How China Can Retaliate Against the US - FX Leaders News
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How China Can Retaliate Against the US

Posted Sunday, July 29, 2018 by
Skerdian Meta • 3 min read

As everyone knows by now, US President Donald Trump has started a trade war. He vowed to take action against China during his campaign for the US presidential elections regarding China’s intellectual property theft and the massive trade deficit that the US holds against Chinese products. It took Trump some time to get it going, but he waged a trade war earlier this year. He announced tariffs on $50 billion worth of Chinese products although implemented only $34 billion and promised another round of tariffs on an additional $200 billion products a couple of months ago. Last week, he surprised us again by threatening tariffs on $500 billion of Chinese products.

Although, I think this last one is just a bluff, so China takes it easy on its part when Trump goes ahead with the previous plan and imposes tariffs on $200 billion of Chinese products. I don’t think that China will take it easy though. China has retaliated accordingly to US tariffs by placing its own tariffs on US products, particularly soybeans. Trump said earlier that when a country like China has a $600 billion trade surplus with the US, it is impossible to fight back. But China can and it is fighting back. The US deficit with China is lower at around $375 billion as of 2017 for a remainder, but let’s see how China can fight back.

Tariffs

While China is in a trade surplus with the US, China does import from the US. It imported $130 billion worth of US products last year, so it can place tariffs on those products. They already started doing so by placing 25% tariffs on $34 billion on US Soybeans. Chinese officials have threatened earlier that a trade war initiated by America will force China to stop purchasing Boeing airplanes and switch to Airbus instead, which is a British/French company. iPhones are another product China might find it easy to target, since it can easily switch to its neighbor’s Samsung.

Weaken the Yuan

It doesn’t necessary have to be tariffs on products, China can depreciate its own currency as well, so Chinese products become cheaper if the US imposes tariffs on them. You can say that Trump can do so as well and since he took office last year the USD has devalued more than 15%. But China pegs the Yuan to the Dollar, so when the USD was weakening, the Yuan was weakening together with the USD. But, China can devalue its currency even further against the USD. China is still a communist country if you remember and it has total control on its central bank. In the last few weeks, the PBOC (People’s Bank of China) has set the overnight rate lower and the Yuan has depreciated against the US as a result. If the US places 25% tariffs on Chinese products, China can depreciate Yuan by as much as possible. While they cannot depreciate it indefinitely, this is a strong weapon they have in their armor.

Harassing US Companies

China is arguably the second biggest economy in the world with many economists claiming that it is the first. Even if it is not the first, it will be soon. This means that larger US companies will want to do business in China as other sectors of the US economy grow, besides manufacturing. China’s service, financial and retail sectors are already huge and will be even more massive as China grows. There are trillion dollars worth of profit to be made in these sectors and US firms operating in China already generate $275 billion profit. These companies could be the first to be targeted and as China grows, US companies will miss out doing business on a massive market. This is a big risk.

Seek Out New Connections and Diversify Away From the US

China is looking at the EU as the first major partner. The EU is China’s first trading partner and China is EU’s second, after the US. Given that the EU is already under some US tariffs, a closer trade connection would be a way to fight Trump back. The other major economies of the world such as India, Canada, Mexico, Russia, Iran, Brazil, etc., are also not happy with the White House and tariffs would push them closer together and alienate the US. Besides that, China has already started major infrastructure projects to link it to Southeast Asia and Europe through the Silk Road and even as far as Africa with port, railway and airport projects as well as in Oil, gas and other raw material industries in certain countries. So, China is building up its network to increase trade and trading partners, while the US is fragmenting its trade routes and possibilities.

There are of course many more ways for China to retaliate and they did threaten Trump that they would retaliate everything. China has a long history of retaliation against many countries so they are not an easy target. They could continue to attack intellectual property, they could stop tourism since they are not a democracy unlike the US, they could sell US bonds, etc. If I remember well, they hold around $1.20 trillion worth of US bonds. But, a trade war is bad for everyone since it means less trade and less business. But, this is the time of Donald Trump and Twitter politics, so let him have his fun. We will all witness the outcome whatever it is.

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About the author

Skerdian Meta is our Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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