How China could retaliate in the trade war against the US
The verdict is out! The US-China trade talks have failed and the US has gone ahead with its fancied 25% tariffs on $200 billion of Chinese imports. China has threatened to retaliate but not too many are taking the threats seriously. Don’t underestimate China and here are 4 ways they can needle America.
Target US companies in China
One can argue that the US imports $600 billion from China but China only imports $125 billion. But that is off the point. US companies generate $400 bn worth of sales in China. All that China needs to do is to slow down customs clearances, delay visa applications to US citizens, use safety checks to disrupt operations, etc. Some of the biggest US companies like Apple, Intel and Boeing use China as a critical hub. Making their China operations cost-ineffective can be one easy way for China.
Devalue the Yuan
This may not be very easy considering that the Yuan is part of the IMF basket but then China has found ways in the past. It can just widen the range for the Yuan to make it weaker. A weak Yuan will more than makeup for the higher tariffs that the US has imposed and helped Chinese goods remain competitive. In the last few years, China has shown a greater intent to engage with UK, EU, Japan, and India to reduce its overall dependence on the US.
How about selling US bonds
China holds $3.5 trillion in reserves which includes $1.4 trillion in US bonds. Even a small sale by China of US bonds can roil the global bond markets and make investors panic. They can also give hints to the global market by shifting more of their reserve holdings from dollars to gold or to other currencies like the Yen or the Euro. These kinds of signals by a large economy like China are enough to give the jitters to currency markets. China will use this carefully because if bond prices crash then China stands to lose a lot in terms of investment value.
Use diplomatic channels
This is something which China is most likely to use to good effect. Let us not forget that the trade war is not just about tariffs but also a display of who has the upper hand in world trade. China can always indulge in some saber-rattling in the South China Sea. For long, the US has accused China of meddling in North Korea. China can just make the job harder for the US. China has already built close relationships with the UK and EU and most of these nations are unhappy with Trump’s arbitrary style of functioning. They would be more than happy to have the support of China. Above all, Russia and Iran are trying to provide a counter-weight to the US and OPEC. China may compound matters by chipping in!
