Here Are All The Ways China Can Retaliate To Trump's Trade War

Picking up where the WSJ left off yesterday, Reuters reports that China is preparing a range of responses to the just announced $50BN in U.S. tariffs and will "stand up to protectionism", but that it still hopes for dialogue, according to Beijing’s WTO ambassador, Zhang Xiangchen.

As a reminder, yesterday the WSJ reported that China is preparing to hit back with its own countertariff aimed at President Donald Trump’s support base, including levies targeting U.S. agricultural exports from farmbelt states in retaliation to the mounting trade offensive from Washington.

“Any Chinese response to new U.S. tariffs would be measured and proportional,” said a Chinese official involved in policy-making. Specifically, China is said to target U.S. exports of soybeans, sorghum and live hogs.

However, as a first step Reuters notes that Zhang Xiangchen said China was considering a WTO complaint against the package of tariffs that President Donald Trump is expected to announce later on Thursday.

“This is a legitimate right for China to do that. But I would not exclude other options, because if the flood approaches you have to bank up to keep it out,” he told Reuters.

Meanwhile, as Trump just said moments ago, Thursday’s tariff announcement is the first in a string of U.S. trade restrictions aimed squarely at China and intended to curb alleged theft of U.S. technology. U.S. Trade Representative Robert Lighthizer said on Wednesday the tariffs would target China’s high-technology sector and could also include restrictions on Chinese investments in the United States. Other sectors like apparel could also be hit: full details are set to emerge over the next 2 weeks.

And while we wait for the details, the imminent question is what China will do next.

To answer this question, Deutsche Bank has laid out several possible scenarios of how China will retaliate to the Trump tariffs.

As the German lender notes, Europe has already outlined the limited actions it would take in response to the steel and aluminum tariffs, targeting areas of US imports that may be politically important to key congressmen (bourbon from Kentucky, motorcycles from Wisconsin, and so on). It notes that if these actions do not spiral upward, their overall magnitude is likely too small to have significant macroeconomic implications.

Digging into the specifics, here are the details from Deutsche on every possible scenario:

Baseline: Under the baseline, we expect China would actively negotiate with the US to avoid an escalation of trade frictions. The US administration has reportedly asked China to reduce the bilateral trade deficit by $100bn. It is not clear what the time horizon for this goal is, though the number itself is too large to be achieved in a short time period (and definitely not before the US mid-term election).

China nonetheless would be willing to offer to import more from the US in products such as automobiles, airplanes, and natural gas. China already announced that it will cut tariffs for automobiles and “some consumer goods.”

Other products where China could potentially cut tariffs and increase imports from the US include plastics, meat, cotton, glassware, fruit, and beverages – China has a weighted average tariff of 15% on US exports of these products, compared to 9% on all trade partners.

China has also promised to open up its manufacturing sector completely, and improve market access to services sectors. There are already discussions about opening up foreign holdings of financial institutions, and China could further open up market access in telecommunication, healthcare, education, elderly care, and electric cars.

Trade war light, Scenario A: Limited tariff on tech imports: Under the trade war light scenario, we would expect China to retaliate, but not aggressively. The Chinese government is likely aware that trade tensions are related to the US political cycle. If the damage from trade frictions is manageable on the macro level, the Chinese government may want to avoid further escalation. The policy options could include:

  • 1. Higher tariffs on selected US exports to China: China would likely target imported products that would have significant impact on the US, and that China could afford to import less from the US. Based on these criteria, we have identified the following products: seeds and fruits (including soybeans), aircraft, pulp, nonferrous metal, wood, ores, and raw hides (Figure 8). Imports of these products amount to about $40bn. China could select from this list and retaliate by imposing “reciprocal” tariffs on imports from the US. It remains to be seen how such retaliation will play out under WTO’s rules.
  • 2. Some warning shots on US business interests in China: Many US firms already generate significant shares of their revenues from China, and their sales may not be reflected in the bilateral trade data. General Motors, for example, has a joint venture in China which supplies the Chinese market. The latest data show that while GM's global auto sales were down by 9% in Q4 2017, its sales volume in China was up 6%. China already accounts for half of GM’s global sales as of Q4. A USChina trade war potentially puts companies like GM in a tough position. Similarly, when the diplomatic relationship between China and South Korea cooled in 2016, some Korean companies with large operations in China suffered losses in their sales revenue, suggesting that non-tariff barriers can be as damaging as tariff measures.
  • 3. Delay the process to open up the service sector, or provide preferential access to countries other than the US.

Trade war heavy scenario: The imposition of a 45% tariff on all imports from China would cause significant damage to China's economy. In such an extreme scenario China would have to respond with drastic measures. Here are the various actions that could be taken and our judgment on the likelihood they would be taken.

