If There’s a U.S.-China Trade War, China May Have Some ‘Unconventional Weapons’
There are ways to make life harder for American companies in China that need not be formal, or widely publicized.
“One of the very important tools that the Chinese have is the ability to make life difficult for a large number of American businesses,” ..
.. “They have all of these unconventional weapons that are not covered by traditional trading rules that could be potent weapons in actually fighting a trade war.”
.. As President Trump often notes, the United States does run a large trade deficit with China — especially if you look only at goods, and don’t count the value of services. That means that if China seeks to match tariffs on goods — a classic tit-for-tat approach — China runs out of “tats” pretty quickly.
.. In 2017, the United States imported $506 billion in goods from China while exporting only $131 billion in goods to China
“It mathematically means that China can’t match the U.S. dollar for dollar,” said Brad Setser, a senior fellow at the Council on Foreign Relations.
.. For example, in its planned retaliatory tariffs, the Chinese government included narrow-body aircraft but not wide-body aircraft. This makes sense strategically, Mr. Setser argued, because only two companies in the world make wide-body planes: Boeing and Airbus. If China put a tariff on planes from the American Boeing but not the European Airbus, it would lose leverage with Airbus with which to extract favorable prices and access to cutting-edge technology.
.. It is unlikely there will be uprisings in the streets of Shanghai if Kentucky bourbon gets more expensive.
.. it also risks raising food costs within China. It’s a fair bet, then, that China views remaining options as even more problematic for the prices of staple goods or the country’s industrial strategy.
.. In other words, for China the low-hanging fruit is gone. If this trade battle continues to escalate, China will have to bear a greater cost.
.. That reality could push China to seek other buttons to press.
.. American companies do significant business in China that doesn’t show up in trade data. When Apple assembles an iPhone in Zhengzhou and sells it in Shanghai, that doesn’t count as international trade, though the profits accrue to the benefit of a California-based company. The Chinese government has any number of tools to try to weaken that business if it wishes. It could decide that phones made by a foreign company are a national security threat, or shut down plants because of minor regulatory problems.
.. Making life difficult for American companies in China as retaliation in a trade war need not be formal and widely publicized. American automakers who make cars in China might find their local joint-venture partners squeezing them out. Regional governments might send safety inspectors to plants of American companies so often as to disrupt production.
.. There are more public options, too. For example, in 2013, Chinese state media accused Jaguar Land Rover and Audi of overcharging buyers for car parts, which analysts viewed as part of a campaign to pressure those automakers to locate more manufacturing in China.
.. Could China use its role as No. 1 lender to exert pressure in a trade war?
It would be a risky maneuver, in which China itself would potentially have much to lose. But it can’t be ruled out.
.. If China were to suddenly unload some of its holdings, or even signal an intention to buy fewer dollar assets in the future, that would probably cause long-term interest rates in the United States to rise
.. And this would cause some pain in the United States, as borrowing costs — whether for the federal government or individual home buyers — would rise.
.. But it would also drive down the value of China’s existing bond portfolio, meaning China could lose billions. And it would tend to push down the value of the dollar relative to other currencies, which would actually help the United States attain more advantageous trade terms.
.. Even after all that, bond prices would most likely readjust over time as other buyers took advantage of the rise in interest rates.
.. That doesn’t mean there isn’t room to cause some near-term pain and disruption. “The Chinese have some leverage to rattle U.S. bond markets, even if the threat of substantive action is not very credible,”
.. Given that a trade war with such a major trading partner is without precedent in modern times, we don’t really know what it would look like.