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Here’s What China Will Do Under ‘Trade War Light’ And ‘Trade War Heavy’

Don't poke that dragon.

Ok, so assuming Trump manages to refocus after spending his morning gaming out possible scenarios for a “fast and hard” fist fight with former VP Joe Biden, the President will take action against China this afternoon in what’s widely being billed as a significant escalation in global trade tensions.

This is the result of U.S. Trade Representative Robert Lighthizer’s investigation into China’s IP practices (the section 301 probe). Basically, Lighthizer can do whatever he wants if Trump gives him the green light and this is apparently going to entail slapping tariffs on $50 billion of Chinese imports covering some 100 different types of Chinese goods – everything from shoes to gadgets.

Trump is also planning on suing China at the WTO for trade law violations.


“Trump officials had earlier said that the tariffs would apply to about $30 billion in Chinese imports,” WSJ reminds you, adding that “an accompanying report on Chinese trade practices is expected to estimate that the harm to the U.S. from improper technology transfer to Chinese firms is $30 billion annually.”

As noted earlier this morning, China will invariably retaliate. That’s especially true now that Xi is “king” (as Trump would put it) for life. As Bloomberg notes on Thursday, there are multiple ways China could strike back including retaliatory measures against US crops, a crack down on tech companies that manufacture in China, replacing Boeing orders with Airbus, a move to shrink the services surplus, an effort to cut down on the number of Chinese students who attend U.S schools and, as mentioned last night, using the yuan as a weapon.

All of this has implications for NAFTA and for U.S. trade with the rest of the world, because the more aggressive Trump gets towards “Gyna“, the more worried everyone is going to be about what he might do next. In short, this is a goddamn mess.

In an effort to make some sense of things, Deutsche Bank has come up four scenarios for US protectionist policy action:


We can (probably) go ahead and rule out their baseline to the extent it assumes “the remedies pursued relating to the Section 301 investigation into China’s infringement of intellectual property rights will be relatively limited in scale.”

Ok, so the most applicable scenario to today’s news would appear to be “Trade war light (A)” and here’s what Deutsche says the Chinese response would likely be.

Trade war light, Scenario A: Limited tariff on tech imports: Under the trade war light scenario, we would expect China to retaliate, but not aggressively. The Chinese government is likely aware that trade tensions are related to the US political cycle. If the damage from trade frictions is manageable on the macro level, the Chinese government may want to avoid further escalation. The policy options could include:

  1. Higher tariffs on selected US exports to China: China would likely target imported products that would have significant impact on the US, and that China could afford to import less from the US. Based on these criteria, we have identified the following products: seeds and fruits (including soybeans), aircraft, pulp, nonferrous metal, wood, ores, and raw hides (Figure 8). Imports of these products amount to about $40bn. China could select from this list and retaliate by imposing “reciprocal” tariffs on imports from the US. It remains to be seen how such retaliation will play out under WTO’s rules.
  2. Some warning shots on US business interests in China: Many US firms already generate significant shares of their revenues from China, and their sales may not be reflected in the bilateral trade data. General Motors, for example, has a joint venture in China which supplies the Chinese market. The latest data show that while GM’s global auto sales were down by 9% in Q4 2017, its sales volume in China was up 6%. China already accounts for half of GM’s global sales as of Q4. A US- China trade war potentially puts companies like GM in a tough position. Similarly, when the diplomatic relationship between China and South Korea cooled in 2016, some Korean companies with large operations in China suffered losses in their sales revenue, suggesting that non-tariff barriers can be as damaging as tariff measures.
  3. Delay the process to open up the service sector, or provide preferential access to countries other than the US.


Ok, so what if China gets really pissed? Or what if, for instance, Trump gets even more aggressive?

Well then things spiral out of control as we transition to Deutsche’s “trade war heavy” scenario. Here’s what China might do under duress:

Trade war heavy scenario: The imposition of a 45% tariff on all imports from China would cause significant damage to China’s economy. In such an extreme scenario China would have to respond with drastic measures. Here are the various actions that could be taken.

