The US China trade wars heated up last week with President Trump’s announcement of increased tariffs on Chinese goods entering the US. He announced Friday that he was prepared to apply tariffs on all Chinese goods imported into the US: a total of $505 billion worth.
China cannot respond in a similar fashion, so what form of retaliation is open to President XI Jinping? Quite a lot, in fact, and some of the response available to him could harm the US. Sure, China imports significantly fewer goods from the US than the US does from China, but the Chinese have a few tricks up their sleeve that could prevent the US from easily winning the US-China trade war. What are they?
1. Devalue the Yuan
It has been calculated that an 8% devaluation of the yuan would likely negate the economic effects of the tariffs. The tariffs are designed to make Chinese goods more expensive to purchase. An 8% devaluation would reduce this price increase to just 2%. This would be sufficient to bring the retail prices of Chinese goods after the imposition of new tariffs to much the same as they are today.
There are two ways of achieving this. Either by a straight devaluation of the Chinese currency or by reducing interest rates. Any interest rate reduction in a country generally results in reducing the value of that country’s currency. However, a salient point is that the currency of any country would naturally drop in value with the imposition of tariffs. China might have to do nothing – the yuan may be devalued by the tariff itself!
2. Stop Buying US Goods and Stop Selling to the US
This need not necessarily be a trade embargo, but China could focus on Europe, Asia and the Americas minus the USA. The US could be hard hit if China joined the Trans-Pacific Partnership which the US left in January 2017. This involves 11 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. This would really heat up the US China trade war.
Add China to that list and it is a very powerful trading group. If China also expands trade in Europe the USA could easily find itself isolated with regard to world trade. President Xi Jinping is a very astute statesman who plays the political game very well. He is unlikely to be lost for answers to President Trump’s tariffs. One word from him and the Chinese would stop buying American goods and Chinese tourism to the US would dry up.
3. US Treasury Bonds
China is a large holder of US treasury bonds, holding around $1 trillion worth last year. Should the Chinese decide to take action that would hurt the US, then it could sell these bonds or even simply stop buying more. Either of these actions would have a significant effect on the US economy.
One action China could take would be to flood the market with US treasury bonds, causing bond prices to drop and yields to increase. This could lead to a number of financial and economic issues for the US. This is not the best of actions for the Chinese to make since they would also suffer. However, if China wants to hit the US severely, then that is one way to do it.
US China Trade Wars: Conclusion
There are more ramifications to the US China trade wars than most people realize. China has a number of options available if it wants to hit back at the US. It has already applied its own tariffs to US imports, although only on around $200 billion of goods. China exports more to the US than it imports. The above are just three more actions that it could take at any time without warning.