Here Are The Six Ways China Could Retaliate In Trade War With The U.S.

It's all about the trade war between the US and China this morning, and more specifically, how will Xi retaliate to Trump.

For those who missed the overnight fireworks, late on Monday, President Trump asked the US Trade Representative to identify USD 200BN in Chinese goods for further tariffs of 10% which will be imposed if China refuses to change its practices and goes ahead with its retaliation threat, while he also stated that China raising tariffs is unacceptable and that the US will pursue tariffs on another USD 200bln of Chinese goods if China increases tariffs yet again.

Predictably, China - which last week reacted instantly to Trump's first round of $50BN in tariffs - again responded immediately, wasting no time in accusing Trump of "blackmail." China’s commerce ministry said on its website that if the US “irrationally” moves forward with the tariffs then China has no choice but to “forcefully fight back” with "qualitative" and "quantitative" measures.

“China’s response is to safeguard the interests of the country and its people,” China's Mofcom said, adding that the US “practice of extreme pressure and blackmail departed from the consensus reached by both sides during multiple negotiations and has also greatly disappointed international society”.

But now that the chips are on the table, and Trump is locked into a tit-for-tat strategy with China from which neither he nor Xi can "defect" without losing face, the question is how exactly will China retaliate to punish the US while minimizing the damage to China's economy as much as possible.

There are 6 possible things that China can do at this time, in order of escalating severity:

  1. China could de-escalate tensions by presenting a list of actions it will follow to reduce its significant trade deficits in services with the US. This could affect education service institutions, the local tourist industry, and entertainment. However, as the CFR's Brad Setser writes, it increasingly looks like the Administration is putting China in a position where China cannot make concessions without appearing to cave - which most think China won't do. Setser, not alone, has trouble seeing a de-escalation option if Trump goes through with the $200b

  2. China will likely launch an economic subsidy for its economy in the form of further easing in financial conditions to offset any potential trade-drag. Some, such as Deutsche Bank have proposed that in order to offset the negative hit to its consumers, China will loosen policy such as tolerating the property and land market boom in tier 3 cities and cutting the RRR twice over the rest of this year to partly offset the potential drags. This would also involve a modest devaluation of the Yuan.

  3. China could unleash differential treatment of local enterprises: as some have suggested, Beijing could simply opt not apply its "market access liberalization" policy recently announced. This could greatly disadvantage US firms greatly. Beijing could also engage in an aggressive crackdown on US firms operating in China (Apple), hinder border passage of US products (automotive), or pursue antitrust and monopoly allegations against US tech names (Micron).

  4. China could also choose a diplomatic retaliation, and order Kim Jong Un to scuttle the recent agreement North Korea signed with the US, humiliating Trump by showing that it was Beijing all along who made the US-N. Korea summit possible and successful.

  5. China could pick an aggressive route, and instead of a mild depreciation, it could aggressively pursue a weaker Yuan to boost trade competitiveness: which, ironically, is the catalyst behind much of the Trump administration's animosity toward China. To achieve this, China would relaxing some of the capital control measures that have helped strengthen the renminbi in the past 2 years. That said, such a move would unleash sizable outflow demand, while boosting precious metals and cryptos. The US would also brand China a currency manipulator.

  6. China, finally, could pick the nuclear option, and gradually or suddenly liquidate its Treasury holdings. This is a long-running worry by markets given China’s $1.2 trillion in Treasury holdings. In January, Bloomberg reported this was a possibility which was at the time denied by China State Administration of Foreign Exchange; however the recent liquidation of half of Russia's Treasurys was seen by some as a rehearsal for what would happen if Beijing decides to pursue this approach.

It could also be some combination of the above or simply continue the tit-for-tat: according to overnight press reports, China is already preparing a second round of tariffs on US energy; US oil, gas and coal face 25% levy in threatened second round of duties.

As a reminder, as noted above whatever China does, the biggest challenge for Beijing would be how to inflicts the least damage on its own economy and credibility while hurting the US. UP until now, China has been responding in a tit-for-tat manner, and has avoided implementing more damage than the US has with a measure conciliatory tone in its statements. That could soon change.

Finally, there is the markets angle. While Beijing would likely want to avoid a currency or bond market war, a recent analysts by Goldman concluded that for the tit-for-tat stalemate to be broken, the markets would have to tumble. And while many believe that China would prefer to avoid directly riling markets, it may soon have no other choice if it plans to send Trump a message. After all, overnight the Shanghai Composite just plunged to the lowest level in 2 years. Will Xi now return the favor?  Keep an eye on TSY yields and, of course stocks, for the answer.

Comments

Yellow_Snow Zero Point Tue, 06/19/2018 - 08:57 Permalink

Go to Amazon and Walmart.com and try to find stuff 'Made in Amerika'...  Good Luck...

Even the crops we export are oversized tasteless GMO that are often refused by other nations...

Tariffs would have made a difference 30 years ago...  when our industries were dying... on life support, with a feeble pulse...  Now it's too late... Most of those patients are RIP or the lucky survivors moved overseas permanently... Those 'elites' running this country didn't give a damn then or now...

