Beijing has plenty of options to strike back against Trump’s latest tariffs: devalue the yuan, dump Treasury debt, boycott US companies. Unfortunately, all of them would damage China at least as much as the US
When last week US President Donald Trump threatened to slap tariffs on an additional US$200 billion of imports from China, on top of the US$50 billion already targeted, the Chinese government immediately promised to retaliate in full proportion. The trouble is that retaliating will be a lot more difficult and painful than Beijing’s counter-threats make it sound.
So far, responding to the US trade actions hasn’t been a great problem. The first round of US tariffs targeted specifically at China is due to go into effect on July 6. On that day, the US will begin to levy a 25 per cent tariff on 818 imports from China, worth US$34 billion annually. When it does, Beijing will immediately impose equivalent tariffs on US$34 billion of goods imported from the US.
And when the US follows up with tariffs on another US$16 billion of imports from China, Beijing will again respond in kind.
But Trump’s threat last week to slap tariffs of 10 per cent on a further US$200 billion of imports from China, and possibly on another US$200 billion after that, massively raises the stakes and completely changes the game. The most obvious point is that while the US imported goods worth US$505 billion from China last year, China only bought stuff worth US$130 billion from the US. As a result, if the US does put tariffs on US$200 billion of Chinese goods, China will find itself unable to retaliate in kind and proportion. It just doesn’t buy enough from the US.
This inability to launch equal and opposite trade actions against the US has led to some fanciful and ill-conceived ideas about other ways China might respond. Some observers have suggested that China could retaliate by devaluing its currency, others that it could dump its holdings of US Treasury debt.
Neither would work. Nor would boycotts of US companies operating in China.
To offset the effects of the proposed tariffs on US$250 billion of its shipments, China would have to devalue the yuan by 6-10 per cent. It could do that, but the expectation of further devaluations to counter future rounds of US tariffs would trigger massive outflows of capital from China’s financial system, potentially triggering a domestic crisis of confidence.
What’s more, a devaluation would blow a hole in the yuan’s credibility as a potential trade and reserve currency, destroying Beijing’s hopes that it may one day displace the US dollar across much of Asia and the wider world.
