Trade war: What China has in its arsenal

Game on. It’s the battle of the world’s two titans again.

The latest turn of events in the escalating US-China trade war includes US President Donald Trump’s announcement that he would put a 10 percent tariff on $300 billion worth of goods imported from China.

Trump said the 10 percent tariff could rise further in stages and could go well beyond 25 percent.  

This effectively means all Chinese exports to the US will come under taxation when the new duties come into effect after September 1.

Americans could see the price of consumer electronics, apparels, shoes, and toys increase because US firms import a significant portion of these goods sold in the United States from China.

Smartphones, laptops and tablets, desktop computers, video game consoles, TVs and digital cameras are all part of the new tariff list.

Trump’s new tariff announcement has caused a stir, with economists and analysts warning about the ugly consequences of a prolonged trade battle between the two economic giants.

China has already raised its voice, saying it was ready for a fight and would retaliate if Trump follows through with his plan. 

But how can China hit back?

A spokesperson for the Chinese Ministry of Commerce said in a statement that China will have to take measures countering Trump’s planned move.

He also categorically said it is the US that will be bearing all the consequences when his country will be taking action.     

However, experts are of the opinion that China is not fortunate enough to have a stronger side when it comes to retaliation.

They also said a direct counterattack will involve collateral damages on China’s part.     

The few counteroffensive options that China has include:

·   Levying tariffs on US goods. China has done this in the past. It responded to Trump's last escalation in May by raising duties on $60 billion worth of US goods from 10 percent to 25 percent. However, China purchases a lot less from the US than it sells, and it has only goods worth $120 billion to target.

On the other hand, US can tax around $540 billion of Chinese imports. Most of the American exports China has not yet targeted are high-tech products that cannot easily be substituted, says Evans-Pritchard, senior China economist at Capital Economics.   

·   Regulating rare earths supply. China has seemingly invincible dominance on rare earth elements, controlling over 90 percent of their global production. If it restricts the supply of rare earth minerals, the global tech industry will bear the brunt.   

Evans-Pritchard says such a move would lead to a greater impact on the short run but would have a fatal impact on China’s other trade partners, especially Japan which is the primary importer of rare earth minerals.   

·   Depreciating the yuan. A weaker Chinese currency makes Chinese exports cheaper. It will also partially nullify the new American tariffs.

But devaluing the yuan will severely hurt China’s own economic stability, something the country will prudently want to avoid. It will also spark a large outflow of money. 

In 2015, the move to devalue yuan triggered a crisis of confidence in the currency. The government then spent $1 trillion to strengthen the currency.   

·   Tightening the screws on US business in China. Some of the largest American companies, such as Tesla, Apple and Ford, earn billions from the huge Chinese market. China can make life harder for US firms by introducing additional regulatory restrictions.

However, such a move could negatively impact China’s already sluggish economy if the companies move somewhere else. Evans-Pritchard says making it hard for US companies to operate in China might mean that the country is shooting itself in the foot to some extent.  

How fast will China spring into action?

In light of the continuing trade war and Trump’s latest decision to slap more tariffs on Chinese goods, it is not yet clear when China will respond and get down to business.

Chinese leader Xi Jinping has called on his countrymen to prepare for hard times. Senior officials holding a high-level economic meeting this week said China needed to tap domestic demand to help manage “new economic risks and challenges”.

Shaun Roache, chief economist for Asia Pacific at S&P Global, told the New York Times that China would try to focus much more on domestic stability than retaliation.   

“China will no longer give priority to controlling trade war scale,” Hu Xijin, the outspoken editor of China’s nationalist tabloid Global Times, said on Twitter.

“They will focus on the national strategy under a prolonged trade war.”

It is unlikely that Chinese officials will take much retaliatory action before September, said the New York Times.