There is something more nefarious going on...  kinda like invading Iraq after 9/11...  at first people thought it was the right thing to do...  but years later, the sheeple soon discovered that there were 'less than patriotic reasons' behind the country-wide 'leveling' and genocide of shock and awe... 

There is a reason why there are so many Goldman Sachs Bankers, 'Israeli Firsters', and Rothschild connections in the WH...  Even if you think Trump is sincere in his attempt to MAGA, he's not making all these decisions...  look at the missile attacks on Syria...  that was a man with a gun to his head...  the day when we should have realized he is a man that is seriously compromised...

They are looking out for us...  /sarc

Follow the money...   /not sarc

Hint:  Look for EXCEPTIONS

In reply to by Zero Point

PrayingMantis TheParty'sOver Tue, 06/19/2018 - 16:05 Permalink

 

   ... here’s the 7th way avoiding the tariffs ... posted this on another thread, but just as relevant here ...

 

       ... China would simply use a “middleman”  ... they would sell to another country not on the “sanctions” list ... China would lower the “middleman’s price to a manageable level ... and that “middleman” country will ship the products to the US ... making a little profit, thus, avoiding higher tariffs ... US consumers would still enjoy lower-priced Chinese-Made American-branded products ...

     ... and everyone would be happy ... except Trump’s handlers ... “wtf just happened! “,  they would scream ... 

 

In reply to by TheParty'sOver

MoreFreedom Greyhat Tue, 06/19/2018 - 13:27 Permalink

"And what happens to high tech if China stops exporting rare earth metals?"

Then the Chinese politicians invested in rare earth metals will scream bloody murder because their income stream (along with the income of all the workers producing it) will end.  Then they'll export it to other countries, that will in turn export it to the US.  

Politicians can meddle in economics, but the laws of economics and markets always win.

In reply to by Greyhat

TGF Texas Mr.Sono Tue, 06/19/2018 - 09:27 Permalink

First, they don't hold alot of UST.

Second, the ones they do own are leveraged against oversea's assets, so they can't just sell them outright. (i.e. Look up some of the Minning assests they own in South America,  etc.)

Third, what are they going to take in return? They don't have any more vault space for more gold, the Euro's a dumpster fire, and US cash is losing 3-5% of it's value annually. 

In reply to by Mr.Sono

gdpetti TGF Texas Tue, 06/19/2018 - 09:47 Permalink

First, they start by simply stop purchasing MORE..... that will send a signal... China is applying its 'Art of War'... nothing new here except the stupidity of American imperialism... even our cousins across the pond have more experience with this crap and could inform us about these things... but we don't listen, because that's what they taught us to do... ignore reality as long as possible.

China is operating in 'diesel' mode, compared to our turbo charged gas engine... lots of horsepower in our little 4 cyclinder, but like a semi, they are just picking up speed as together we head up the hill... they are built for the long run... ours is all short term, all the time... and as Mother Nature gets closer, the OWO is being outed, exposed and pushed over the cliff, with Trumpy the perfect man for the role of agent provacateur... the infamous trickster... he knows not what he does... perfect.

Out with the OWO, in with the NWO... these puppets aren't needed in the new one.... their masters will be coming out of the shadows to take the reins directly..... which is our real complaint with the 'East'... the same as always... our fake indirect approach vs their real direct one... that's always been the case in recent empires.

Stop new purchases or just slow them down... increase PM purchases... to the point of stripping the open public market of them... and let the Comex et al deal with the changing reality.... the underpinnings of the entire global market.. that's what is changing... not a simple tit for tat, but the whole shebang.... and this is before Mother Nature cleans house.... all of it.... China doesn't seem to be aware of this.... OWO... best if they aren't... same with our puppets, psychos, pedophiles etc.

Notice how CHina is still supporting our USTbill market? their export market in the West? Japan and Russia is selling... Hmmm.

In reply to by TGF Texas

TGF Texas gdpetti Tue, 06/19/2018 - 09:54 Permalink

So what do they do with their money, honey? Keep it in Yuan, when they are about to devalue? They don't have any viable alternatives.

You know the gold market is rigged like the stock market, right!

Lets all repeat the realities of the world we live in!, "Gold never goes up, and Stocks never go down, so BTFD" 

In reply to by gdpetti

HenryHall Mr.Sono Tue, 06/19/2018 - 09:49 Permalink

>> Do what Russia did, sell treasuries.  

And if China sells treasuries China has to spend the resulting (suddenly printed by the Fed) dollars on something tangible.

The obvious choice is American grain. Grain is a proxy for energy and an insurance against worldwide harvest famine. And any other raw material or semi-processed material (such as paper pulp) that can be found and stockpiled. Better to have a mountain of coal than a mountain of paper dollars when the crunch comes.

Selling manufactured goods in return for raw materials has historically been the way that rising empires treat colonies and pseudo-colonies. You will know we are on the edge of real war when the US embargoes grain exports.