  • 1. Impose higher tariffs on all US exports to China: China imported $153bn of goods from the US in 2017, based on data from China's Customs Office. Assuming China also imposed a 45% tariff and a price elasticity of 1.2, this would lead to a drop of US$83bn of US exports to China, equivalent to 3.6% of total US exports in 2017. As China runs a large trade surplus against the US, hiking bilateral tariffs by the same percentage will cause more damage to China than to the US. Hence China may go beyond tariff measures to retaliate.
  • 2. Restrict market access for US firms in China: Similar to what we discussed under the trade war light scenario, China may set barriers and obstacles for China-based US firms. US business interests in China would suffer as a result.
  • 3. Provide preferential treatment to US competitors: China may try to strengthen its relations with the EU and other countries to offset the damage of an emerging bilateral trade war with the US. This may lead to more free trade agreements without US participation. China may also open part of its service sector to other countries rather than the US.
  • 4. Restrict US travels by Chinese nationals: Similar to what happened with South Korea, China may make it more difficult for Chinese nationals to personally travel to the US, such as for tourism or education purposes. Chinese spend $30bn per year on their US travels (including accommodations, shopping, education expenses, etc.). The impact could potentially be large, depending on the scope of such restrictions and how strictly they will be implemented.
  • 5. Sell US treasuries and buy other government bonds: China does not disclose the composition of its reserves  holding. According to the IMF COFER database, the typical holding by central banks is 64% in US dollar assets, most of which US government bonds. The US TIC data shows that China holds $1.18tn of US treasuries as of December 2017.

Among these policy options, 1 through 4 are likely to happen. One advantage of these measures is that they are bilateral. Rebalancing reserve holdings away from US treasuries would have global ramifications given the role of US interest rates in global financial markets. A disruptive rise of US interest rates would be damaging for China's economy as well. Hence, we think it is less likely than the first four options.

Besides government actions, private companies in China will likely diversify their production base to other countries such as Vietnam. This process has been ongoing for several years, but a trade war could accelerate its speed. Countries in Latin America, such as Brazil and Argentina, could potentially gain from the trade war by taking the lost market shares both in the US and in China. Countries and regions closely integrated with China’s supply chain, such as Korea, Malaysia and Taiwan, would still lose on a net basis.

* * *

And while there are many nuances, these can be summarized into two general categories: trade war light and trade war heavy, or "nuclear." The latter could escalate into a recession:

  • In the "light" scenario, a significant but contained increase in tariffs on US imports from China on a scale very recently floated by the Administration would likely be met by a similar imposition of tariffs on China's imports from the US. Assuming no further escalation, the net effect would be a modest decline in growth and a smaller increase in inflation in both countries, with limited net spillover to other economies.
  • In the "heavy" scenario, US-China trade tensions spiral into a larger conflict with high tariffs imposed across-the-board by both sides. This could move the US economy into recession. China might be able to significantly damp the negative effects on its economy via large scale fiscal stimulus, though not without risk to that country’s financial stability in the longer term.

And now all eyes on what China will actually do next.

Comments

Davy Crockett I woke up Thu, 03/22/2018 - 13:22 Permalink

So what?  I am so tired of that threat.  Do you want to live as China's bitch your whole life?  Grow a pair, take the pain, and move on, don't cower in the corner hoping the commies who killed 10,000 people in Tiananmen will be kind to you.  It's outrageous that we trade with the bastards at all.

If you insist on trading with such people, at least have the self respect to demand they lower their tariffs to match ours.  Currently, the relationship is completely one sided in favor of China.  If you are too scared to demand fair treatment, you are what is commonly known as a Bitch.  Trump wants us to stop being China's bitch.

In reply to by I woke up

Be Intelligent… Davy Crockett Thu, 03/22/2018 - 15:26 Permalink

Americunt victim complex at it's finest.

Not a single word about the US economical, cultural and military abuse to the rest of the World. Not a word about US sanctions on Russia, Syria, Venezuela, South America, Mexico, Middle East, etc.

Not a word about US military interventions in democratic countries.

Not a word about the US CIA-backed coups around the World, from Chile to Australia.

 

You americunt 'bitches' are lucky Russia and China want trade and not war, if anything, the only thing your bitch ass nation deserves is utter and total destruction.

 

But what am I saying, you'll end up getting the war you always wanted. You, 'The People' (what a joke lol) may not wish a new World War, but your Trumptard messiah and the Israeli cabal want it nonetheless, and they are indeed pushing for it.

In reply to by Davy Crockett

DemandSider Be Intelligent… Fri, 03/23/2018 - 05:10 Permalink

"Not a single word about the US economical, cultural and military abuse to the rest of the World."

