tariffs would trigger massive outflows of capital from China’s financial system, potentially triggering a domestic crisis of confidence.
What’s more, a devaluation would blow a hole in the yuan’s credibility as a potential trade and reserve currency, destroying Beijing’s hopes that it may one day displace the US dollar across much of Asia and the wider world.
Selling US government debt wouldn’t work either. According to US data, China currently owns US$1.18 trillion Treasury bills, notes and bonds, or about 5.6 per cent of total outstanding US public debt.
If China were to dump all that on the market, it would certainly push US funding costs sharply higher. But dumping is easier said than done. If China tried selling in dribs and drabs, the market would absorb the supply. As the failure this year of the 10-year US Treasury yield to remain above 3 per cent demonstrates, there is no shortage out there of private buyers of US government debt.
And if China tried to dump the whole US$1.18 trillion in one go, the market would instantly dry up. The only potential buyer would be the US Federal Reserve, which in effect means the US government would be buying back its own debt at a cut price rate.
In any case, the 1977 International Emergency Economic Powers Act gives the US president all the legal authority he needs to freeze China’s Treasury holdings indefinitely, and the word in Washington is that Trump would relish wielding it.
So if China can’t impose countervailing tariffs, can’t devalue, and can’t dump its holdings of US debt, Beijing will have to look for another means of retaliation. The most obvious would be to target the businesses of large US companies operating in China.
There are signs this is what Beijing is planning to do. It’s done similar before, orchestrating consumer boycotts of Japanese brands in 2012 in a spat over the Diaoyo/Senkaku islets.
And on Wednesday, the Communist Party-backed Global Times warned of unspecified “countermeasures” against the US blue chip companies that constitute the Dow Jones Industrial Average.
Look down the list of DJIA members, and it reads like a line-up of the US companies most active in China, whether in manufacturing or sales: Apple, Microsoft, Coca-Cola, Procter & Gamble, McDonald’s, Caterpillar, and Boeing, to name just a few.
But again, hitting these companies would be neither as simple nor as straightforward as it might seem. Yes, in some cases products can easily be substituted by rivals. For example, a consumer discouraged from buying P&G’s Pantene shampoo can easily switch to Sunsilk from Unilever, or to a local brand.
But boycotts would hit local jobs. P&G, Apple and Caterpillar for example, all manufacture the vast majority of the products they sell in China in local factories. And consumer boycotts could well hurt local companies more than their US targets. Although there are more than 2,500 McDonald’s restaurants in China, the US company holds only a 20 per cent stake in its Chinese business. The majority belongs to Chinese state-owned conglomerate Citic.
Even where US products can be substituted, boycotts may hurt China more than the US businesses they are aimed at. For example, China could refuse to buy Boeing airliners. But in the widebody market, that would leave China no option but to buy from Airbus, which as a result would slash the discounts it offers Chinese buyers.
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Able to sell there at a premium, Airbus would naturally concentrate on serving the Chinese market. With production capacity limited, that would push non-Chinese buyers towards Boeing. The upshot would be that Boeing’s global sales would not suffer greatly, if at all, while China would end up paying more for its airliners.
And some US products cannot be substituted at all, at least not effectively. Chinese programmers have spent much of the last two decades attempting to develop an alternative to Microsoft’s computer operating systems. In 2015, they finally rolled out something that looks and feels much like Windows XP – the operating system that Microsoft retired in 2008.
In short, China has few attractive options. Retaliatory measures against US companies might damage their targets, but they will also destroy jobs and degrade competitiveness at home. Economists almost universally say that Trump’s tariffs will hurt the US at least as much as China. Similarly, it seems that retaliating against them will damage China just as much as the US – if not more. ■
Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years