The limited choice for options pushes China to Trade War of Exhaustion with Trump
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Beijing, who feels pressed into the corner by the increasing attack of the United States with the duties against China and any country that buys or assembles Chinese goods, is preparing for an economic war of exhaustion.
On Saturday last week, Washington imposed import duties of at least 10% for almost the whole world and much higher for countries like Vietnam, where Chinese factories diverted their production. This provoked revenge from China, followed by new threats and escalation from US President Donald Trump to a duty of 104%.
« He who first surrenders is a victim, » said a Chinese political advisor, who requested anonymity because of the sensitivity of the topic. « The question is who can endure more. »
| However, China has no great opportunities. It will court other markets in Asia, Europe and the rest of the world, but this may not be a great rescue valve. |
Other countries have much smaller markets than the US and local economies also bear strikes from Trump’s duties. Many are also worried about admitting more cheap Chinese products in their economies.
- Internally, currency devaluation would be the easiest way to mitigate the impact of duties, but this could cause capital leakage, while alienating trade partners, China may try to court. China has so far allowed a very limited depreciation of the yuan.
- There may be more subsidies, discounts on export taxes or other forms of stimuli, but this also risks exacerbating the industrial supercapacity and nourishes greater deflation pressure.
- Analysts have been advocating policies for years that would encourage internal demand.
- But despite Beijing’s declarations, a little has been made to significantly increase household consumption, given that the bold political changes that will be needed can be destructive to the production sector in the short term.
Returning with own duties and export control may not be very effective, given that China supplies about three times more goods to the US than imported US goods for $ 160 billion. But this may be the only option if Beijing believes there is a higher pain threshold from Washington.
- China first responded to the extra 34% US duties last week with a similar overall rate.
- While Trump threatened escalation with an additional increase of 50%, Beijing promised to « fight » to the end.
- When Washington raised the duties of China to 104%, Beijing immediately responded today with the addition of another 50 points to 84%.
« China cannot cause as much pain in the US as it receives from Americans as it maintains a large trade surplus and, if we put aside the rare earth materials, there is still something to lose of export control, » said Arthur Kriober, a head of Gavekal research.
« But this is no longer important. The signal from Beijing’s course is that he will repel the US efforts for domination and that he is completely happy to join a war of economic exhaustion. »
« Precision bumps »
In addition to his own extensive duties, Beijing can use his control over some strategic goods and parts of the corporate world to hit Washington where it hurts the most.
China suggested that the United States try on Friday how it would seem to them when it added seven editorial elements to its export control list. The move threatened to stop the supplies of materials on which the US defense and technology sectors depend. Beijing reserves the opportunity to extend control over 10 other editorial elements or directly ban their export to the United States.
In the corporate world, Trump has expressed interest in the release of the Tiktok video in the United States.
But China also has an impact there thanks to the rules it introduced in 2020. They require the company to obtain a technology export license before transferring its algorithm for the « secret ingredient in the sauce » abroad.
| China said it would not approve of the deal after the announcement of duties, Reuters sources said. |
Beijing may also impose sanctions on US companies or add them to a list of unreliable subjects, which so far includes mainly companies that believe Taiwan’s weapons. The US drone manufacturer Skydio, which supplies its batteries from China, is such a company facing Chinese sanctions.
« Our strokes are » precision strikes, « said Cinbo, director of the Center for American Studies at Fudan University. » The main priority is to continue with restraint, and the next is the use of asymmetrical methods, « said Wu, adding that they include export control.
Political risks
As Washington and Beijing are trying to cause increasing pain to each other, and the rest of the world is regarded as a concomitant damage in their trade war, it is difficult to imagine what a big deal for de-escalation would look like.
| Economists say Trump’s goal for balancing trade with China is an impossible in the short to medium term, given that one country is the world’s leading manufacturer while the other is the largest consumer. |
China, affected earlier this year by an increase in duties by 20%, justified by the fight against Fentanyl precursors, not its trade surplus, is confused about what Trump wants and rejects attempts to restrict even when declaring a readiness for negotiation.
« China does not view the US measures as favorable to create a suitable atmosphere for negotiations, » said Bo Genuan, a partner at China -based consulting company Planum.
| If a quick deal is unattainable, then it can become a battle of political will, where some analysts believe that Beijing has supremacy. |
Thousands gathered in Washington and cities in the United States over the weekend to protest Trump, which is also facing tough criticism of Wall Street for the global market turmoil caused by his duties.
Chinese President Xi Jinping is unlikely to meet such resistance in his strictly controlled country and can plan cash and fiscal incentives for later this year to relieve some of the social stress if necessary.
« Ultimately, everything becomes a game which country can actually manage its own population more efficiently to manage the subsequent economic consequences of this trade war, » said Hku Business School Finance Professor.
« Trump has to stand up – or at least Republican politicians have to stand up – before great electoral pressure, and the US media are still almost free, » he said. « So I think Trump’s ability to fight politically with China is not so great.
