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Does China Have A Secret Weapon In The US-China Trade War?

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Secret Weapon US-China Trade War
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Friday, US President Donald Trump said he would be willing to impose tariffs on all goods imported from China. Chinese government officials have been insisting US tariffs will have little impact on the Chinese economy, but President Trump’s willingness to impose tariffs on all $505.5 billion worth of goods imported from China may change these projections. With China importing only $129.9 billion from the US, can Beijing keep up with these tariffs? Third party economic experts seem to think that China still has a secret weapon in their back pocket.

In the Words of President Trump

President Trump told CNBC’s Joe Kernen “I’m ready to go to 500,” meaning he would be willing to impose duties on all imports from China. President Trump also pointed out that the tariffs aren’t just necessary because of the trade deficit, they’re also meant to punish China for rampant intellectual property theft. “I’m not doing this for politics, I’m doing this to do the right thing for our country,” Trump said. “We have been ripped off by China for a long time.”

“I don’t want them to be scared. I want them to do well,” he went on. “I really like President Xi a lot, but it was very unfair.”

So far, the US has only imposed tariffs on $34 billion worth of goods imported from China. Beijing responded with retaliatory tariffs. But if the US moves ahead and places duties on $505.5 billion, China won’t be able to keep up.

China’s Secret Weapon

China won’t be able to keep up with US tariffs, but economic experts claim Beijing still has a number of tricks up its sleeve to win the US-China trade war. Some economists even believe China has a larger arsenal of weapons that the US. Kristina Hooper, Invesco’s chief global market strategist is one of the experts. She said, “China has a much larger arsenal of weapons than the U.S. Tariffs are just the tip of the iceberg in terms of what China has.”

Selling Off Bonds

As of 2017, China owned about $1 trillion of US Treasury bonds. According to Hooper, China’s “nuclear option” might be refusing to buy more Treasurys or even selling off all of their bonds, which would be disastrous for the US economy.

Selling off all of their US bonds would also hurt individual American citizens. One of the benefits of buying US government bonds has always been that they’re a pretty safe investment for millions of Americans who have invested in Treasurys. But if China began selling off their bonds, Americans would see the value of their investment plummet.

Hooper calls this the nuclear option because it would also hurt China pretty badly. China needs someplace safe to invest their greenbacks. If they torpedo the value of Treasury bonds, they’ll lose the best option for investing their USD. And, of course, it would also harm China’s own holdings. But Hooper explains China might make that move if they really need to hurt the US, “This will take away revenues at a time when the government is already running large deficits, so it places more pressure on the U.S.”

Harming American Companies

Hundreds, if not thousands, of American companies do business with China on a regular basis. For some companies, cheap goods from China is literally their lifeblood. Unfortunately for them, China has a number of tools they could use to make life more costly and difficult for American companies.

The Chinese government could slow down bank transfers, hindering business activity in China for Americans. Beijing could also make it more difficult for American businessmen to get visas to travel to China for work.

In addition, Beijing could impose regulations that makes business more difficult and expensive for Americans. China could impose “environmental” regulations or place taxes on American businesses. The Red Giant could even open costly and time consuming investigations into American companies.

A factor that not many Americans consider is the fact that China is still technically a communist country. That means state run media still holds sway over the population. In the past, the Chinese government has successfully harmed foreign businesses by turning the Chinese population against them. Beijing could potentially initiate a boycott of American companies, which would be seriously detrimental for the US. Not only would this make doing business more difficult, but if the Chinese are no longer buying American, US companies could lose market share.

Gerardo Zamorano, director of Brandes Investment Partners’ investments group, explained, “There’s no prohibition in place, but the Chinese government says ‘wink wink’ and then tells the state media to make certain comments, and all of a sudden businesses are losing market share. That could happen to McDonald’s or Burger King, symbols of the U.S.”

The government has also harmed other countries in the past but instigating travel boycotts to certain places, harming tourism industries.

Currency Devaluation

While on the campaign trail, President Trump time and time again blasted China for their policy of currency manipulation.

Devaluing the Chinese yuan could be the antidote to President Trump’s tariffs. If the value of the yuan falls against the US dollar, the price of buying the product would essentially be the same as they were pre-tariffs. While Beijing can take steps to devalue their own currency, the more tariffs imposed on Chinese goods, the more the value of the yuan will naturally fall.

A volatile currency could spell disaster for China, but allowing the value of the yuan to naturally fall wouldn’t be apocalyptic for Beijing. Salman Baig, a multi-asset investment manager at the Geneva based investment firm, Unigestion, “What they don’t want is a lot of volatility in their currency. But they’re perfectly happy to devalue another 2 percent to 5 percent, as long as the devaluation is orderly.”

The trade war between the world’s two largest economies and superpowers has been called the trade war of the century by alarmists, but only time will tell what tools China will be willing to use to come out on top.

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