  1. Impose higher tariffs on all US exports to China: China imported $153bn of goods from the US in 2017, based on data from China’s Customs Office. Assuming China also imposed a 45% tariff and a price elasticity of 1.2, this would lead to a drop of US$83bn of US exports to China, equivalent to 3.6% of total US exports in 2017. As China runs a large trade surplus against the US, hiking bilateral tariffs by the same percentage will cause more damage to China than to the US. Hence China may go beyond tariff measures to retaliate.
  2. Restrict market access for US firms in China: Similar to what we discussed under the trade war light scenario, China may set barriers and obstacles for China-based US firms. US business interests in China would suffer as a result.
  3. Provide preferential treatment to US competitors: China may try to strengthen its relations with the EU and other countries to offset the damage of an emerging bilateral trade war with the US. This may lead to more free trade agreements without US participation. China may also open part of its service sector to other countries rather than the US.
  4. Restrict US travels by Chinese nationals: Similar to what happened with South Korea, China may make it more difficult for Chinese nationals to personally travel to the US, such as for tourism or education purposes. Chinese spend $30bn per year on their US travels (including accommodations, shopping, education expenses, etc.). The impact could potentially be large, depending on the scope of such restrictions and how strictly they will be implemented.
  5. Sell US treasuries and buy other government bonds: China does not disclose the composition of its reserves holding. According to the IMF COFER database, the typical holding by central banks is 64% in US dollar assets, most of which US government bonds. The US TIC data shows that China holds $1.18tn of US treasuries as of December 2017.

Some of that (notably the selling of U.S. debt) has been discussed here and elsewhere at length and there are reasons to think an aggressive push to diversify reserves (a euphemism for dumping USTs) isn’t particularly palatable for China (more on that here).

But whatever the case, it’s probably safe to say that Trump doesn’t fully appreciate all of the above and I’d be willing to go out on a limb and say that Navarro is so blinded by his own bullshit that he’s incapable of objectively evaluating the possible repercussions.

So now you know the risks. Adjust your expectations for “winning” a trade war accordingly.

And remember, Larry Kudlow will save us…


21 comments on “Here’s What China Will Do Under ‘Trade War Light’ And ‘Trade War Heavy’

  1. Anonymous

    So we continue to “quake and shiver” like children and put up with whatever China does? China will do what China wants to do. Once they get to a self-sustaining economy, they will do all that you say and more, tariffs or not. All this fearmongering about “What will China do” is companies not wanting to give up their short-term profits. In any trade war scenario, China will suffer more than the US. That’s a given.

    At last we have a president with the balls to deal with China. Unfortunately, it has to be this dude.

    And Larry Kudlow is a joke. Every time he talks on CNBC, the others can barely supress their mirth. What a terrible choice!

    • “China will suffer more than the US. That’s a given.”

      Well according to the Swiss banking giant UBS, in 2017 the Chinese consumer economy was US$7-trillion and growing at 9% per year with 50% household savings rate, while the US consumer economy was only $5-trillion growing at 2% and just 1% savings rate (means no future potential). Simple arithmetical consequence of one country having 4.2 times as many people as the other plus a faster growing, larger economy now.

      Bottom line: Swiss banks and wealth managers seem to disagree with your assessment.

      But, even if one accepts your hypothesis, both sides *will* LOSE (which should be point #1, full-stop)… And yours begs the question, who is more tolerant of any suffering? The ones who’ve been living a relatively cushy life for many decades or the ones who are already used to many decades of material hardship until recently and even inconceivable suffering in their living memory?

      Not sure about Kudlow being a totally “terrible choice”, but Trump sure was.

  2. I can’t believe for the Heavy scenario that they missed the checkmate option to cut-off rare earth minerals.

    Would soon mean the end of everything from IT/telecomm to electricity generation, manufacturing to military

    It’s precisely what Xi did over the islands dispute with Japan which then had no choice but to acquiesce.

    Seems like Mr Trump hasn’t thought this through much. But Mr Xi might well save this “trump” card as a contingency in case there’s ever something more serious than just trade frictions.

  3. Engaging in a trade war with the world’s second largest economy – and your largest creditor – is ridiculous.

    • Largest ten economies in order for 2017 per Wikipedia (chart link below, see source for detail #’s):

      Based on IMF, World Bank and CIA lists.

      1) China (excludes Hong Kong, Macau, Taiwan)
      2) European Union (sum of all 28 member states)
      3) USA
      4) India
      5) Japan
      6) Germany
      7) Russia
      8) Indonesia
      9) Brazil
      10) UK

      • Thanks ! Knew China was close to being #1 and now they are positioned to kick ass.

