How China will strike back at Trump
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The Economist
Dec 11, 2024 08:00 AM IST
Xi Jinping has set out his tariff red lines. What if America crosses them?
Who is Huohuade Lutenike? The Chinese rendering of Howard Lutnick, the billionaire nominee to lead America’s commerce department, is not well known in China. But he may end up shaping America’s trade policies. Since Donald Trump announced his pick, Chinese investors and policy-watchers have scrambled for information. More than anything they want to know if Mr Lutenike will slap Mr Trump’s proposed 60% tariffs on all Chinese imports. The urgency of such efforts has only increased since the president-elect fired an opening salvo on November 25th, announcing he would start with an additional 10% tariff on Chinese goods on his first day in office—a figure with potential to grow.
FILE PHOTO: U.S. President Donald Trump attends a bilateral meeting with China's President Xi Jinping during the G20 leaders summit in Osaka, Japan, June 29, 2019. REUTERS/Kevin Lamarque/File Photo (REUTERS)
FILE PHOTO: U.S. President Donald Trump attends a bilateral meeting with China's President Xi Jinping during the G20 leaders summit in Osaka, Japan, June 29, 2019. REUTERS/Kevin Lamarque/File Photo (REUTERS)
Other nominees are better understood. Marco Rubio, presumptive secretary of state, has tried to force Chinese firms to delist from American stock exchanges and was hit by sanctions in response to ones he helped put on Chinese officials as a senator. Mike Waltz, Mr Trump’s choice for national security adviser, boycotted the Beijing Winter Olympics. Jamieson Greer, the new trade representative, was an architect of Mr Trump’s first trade war with China.
In the face of such hawkishness, Chinese officials have kept quiet. But the country’s formula for trade talks is starting to emerge. Xi Jinping, China’s leader, laid down “red lines” in a meeting with President Joe Biden on November 16th. The gist was that Communist Party rule and China’s claim on Taiwan should not become bargaining chips in negotiations. Then on December 1st tax rebates on aluminium and copper came to an end. Ones for batteries and photovoltaic products have fallen from 13% to 9%. This is a striking shift. Over the past year China has rejected claims it is exporting batteries and solar products at artificially low prices. Cuts to rebates are the first time officials seem to have taken action to lessen the force of such accusations, says Martin Lynge Rasmussen of Exante Data, a research firm. Analysts at Sinolink Securities, a broker, call them a “pre-emptive strike”.
At the same time, Chinese officials want to increase trade with the rest of the world. The Ministry of Commerce said on November 19th that it will boost export credit and insurance, and support logistics services for Chinese firms. The ministry wants to expand the number of countries that can get short-term business visas. It has promised to help companies respond to “unreasonable foreign-trade restrictions” as they arise. This month it will ditch tariffs on imports from some of the world’s poorest countries.
Mr Trump may target companies that help Chinese firms assemble goods in, or re-route them through, third countries. Solar firms, for example, have set up factories in Indonesia and Laos to circumvent American tariffs on exports passing through Mexico and Vietnam. To help small businesses sell goods overseas via e-commerce platforms, Chinese local governments have established service centres. Shanghai is setting up a “Silk Road e-commerce pilot zone” to facilitate trade with Central Asia.
Tariff workarounds mean that America’s existing measures have not stopped China from increasing exports. Since the start of Mr Trump’s trade war in 2018, China’s trade surplus has more than doubled to $820bn (or 6% of GDP). Its surplus with America remains at $340bn, about the same as in 2018. If Mr Trump is willing to strike a deal, involving limited increases in tariffs, his measures might reduce annual Chinese GDP growth by a manageable 0.4 percentage points between 2027 and 2029, according to Oxford Economics, a research firm. CF40 Research, a think-tank in Beijing, estimates that “moderate” tariffs of 10-20% would slow China’s year-on-year export growth to 1.5% next year, down from 2.2% were no tariffs imposed. Mr Trump’s promised 60% tariff hike could shrink exports by 6.5% next year, which would have a devastating effect.
Will China resist tit-for-tat retaliation? During the first phase of the trade war, officials responded to tariffs by hitting American imports with similar penalties. The strategy was ineffective as America is much less reliant on Chinese demand than the other way round. Some expect China to allow its currency to devalue against the dollar. Although doing so would make its goods more affordable, big drops in the yuan risk spurring capital flight.
Instead, Chinese trade experts hope the government will focus on domestic policies as a means of counteracting American pressure. Lian Ping, an influential economist, has recommended that it seek to boost wages and consumer demand in order to steel itself against American economic attacks. “Only when your body is strong and healthy can you withstand external blows,” he wrote. This might be part of China’s plan. The government has promised stimulus to improve the glum sentiment that afflicts the Chinese economy. Bankers in Shanghai quip that they have been cheering on a Trump victory in hope of more government spending.
Trade worriers
There is more to the president-elect’s China policy than tariffs. America and China are still in the midst of a tech war that was started by Mr Trump, amplified by Mr Biden and shows no sign of stopping. Mr Biden has attempted to cut off China from inputs needed for advanced tech, such as artificial-intelligence chips. Hundreds of Chinese firms have been added to the Department of Commerce’s entities list, restricting American dealings with them. In October the Treasury enacted a broad investment-control regime that will stop most American investments in Chinese AI, semiconductors and quantum computing. The Biden administration is also thought to be drafting a definition of which types of AI chips firms can sell to China. Mr Trump could tighten it considerably.
Chinese firms might also soon be hit with sanctions from the Office of Foreign Assets Control (OFAC), which, unlike the Department of Commerce’s entities list, restricts the ability to use dollars. The imposition of OFAC sanctions on a Chinese bank would lead to a freeze in dollar transactions with other banks, and probably to its collapse. These have so far been used sparingly, but the nominations of Messrs Rubio and Waltz suggest that such measures could become more common, says a former American trade official.
China’s ability to dodge attacks is limited. Officials have pushed tens of billions of dollars into the semiconductor industry in an attempt to make China self-sufficient. Although this has shown progress, especially in chipmaking machines, the country still does not make the most powerful chips and sources less than 15% of its chips domestically. China is also reliant on the dollar-based financial system. Transactions in yuan have risen in the past two years, but most still use SWIFT, a messaging network susceptible to American influence.
Mr Xi will probably retaliate if such drastic actions are taken or his red lines are crossed. On December 1st, for instance, China put into effect new dual-use export-control rules, creating a list of items with military uses that face export restrictions. In time, China could use these to bar exports of minerals needed for high-tech gear, such as gallium and germanium, where it dominates production. To ratchet up pressure, Chinese regulators may identify other items they can stop exporting without rocking domestic industries. Some antibody precursors, which pharmaceutical firms use, come exclusively from China and could make good candidates.
Chinese regulators have been keen to highlight the damage they could do. Last month China employed a new tool, the Anti-Foreign Sanctions law, to cut off Skydio, America’s largest dronemaker, from Chinese batteries, since it sells to Taiwan. The law could be used to deny dozens of American companies Chinese-made components on which they rely. American firms in China could also be hit. In October an industry body called for a probe into Intel, an American tech company, owing to alleged security vulnerabilities in its chips.
China’s commerce ministry recently used its “unreliable entities” list to probe PVH, the American owner of brands such as Tommy Hilfiger, because it has complied with America’s Uyghur Forced Labour Prevention Act, which requires firms to stop using cotton from Xinjiang. The original bill was sponsored by Mr Rubio. With him as secretary of state, it is easy to see the potential for numerous more clashes and possibly even a total disregard for China’s red lines. Mr Xi is prepared to talk trade with Mr Trump. Anything beyond that risks very quickly spiralling out of control.
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