From More Tariffs To Using North Korea As Leverage, Here Are China’s Options For Responding To Trump’s Latest Trade Escalation

Overnight, China promised to respond to the Trump administration’s ill-advised decision to ratchet the trade tensions up by publishing a list tied to the proposed imposition of tariffs on some $200 billion in additional Chinese goods.

Just to reiterate, this wasn’t entirely unexpected. But it does suggest that the Trump administration is ready and willing to escalate this situation even before it “needs” to be escalated. That is, it’s not entirely clear why the USTR didn’t wait until after the second round of tariffs tied to the $50 billion in total Chinese goods went into effect to publish the new list. Friday’s move to slap duties on $34 billion in imports was the first step in a two-part act to get to $50 billion and the second act was due in under two weeks, so either Trump is trying to gain leverage ahead of that or else he’s just being aggressive.

Maybe it’s a little of both.

But whatever it is, China isn’t pleased and they made that abundantly clear on Wednesday, when a series of officials decried the latest escalation from Washington and couched it in the most nefarious terms imaginable.

As usual, it’s not entirely clear how China plans to retaliate given that beyond $130 billion, it’s mathematically impossible for them to respond mechanically with tariffs.

Analysts and pundits have been debating what’s in Beijing’s tool box for months, and there’s no shortage of discussion about the extent to which recent yuan weakness was deliberate or “tolerated”, but either way, it’s a policy decision. That is, the yuan is controlled by the PBoC, so to the extent they let it depreciate rapidly, that’s a form of weaponization, even if it’s passively done.

In any event, whatever they’re planning to do, you can expect that planning process to move along at an accelerated pace now.

For their part, Barclays is out with the following list of options that’s worth a skim to the extent you’re interested in calibrating your expectations. The bank says they see Beijing adoption “a combination of the below actions”.

Via Barclays (truncated for brevity)

1. (retaliation) Follow up with more tariffs. China could impose tariffs on up to an additional USD100bn of US goods.
2. (retaliation) Follow up with non-tariff retaliations. Such measures, most likely at a company or industry level, could include: 1) intensifying inspections of goods shipped from the US (as is already being observed), 2) guiding state-owned enterprises to diversify away from the procurement of US products and services, and 3) applying greater scrutiny to operations of US companies in China
3.  Make significant concessions to try to strike a deal with the US. China could compromise (to address US demands) by agreeing to: 1) increase imports from the US (or commit to expand them at a faster pace) to narrow its trade deficit with China; 2) more meaningfully open access to domestic service industries by committing to a specific agenda to remove restrictions on foreign participation; and 3) adjust some industry policies such as reducing government subsidies to certain high-tech industries targeted by the ‘Made in China 2025’ plan.
4. Accelerating the opening up, which is in China’s own interests. Some recent developments suggest that the government remains committed to more meaningful opening up of domestic markets, and reductions in tariffs with other trading partners
5. Use North Korea as a leverage. Following a North Korea statement describing US demands as “gangster-like” and “cancerous”, President Trump tweeted on Monday that he believed Beijing “may be exerting negative pressure on a (US-North Korea) deal because of US posture on Chinese trade”. While we believed that President Trump would still impose sizable tariffs on China post the Trump-Kim summit on 12 June regardless of US-North Korea developments, North Korea could continue to play some role in influencing the pace and intensity of the Sino-US trade war.