China Still Has Trade War Cards It Can Play

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Wang Yong, director of the Centre for International Political Economy at Peking University, said that hitting back with tariffs might not be a good option for China, given that China was running out of US goods to tax, and it would hurt Beijing’s efforts to boost domestic demand.

But it had other options to deal with further escalation in the conflict, Wang said. “To increase tariffs would only increase the burden on Chinese customers,” he said. “Instead, China can limit its purchases and stop opening up its market to US firms.”

Among the sectors hardest hit under those conditions would be US agriculture, finance, energy and manufacturing, Wang said. US soybean producers are already feeling the impact of tariffs.

When the trade war erupted in July, China slapped a 25% tariff on the US crop as part of its efforts to weaken Trump’s support among rural farmers.

A statement released by the American Soybean Association on Tuesday said Trump’s announcement was a “worst case” for soybean growers. It called on the Trump administration to hold off on additional tariffs and conclude trade negotiations with China.

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“After so many threats and missed deadlines for concluding negotiations, this ongoing uncertainty is unacceptable to US farmers,” the association’s president Davie Stephens said. “With depressed prices and unsold stocks forecast to double before the 2019 harvest begins in September, we need the China market reopened to US soybean exports within weeks, not months or longer.”

Also at risk are promises that China would take another step in opening its US$ 44 trillion financial sector, with plans to remove limits on ownership in local banks, scrap size requirements for foreign firms that operate onshore, and allow overseas insurance groups to set up units in China.

Another Chinese trade specialist who advises Beijing said retaliation would be “unavoidable” if Trump went ahead with the tariffs. China could hit back by banning exports of key components, intermediate materials and equipment that US manufacturers depended on for the country’s advanced manufacturing sector.

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“The trade war will escalate, and China has many cards at its disposal,” the specialist said. “The US is reliant on components manufactured in China and they will not be able to find substitutes for them. This would mean US consumers would suffer.”

Both sources said China was banking on the resilience of its economy to weather further trade war hits, saying the US’ long economic expansion had peaked and the country would soon start to feel the pinch.

China’s exports shrank in April but imports surprised with their first increase of 4% in five months, indicating that domestic demand rebounded slightly in April.

But Kaiyuan Capital managing director Brock Silvers said Beijing might be too optimistic about its bargaining power. “China’s economy has stabilised thanks to its stimulus measures, but new confidence may prove short-lived. The economy is still problematic – Beijing’s massive credit increase may only be a temporary balm – and many analysts have talked about a possible slowdown later this year,” Silvers said. “A waiting game on trade is thus much riskier for China than for the US, where the economy remains extremely robust. Should China respond with new tariffs, trade talks could go on an extended hiatus. China’s best bet should still be a quick trade resolution while economic tailwinds continue.”

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