China wants to hit back at Trump. Its own economy stands in the wayhttps://indianexpress.com/article/world/china-wants-to-hit-back-at-trump-its-own-economy-stands-in-the-way-5874439/

China wants to hit back at Trump. Its own economy stands in the way

Chinese officials have vowed to respond with measures of their own if Trump follows through on his threat to put 10% tariffs on $300 billion in Chinese imports a year.

China wants to hit back at Trump. Its own economy stands in the way
President Donald Trump and President Xi Jinping of China at the G-20 Summit in Osaka, Japan. (Erin Schaff/The New York Times/File)

Written by Alexandra Stevenson

As China considers ways to retaliate against President Donald Trump’s mounting tariffs, it has increasingly acknowledged that it must first address its main obstacle to punching back: its own slumping economy.

Chinese officials have vowed to respond with measures of their own if Trump follows through on his threat to put 10% tariffs on $300 billion in Chinese imports a year. If Trump enacts the tariffs next month, as he said he would do Thursday, the costs would rise for nearly everything China ships to the United States, from shoes to car parts to the latest gadgets.

On Friday, China’s Ministry of Commerce, which is heavily involved in the country’s trade policy, said it would “take necessary counter measures to resolutely defend the core interests of the country and the fundamental interests of the people.”

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The question is how. China’s imports from the United States only a fraction of the trade going the other way, so it cannot match Washington tariff for tariff. Much of that trade consists of agriculture goods like soybeans, as well as specialized products like Boeing jetliners or the U.S.-made chips for the smartphones China makes.

There are several things China could do. It could call for a boycott of U.S. goods or stop buying Boeing planes. It could devalue its currency, which would in effect partially nullify U.S. tariffs. It could make life much harder for American business and executives in China, or it could exercise its power over key parts of the global supply chain, like its dominance over key manufacturing minerals called rare earths.

Some investors Friday signaled they expect at least one of those moves. China’s currency, the yuan, fell to its weakest point so far this year. Shares of rare earths companies rose, while Boeing’s shares fell more than the broader market Thursday.

But each of these measures has drawbacks. Perhaps the biggest among them is that China’s economy is growing at its slowest pace in 27 years. Many of the arrows Beijing has in its quiver could ricochet and hit its own factories and workers.

Chinese officials have signaled in recent weeks that tackling sluggish growth is a necessity for prevailing in the trade war, especially as it looks to drag on for months or perhaps years. That prospect was made clearer still to Chinese leaders Thursday, as Trump’s latest threat came just one day after top U.S. negotiators concluded talks with their Chinese counterparts in Shanghai.

“China has to make long-term plans, and it will be more focused on itself,” said Song Guoyou, deputy director of the Center for American Studies at Fudan University.

“It cannot change the Sino-U.S. trade war process, which makes China realize that it should put more focus on domestic reform,” said Song.

China’s top leader, Xi Jinping, has called on Chinese people to brace for a period of hardship. In recent months, the country’s central bank has allowed money to flow into infrastructure projects, a once-reliable recipe for growth that now threatens to add to a national mountain of debt.

Senior officials gathering this week at a high-level economic meeting chaired by Xi said China needed to tap domestic demand to help manage what they described as new economic risks and challenges. They also hinted that the central bank could pump more money into the system to allow local governments to shore up the economy over the next few months.

“The Chinese 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.”

Officials are also taking concrete steps to shift China’s dependence on the United States for certain goods. They have focused efforts on new trade partnerships with countries like Japan and South Korea and lowered trade barriers for other countries. They have also struck deals to import agricultural goods from countries other than the United States. This week, China approved barley imports from Russia.

The strategy has risks, especially if the trade war continues to drag on. China has plenty of financial firepower at its disposal, including the savings of its people inside its state-controlled banks and a vast hoard of foreign currency. Its control of the local media can also go a long way toward preparing its people for tough times.

But supporting its vast economy, the world’s second largest after the United States, could get increasingly expensive. Xi could wait for next year’s U.S. elections to see whether voters oust Trump, but at least some of the potential Democratic candidates also favor a tough stance against Beijing.

If Trump makes good on his promise of new tariffs next month, China has some measures that it can turn back to, including placing tariffs on the rest of China’s exports to the United States.

It could also begin to place U.S. companies on an “unreliable entities list” it recently announced in response to an American blacklist. China has already issued warnings about FedEx, which it has accused of delaying shipments from Huawei.

It could also make life more difficult for U.S. businesses, by holding executives at the border through so-called “exit bans,” and by slowing the pace of license approvals and deal clearances.

Officials could also call on consumers to boycott products from U.S. brands like Apple. But such a move could also backfire because it would hit factories that employ hundreds of thousands of people and dent growth at a time when the government is depending on consumers to help kick-start the economic growth engines.

One measure that would also help to soften the blow of new tariffs would be to devalue the yuan. This approach, however, is fraught with problems. Money flooded out of the country when China shocked markets four years ago with a surprise devaluation, prompting Beijing to tighten its control of money flowing through its border and spend $1 trillion to shore up the currency.

It could also seriously escalate tensions. Trump has repeatedly complained that Beijing weakens the yuan to take advantage of the United States. A cheaper currency gives Chinese factories an advantage when selling goods in the United States.

In fact, Beijing right now is preventing, not enabling, a weaker currency. The yuan would weaken if Chinese officials relaxed their grip.

China may do exactly that. They make take a freer hand with the currency, letting it weaken toward 7 yuan against the dollar, a psychologically important marker that would be likely to get the Trump administration’s attention if it was passed.

“Psychologically, it is important, but economics trump politics at the moment,” said Shaun Roache, chief economist for Asia Pacific at S&P Global.

However, officials would have to risk letting the currency fall too quickly, which would set off panic in China and trigger outflows.

On Friday, the yuan dropped to its lowest level so far this year against the dollar, hovering at 6.9590 yuan.

Before September, however, it is unlikely that Chinese officials will take much retaliatory action.

“China will try to focus much more on domestic stability than retaliation. We were seeing growth start to stabilize, but it was by no means guaranteed. Their first priority is domestic stability,” said Roache.

As they consider their moves, Chinese officials will also try to parse Trump’s negotiating strategy. Experts said his capricious style had flummoxed Beijing.

“We don’t know how to deal with this either,” said Tu Xinquan, president of the China Institute for WTO Studies at the University of International Business and Economics.

“Is he a sane person at all?” Tu said of the latest move by Trump. “It’s quite surprising. Didn’t the White House just announce that the trade talks were constructive?”

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But, he added, if new tariffs kick in Sept. 1, “I think the Chinese side will stop trade talks completely.”