 

Most Americans don't know or care what The Saudis are doing in Yemen, but the banker backed whores and other sociopaths running this place sure as hell know why. Your warmongering bigotry is just the other side of the same hackneyed coin. I can guarantee that for whatever country you're from, any serious history buff with an axe to grind could make a very good case for your complete annihilation.

 

If you think a president Hillary would be any more peaceable than this nitwit, you need to to some serious review of the last decade or two. Does the quote, "We came, we saw, he died!" ring a bell? Give us all a break, already, and stop flaunting your ignorance.

In reply to by Be Intelligent…

DemandSider MadHatt Fri, 03/23/2018 - 05:30 Permalink

If my Dad could take numerous cross country trips with 7 people in various run down station wagons and return all of us safely to Minnesota every time without a cell phone, I really don't need one. I get free phone service, etc, through my computer, and block all ads everywhere, so I feel my PC and internet more than pay for themselves. I would carry a cell phone for safety if someone gave me the service for free, but I would expect to be tracked. PAYING to be tracked and pestered with targeted ads just rubs me the wrong way. I have FIRE sector parasites to pay, I don't have that kind of money to throw around.

In reply to by MadHatt

Simplifiedfrisbee DillyDilly Thu, 03/22/2018 - 14:38 Permalink

Stretch face looks like a stupid cuck! 

 

BWAHAHAHA!

 

A weak dollar policy? He is getting fucked in the ass.

Talk about bad advice. 

 

 

Trumptards are incredibly stupid. But that is by choice. Anyone can become an intellectual if they so desire.

 

Ass gapers want to raise their cost of living, eliminate healthcare, lower taxes for corporations, give guns to teachers, eliminate states rights when it goes against their fascist ideology, and destroy civility. 

 

Irrational degenerates.

 

 

In reply to by DillyDilly

Davy Crockett Mike Masr Thu, 03/22/2018 - 13:38 Permalink

What do the poor NEED?  What do they really NEED?  Do they need the shit they buy at Walmart?  Our second hand stores are bursting with quality products that nobody wants.  My family shopped at Salvation Army and Good Will all the time when I was growing up.  It was good stuff.  Now I take my kids to Walmart, because the stuff is so cheap, there's no reason not to buy new.  But when those Walmart prices go up to where they should be (seriously a new $5.00 toaster?), my kids will discover that used stuff works just fine.

Poor people need clothing (cheap even without china) and food (USA certainly has that covered domestically) and gas (we don't get gas from China).  Anything else they want such as $5.00 toasters, George Foreman grills, or fancy phones, they can do without or find used, just like we all did.  I do not share your terror that $5.00 toasters will suddenly skyrocket to $15.00.  I think we'll get by or do without.

In reply to by Mike Masr

Give Me Some Truth I woke up Thu, 03/22/2018 - 13:32 Permalink

Dump as many of their treasuries as they can and buy as much gold as they can with the proceeds.

Then, reveal how much gold the nation really has, prove this by an open and independent audit, and dare America to do the same.

Go forward agressively with this alleged yuan-petrol-gold exchange program.

Get Russia to do the same with its treasuries and gold purchases.

America's government is probably going to keep doing what it wants until nations like China and Russia do this.

After they did this, America would probably still try to continue with its bullying act, but it would be a paper Tiger.

In reply to by I woke up

Pliskin I woke up Thu, 03/22/2018 - 14:48 Permalink

Yeh, but 99.99% of americans are too stupid to realise this!

Big americant companies moved all their offshore production to a country that has NO labour rights, no safety rights, no unions, no pension/healthcare schemes...etc.

...and can pay piss poor wages!

China will benefit from NOT being 'slaves' to the 'MAN'

The u.s....not so much!!

 

In reply to by I woke up

Rubicon727 I woke up Thu, 03/22/2018 - 16:07 Permalink

"threaten to dump a shitload of treasuries"

And that IS precisely what Russia and China have been doing.

Meantime, some of the idiots on this blog don't even recognize the evil hegemon throughout the world called The US of A.

They're so mired in their ignorance of what our government has been doing for decades to other less powerful nations 'round the world, they see the tariff issue as "China needs to be playing fair." Are you kidding me?

After all, the principal reason why the elite destroyed American manufacturing/steel production and millions of good-paying jobs was to outsource to China and other Asian nations would do the same work for slave wages.

NOW, after all that GREED we see the net effect: along with the financial world with its iron-grip along with these GREEDY corporatists, the STING grows monstrous with the rising economic power of China & BRICS who are sick to death of the US belligerant, evil hegemon. It's only a matter of time, folks.

In reply to by I woke up

ZENDOG Thu, 03/22/2018 - 13:22 Permalink

Hey,,,,What happened to the immediate threat by NK ?

Thought we were getting ready to drop the Bomb...

Lil Kim says "never mind, just joking".....