FRIDAY, March 29, 2024
nationthailand

China’s array of trade weapons in retaliating against the US

China’s array of trade weapons in retaliating against the US

TO RETALIATE against the US in the escalating trade and tech tensions, China has various options to choose from its stockpile.

Plausible approaches include imposing tariffs, devaluing the yuan, reducing US treasury holdings,curbing imports, and others, such as banning US products. Any choice China selects to do, when necessary, would inevitably have adverse impacts on the global and Thai economies as well as financial markets.
Regarding the latest US-China trade intensifications, the US imposed higher tariffs on US$200 billion (Bt6.262.03 trIllIon)of goods imported from China and, later, threatened to further hike tariffs on additional $300 billion of Chinese goods following China’s tariff retaliation on merely $60 billion of US goods. 
The sizeable gap between the values of goods tariffed by the two superpowers comes from the fact that the total value of Chinese products exported to the US is about 4 – 4.5 times that of US products exported to China. China’s direct tariff retaliation may not be a favourable solution given the huge gap in values. Also, those who bear the costs of imposed tariffs are indeed Chinese domestic producers and consumers, according to the recent IMF’s research that particularly studied the US-China case. 
Moreover, China might decide to curb imports that the US heavily relies on China, like it is currently doing on soybeans. So far in 2019, US exporting soybeans to China has diminished by 83 per cent , compared to the previous year.
Alternatively, to alleviate the tariff consequences, the People's Bank of China (PBoC) may intervene to devalue the yuan to offset the 
 increases in prices caused by the US tariffs and to improve international competitiveness. However, weakening the yuan comes with costs. For instance, in August 2015, yuan devaluation by 4.4 per cent in total over three consecutive days brought about tumbles in prices of especially Chinese and Asian financial markets.
The situation then became one of the worst months in several years of the Shanghai composite and other regional stock, currency, and commodity markets.
In the bond market, China could consider reducing its US treasury holdings in order to strike back against the US. China, which currently possesses as huge as US$ 1.12 trillion of US treasuries, is the largest foreign creditor of the US. Unanticipated and immense declines in China’s US treasury assets could result in significantly higher bond yields and borrowing costs in the US.
 According to UBS, US treasury yields could rise by 0.4 per cent or 40 basis points if China gradually sell off its US government bonds. Nonetheless, this method might produce adverse consequences since it would strengthen the yuan against the US dollar and hurt domestic imports. Also, selling all US treasuries implies replacing them new alternatives. Currently, seeking for alternative assets that have low risks and high liquidity like US treasuries is proven to be a difficult task.
There are, also, other countermeasures regarding actions against US entities based in China. Examples include delaying customs operations, stalling regulatory processes, and denying visa applications of US businessmen. 
Nevertheless, these options would reduce China’s international credibility and discourage foreign firms from doing businesses in China in the future.
Furthermore, in response to the blacklisting of Huawei by US authorities in the recent tech cold war, Chinese government could follow the campaign started from Chinese consumers to stop using devices from Apple by banning Apple products as a counteract measurement. 
This action, however, could be harmful to certain supply chains in China as almost half of Apple’s entire production facilities are located in China. Additionally, as widely rumoured in the media, China might counter the US by limiting exports of rare-earth elements, which are crucial raw materials in advanced technology, to the US. 
At present, as dominant as 80 per cent of the total imports of rare-earth elements to the US United States come from China.
Due to escalatory, prolonged, and seemingly unending US-China trade disputes, it is possible that China would retaliate against the US by perhaps picking one of the weapons upon certain pros and cons mentioned above. 
Whichever approach China decides to choose for such retaliation could accelerate global risks, which, in consequence, assuredly raises concerns about economic growth and international trade and spikes volatilities in financial markets across the globe. Thus, investors should get prepared to encounter rising uncertainties from US-China trade retaliation.

Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives. Biz Insight is co-authored by SIWAT NAKMAI and DUANGRAT PRAJAKSILPTHAI. They can be reached at [email protected]
 

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