        • I don’t think someone in China who must suddenly pay way more for US pork or beef feels he is kicking ass, nor of course does the US producer who is losing sales. As you wrote above, everyone loses and there are bad consequences. Stocks are down bigly this week everywhere and the dollar has been crushed – which for Americans means a double ass-kick to their financial net worth. So indeed, everybody is losing, except for the damn governments collecting more tax in the form of tariffs.

        • But also, even with a large economy, they (China) are way behind in income per person. That’s because they have 4.2 times as many people with a similar sized economy that must be shared among so many people, So they’re about 75% poorer per person, and can’t catch up for many decades on that metric.

  4. This trade war, that we can only lose, will only have a lot of bad consequences. It will be bad for the stock market, bad for the economy, bad for the dollar, etc. Whenever the government tries to micromanage the economy, using taxation (tariffs), regulations, etc. it is saying we want a different outcome than the outcome that a free market determines. The government prevents the market from acting freely, and tries to manipulate it, to derive a political agenda, commanding decisions from the top down. Think the last time we had tariffs was under Baby Bush, but they didn’t last long after the administration “realized” we lost 200,000 US manufacturing jobs as a result.

    • Anonymous

      Free market or “free” market? China, EU and others have pursued a mercantilism approach while the US has played open and free to our detriment because it was very good for the 1%. Everyone should play by the same rules: everyone open or everyone mercantilism. Obviously, everyone open might be preferred for a higher equilibrium state of trade and prosperity. But, fighting with your hand tied behind your back against someone fighting with both is silly.

      • Ok except that, almost everywhere, people say they play fair while everyone else takes unfair advantage, lol. Newsflash: US is among the worst cheaters of all.

        Fact: Since Mr Trump took office, the dollar has been devalued 23 fucking percent, intentionally if you heard US Treasury Secretary Mnuchin at Davos brag that dollar devaluation is helping US exporters. If that’s not cheating and “mercantilism”, then what the hell is? Obviously the Europeans think so because Draghi basically said as much in his next ECB presser.

        Meanwhile, Mr Trump has the audacity, or the ignorance or most likely both, to call others “currency manipulators”. Y’know, those whose currencies have in fact surged against Trump’s dollar devaluation – from Europe to Japan to China.

        A 23% currency devaluation is effectively equivalent to imposing a 23% tariff or border tax on *all* goods AND services from everywhere else. Thus the US is actually about the biggest currency manipulator and trade cheater anywhere – and in Mr Trump’s case, the biggest hypocrite about it too.

  5. When trump makes a move that is confounding the smartest people, I immediately try and look at solving the puzzle by thinking “how will this make money for trump or his rich friends?” The answer usually lies close by that reasoning. He is only motivated by making money or keeping his ass out of jail.

    A hundred years ago when he decided to run for President, he bragged openly that too much money is spent on campaigning and that he could run for office and make money at the same time. I understand there are still several million unspent and/or unaccounted for dollars in his campaign financial report.

  6. “This trade war.. will only have a lot of bad consequences”
    “China will suffer more than the US”

    Nope, the clear winner is China because now they can ban Justin Bieber and Bruno Mars tour there.

    • America should ban Bieber.

      • How to win a war with north korea:


        • ^ oops, embedded image not supported

          direct linky instead:

          • i don’t really know what you are trying to “say” – both links are the same identical thing. Maybe could use the crap singer as a distraction is your point. Ok.

          • Yeah both were same cartoon, sorry, but first was my (unsupported) embedded image attempt.

            Yep, it jokes S.Korea send their sexy K-Pop girls to distract N.Korea army boys. K-pop is a music genre not a “singer”, and they ARE sexy. Ask your kids lol? Example below: K-pop group “Twice” from S.Korea, filmed in the Asian city of vancouver. I like ’em & I’m not even a guy!

          • bunny — My kids are 50 and 47 – they would not know! hahaha!

          • Oh so grandchildren may know?..Ask/show ’em this Likey song by Twice; they”ll think grampa is cool :D.
            K-pop is quite popular with kids on the west coast. That’s where I came of age. This m/v is about kids feeling self-pressured to get likes on social media from selfies etc.

            Thing is, cross-border music is all good cuz it’s a growing force that helps bring people together, just like Bruno Mars & Ellie Goulding and others touring across Asia, in contrast to some others in the highest level of gov’t working to erect walls (both literally & metaphorically) to tear global civilization & people apart.

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