Beijing was on the defensive and unsure how to react when Donald Trump initiated a trade war with China in 2018. Despite losing more, President Xi Jinping is more equipped to battle this time.
Trump has threatened to impose up to 60% tariffs on Chinese imports, a figure that Bloomberg Economics claims could severely harm commerce between the world’s largest economies. Trump won a second term as president in an election on Tuesday. This is in addition to several export restrictions on cutting-edge technology that the Biden administration has only made stricter since Trump’s exit.
China has taken calculated measures during this time to make sure it is more resilient and ready to retaliate. Expanding its toolset, which now includes tariffs on agricultural products, export limits on vital raw resources, and an entity list that can target important American corporations, has been crucial to that.
Zhou Bo, a former senior colonel in the People’s Liberation Army and senior fellow at Tsinghua University’s Centre for International Security and Strategy, stated that “China is much more prepared to deal with him again, psychologically speaking.” China’s Foreign Ministry said it respects Americans’ choices and congratulated Trump on his election victory on Wednesday.
However, Xi would much rather avoid a tariff war that could turn out to be far more destructive than the initial one. Chinese lawmakers are gathering this week to develop policies to support growth, as the country has depended on exports of products like batteries and electric cars to support an economy struggling with deflation and real estate issues.
Chinese officials will have to take even more action to support the economy if Trump carries out his trade threats. Stronger trade restrictions on China could compel Xi to support domestic consumption, something the Communist Party has always aimed to avoid, according to a statement made last week by Goldman Sachs Group Inc.
Chinese markets plunged and the yuan plummeted for the first time in two years on Wednesday, providing investors a preview of the volatility that would accompany Trump’s clinching of the US president. The offshore yuan experienced its biggest one-day decline since October 2022, plunging as much as 1.3% against the dollar. The selling was concentrated on Chinese stocks listed in Hong Kong, with a Hang Seng barometer closing 2.6% lower.
“China can hardly retaliate on 60% tariffs,” said Alicia Garcia Herrero, Asia Pacific chief economist at Natixis SA. “What China will do is to announce a bigger stimulus to counteract so that the market doesn’t penalize China.”
China pledged to purchase $200 billion worth of American goods to reduce its trade imbalance with the US as part of a deal signed in January 2020, after around two years of threats, tariffs, and negotiations during Trump’s first term. However, as Chinese shipments surged during the pandemic, the COVID outbreak around the same time rapidly worsened relations between the countries, and China never came close to meeting the targets.
Global trade could suffer further harm from a resurgent trade war. About 15% of the US’s total export value, or $500 billion, came from Chinese businesses last year. The US might eliminate those sales and further harm businesses dealing with a faltering domestic economy and declining pricing if it imposed high tariffs on all or a large portion of those products.
Scott Kennedy, a senior consultant at the Washington-based Centre for Strategic and International Studies who regularly visits China, said that while Chinese authorities are cautious about seeming weak, they also don’t want to overreact to Trump’s fresh tariff threats. Targeting American corporations with significant stakes in China, selling US treasuries, weakening the yuan, and expanding outreach in Europe and Latin America are some possible alternatives for Xi’s administration, he said.
“They’re sick of being treated like a piñata and want to fight back,” Kennedy said of China. “They’re prepared to deal with Trump and fight fire with fire if needed.”
However, China will be prepared to retaliate if a trade war breaks out, and US agriculture products would once more be the first to be targeted. Brazil is now the main importer of maize and has consolidated its position as China’s top supplier of soybeans since Trump’s first term. This has replaced the significant increase in US shipments to China as part of the 2020 trade agreement. Over 40% of Chinese soybean imports came from the US in 2016, but in the first nine months of this year, that percentage dropped to less than 18%.
Since China’s demand for pork, as well as corn and soybeans to feed pigs, has decreased, the country’s faltering economy also gives Beijing more wiggle room. As a result, it may more readily switch purchases from the US to other countries and is less dependent on imports.
“There should not be any doubt about China’s tit-for-tat retaliation,” said Zhou Xiaoming, a researcher at a Beijing think-tank and a former deputy representative to China’s United Nations mission in Geneva a decade ago. “Easy targets include corn and soya beans. The country is in a better position than in 2018 to take countermeasures as China has developed Brazil as a reliable alternative source of supplies and been able to reduce imports from the US.”
However, China has fewer clear targets to attack at the same time. Since Beijing hasn’t inked a deal to purchase new Boeing Co. aircraft in years and the nation’s imports from the US have decreased from a peak in 2021, it has one less weapon at its disposal. The United States and China’s direct investment connections are also dwindling, in addition to their deteriorating trade relationship: According to United Nations data, the stock of Chinese investment in the US fell 28% last year from its 2019 peak.
This increases the likelihood that China may attempt to weaken its currency to lower the cost of exports. Although China’s last official devaluation was in 2015, authorities permitted the yuan to drop to about 7.2 to the dollar during the height of the first trade conflict, which reduced the cost of its exports and somewhat mitigated the effects of Trump’s tariffs.
The Chinese yuan is currently at about the same level, but letting it fall any more could annoy other international trading partners, who may then impose their taxes on Chinese goods. Countries have already increased their tariffs on steel due to the influx of low-cost steel, and a broader trade war may spread to other goods.
Export controls
Export controls, which the US has regularly used against China, are one of Xi’s main new tools. Beijing last year imposed restrictions on the export of gallium and germanium, two metals that are extensively utilised in the defence, communications, and chip manufacturing sectors. China may now try to restrict access to vital raw minerals, including antimony, which is utilised in some semiconductor devices, that the US need for crucial technology.
Additionally, China now sanctions foreign companies using a more formal procedure. In September, authorities said that China would launch an investigation into PVH Corp., the parent firm of Calvin Klein and Tommy Hilfiger, for not utilising cotton from Xinjiang’s far west, where the US had imposed trade restrictions because of human rights concerns. According to the Financial Times, Beijing has also banned a US drone company from supplying Taiwan by preventing it from buying parts in China.
In the end, China would rather agree with Trump. Henry Wang Huiyao, the founder of the Centre for China and Globalisation study group in Beijing, said the new president has indicated that he will be receptive to Chinese investment in the US, which might serve as the foundation for an agreement of some kind.
EVs
“Trump is a pragmatic politician who focuses on solving specific problems,” Wang said. “China has the super lead on electric vehicles and green technology,” he added. “There’s an enormous opportunity that Chinese companies can help make America great again.”
Beijing does acknowledge, however, that China must prepare for the worst and hope for the best. Furthermore, Trump has few choices if he wishes to carry out his severe threats, which would harm the US and increase costs for American consumers.
“We’ve talked a lot about what China can do to prepare for this scenario, but in the end, there isn’t too much that can be prepared,” said Tu Xinquan, a former adviser to China’s Commerce Ministry who is now professor and dean of the China Institute for WTO Studies at the University of International Business and Economics in Beijing.
“There’s no silver bullet,” he added. “We can only deal with the problem when it comes.”