In reply to by Mr.Sono

Stuck on Zero Yellow_Snow Tue, 06/19/2018 - 09:14 Permalink

The US should create a sovereign wealth fund and start buying up Chinese factories and technology, fire the workers, and bring them back to the US.  China is scared that whatever they produce with their labor can be produced cheaper in India, Vietnam, the Philippines, or Indonesia. Trump also needs to go after Japan, Taiwan, Germany, and Korea for grossly unfair trade practices.  Trump can hit back at China by getting an "eco" law passed to require that all manufactured items be repairable and/or returnable to the manufacturer for recycling. That would just about shut down WalMart. Food and safety inspections could shut down much of what comes from China. Lastly Trump could whisper in the ears of US companies that if they offshore their operations they will be trashed by a litany of government policies. Lastly, Trump needs to break up the top 50 US corporations into little pieces that compete on the basis of quality of product, not quality of lobbying in Washington.

In reply to by Yellow_Snow

veritas semper… Yellow_Snow Tue, 06/19/2018 - 11:26 Permalink

Zactly.

And China did already show a birdie to the US: China lowered tariffs for everybody except US.

LOL!

The old BS with " if you owe the bank ... blah... BS... blah" may apply only if you are talking REAL money, which we don't.

The Donald is not opposed to Globalism, because Globalism = New Old Order=the American-Anglo-Zionist-wahhabist Empire.

All the big American banks and corporations, this is Globalism.

As for " cheap Chinese ..." =this is what the US corporations ORDER for the dumb Americans; China produces high quality stuff, only not for Americans, who can not afford them.

PS: for those interested I have two new posts, one about Bolton and one about making fun of the Empire on my site.
Today I will publish Zarif’s portrait.

I am working on a comparison between Obama and the Donald that I will probably publish this week.
I also published 32 pictures after my oil and acrylic paintings, for who is interested.

https://me582.wordpress.com/
https://artisticexpressions394454247.wordpress.com/

 

 

In reply to by Yellow_Snow

Kayman Yellow_Snow Tue, 06/19/2018 - 11:33 Permalink

China didn't have the factories 30 years ago either. Bring them home, automated or not.

Dirty American politicians made China. Free access to the American Consumer market made China. And American debt was used to fill the gap of lost private sector wages.

Point 4 ? China is going to show Trump who controls North Korea ?  Like Trump didn't already know the China/NK dance?

Point 6. Let China sell/dump U.S. Treasuries. The U.S. economy is growing and China is slowing. They will have to sell them some time anyways.

In reply to by Yellow_Snow

snblitz Yellow_Snow Tue, 06/19/2018 - 14:34 Permalink

Tariffs would have made a difference 30 years ago ...  Now it's too late..

I think we could make it back. One problem is that the people who knew manufacturing are dead and gone from the US.  Or there are simply too few of them remaining.  Just look at Tesla's attempts to manufacture cars at scale.  Also the military and infrastructure companies have been crying about this for about 15 years.

I like Trump's approach 'fair and reciprocal'.  If we can't have that then tariffs are imposed.

There are unfortunately many more problems: regulations, tax policy, regulations, and more regulations.

Consider a recent subway extension being built under New York.  It is costing about 10 times the amount spent in similar cities in Europe for similar subway construction.

In reply to by Yellow_Snow

Teamtc321 SWRichmond Tue, 06/19/2018 - 17:31 Permalink

Exactly, the pressure they will apply to firm's operating in China will be absorbed again, imo. China will float the tirds and so will uncle. At least the favorite tirds.  

 

#3 "China could unleash differential treatment of local enterprises: as some have suggested, Beijing could simply opt not apply its "market access liberalization" policy recently announced. This could greatly disadvantage US firms greatly." <<<<<<

In reply to by SWRichmond

Gaius Petronius Four Star Tue, 06/19/2018 - 15:36 Permalink

Even more bizarre is the amount of fake wealth being generated over there via the roll over commercial loans occurring.  I wish I had something more substantive to link too, but here's what I understand (feel free to correct):

 

1) Chinese (domestic) borrowers are borrowing money to buy (lease 99yr) apts/condos/office space/etc. 

 

2) The borrowing is being backed by the Chinese government.  Just like here in the USA..think Freddie Mac/Fannie Mae. Same concept.  

 

3) Continued borrowing creates big asset bubble.  Something like 20 Trillion U.S. dollars..there's articles about it here on Zerohedge.

 

4) As the borrowers default, new loans are issued to cover/cure the default which keeps the bubble going. 

 

5) Since China is a dictatorship, hard information on nature of the asset bubble is not available because the information is suppresed..

 

6) Since China has been accepted as a world leader, no one questions the data that is released.  

 

7) China manipulates its currency and converts that currency to other currency thereby creating wealth out of thin air. 

 

8) This new wealth is "parked" in foreign countries, like Vancouver, B.C.

 

Maybe I need in on this.

 

 

 

 

In reply to by Four Star