How China will strike back at Trump
Who is Huohuade Lutenike? Howard Lutnick, the billionaire nominee to lead America’s Commerce Department, is not well known in China. But he may end up shaping American trade policy. Since Donald Trump announced his pick, Chinese investors have scrambled for information. More than anything, they want to know if Mr Lutenike will slap Mr Trump’s proposed 60% tariffs on all Chinese imports. Such efforts have only gained urgency in the past fortnight. The president-elect has threatened an additional tariff on Chinese goods on his first day in office, while the sitting president has ratcheted up export controls.
Other nominees are better understood. Marco Rubio, presumptive secretary of state, has tried to force Chinese firms to delist from American stock exchanges and was hit by sanctions in response to ones he helped put on Chinese officials as a senator. Mike Waltz, Mr Trump’s choice for national security adviser, boycotted the Beijing Winter Olympics. Jamieson Greer, the new trade representative, was an architect of Mr Trump’s first trade war with China.
In the face of such hawkishness, Chinese officials have kept quiet. But their formula for trade talks is starting to emerge. Xi Jinping, China’s leader, laid down “red lines” in a recent meeting with President Joe Biden. The gist was that Communist Party rule and China’s claim on Taiwan should not become bargaining chips. Then on December 1st Chinese tax rebates on aluminium and copper came to an end; ones for batteries and photovoltaic products fell from 13% to 9%. This is a big shift. Over the past year China has rejected claims it is exporting batteries and solar products at artificially low prices. As Martin Lynge Rasmussen of Exante Data, a research firm, notes, cuts to rebates are the first time officials seem to have sought to lessen the force of such accusations.
At the same time, Chinese officials want to increase trade with the rest of the world. The Ministry of Commerce has said that it will boost export credit and insurance, and support logistics services. The ministry wants to expand the number of countries that can get short-term business visas. And it has promised to help companies respond to “unreasonable foreign-trade restrictions” as they arise.
The Biden administration recently announced tariffs on solar panels from several South-East Asian countries, with the aim of stopping Chinese firms from re-routing exports through third countries. Mr Trump may expand these as firms look for loopholes. Many have, for example, set up factories in Indonesia and Laos, two countries that are not covered by the latest policies. To help small businesses sell goods overseas via e-commerce platforms, Chinese local governments have established service centres. Shanghai is setting up a “Silk Road e-commerce pilot zone” to boost trade with Central Asia.
Such tariff workarounds mean that America’s existing measures have not stopped China from increasing exports. Since the start of Mr Trump’s trade war in 2018, China’s trade surplus has more than doubled to $820bn (or 6% of GDP). Its surplus with America remains at $340bn, about the same as in 2018. If Mr Trump is willing to strike a deal, involving limited increases in tariffs, his measures might reduce annual Chinese GDP growth by just 0.4 percentage points between 2027 and 2029, according to Oxford Economics, a research firm. CF40 Research, a think-tank in Beijing, estimates that “moderate” tariffs of 10-20% would slow China’s year-on-year export growth to 1.5% next year, down from 2.2% if no tariffs were imposed. Mr Trump’s promised 60% tariff rise could shrink exports by 6.5% next year, which would have a devastating effect.
What about retaliation? In the first phase of the trade war, China responded to tariffs by hitting American imports with similar penalties. The strategy was ineffective as America is less reliant on Chinese demand than the other way round. Some expect China to allow its currency to devalue against the dollar. Although doing so would make its goods cheaper, big drops in the yuan risk spurring capital flight.
Trade worriers
Instead, Chinese trade experts hope the government will focus on domestic policies to counteract American pressure. Lian Ping, an influential economist, has advised that it seeks to boost wages and consumer demand in order to steel itself against American economic attacks, which might be part of the plan. Ministers have promised stimulus to improve glum consumer sentiment. Bankers in Shanghai quip that they were cheering on a Trump victory in hope of extra government spending.
There is more to the president-elect’s China policy than tariffs. America and China are still in the midst of a tech war that was started by Mr Trump, amplified by Mr Biden and shows no sign of stopping. Mr Biden has attempted to cut off China from inputs needed for advanced tech, such as AI chips. At the start of the month, hundreds of Chinese firms were added to the Department of Commerce’s entities list, restricting American dealings with them. In October the Treasury enacted a broad investment-control regime that will stop most American investments in Chinese AI, semiconductors and quantum computing. The Biden administration is also thought to be drafting a definition of which types of AI chips firms can sell to China. Mr Trump could tighten it.
Chinese firms may also soon be hit with sanctions from the Office of Foreign Assets Control (OFAC), which, unlike the Department of Commerce’s entities list, restricts the ability to use dollars. The imposition of OFAC sanctions on a Chinese bank would lead to a freeze in dollar transactions with other banks, and probably to its collapse. These have so far been used sparingly, but the nominations of Messrs Rubio and Waltz suggest that such measures could become more common, says a former American trade official.
China’s ability to dodge attacks is limited. Officials have pushed tens of billions of dollars into the semiconductor industry in an attempt to make China self-sufficient. Although this has shown progress, especially in chipmaking machines, the country still does not make the most powerful chips, and sources less than 15% of its chips domestically. China is also reliant on the dollar-based financial system. Yuan transactions have risen in the past two years, but most still use SWIFT, a messaging network susceptible to American influence.
Mr Xi is already showing willingness to hit back. On December 3rd, a day after the Biden administration issued new chip restrictions, China barred exports to America of minerals needed for high-tech gear and weapons, including gallium and germanium. Chinese regulators may identify other items they can stop exporting without rocking domestic industries. Some antibody precursors, which pharmaceutical firms use, come exclusively from China and could make good candidates.
Individual companies may find themselves part of the conflict. Last month China employed a new tool, the Anti-Foreign Sanctions law, to cut off Skydio, America’s largest dronemaker, from Chinese batteries. The law could be used to deny dozens of American firms Chinese-made components. American companies in China could also be hit. In October an industry body called for a probe into Intel, an American tech firm, because of alleged security vulnerabilities in its chips.
China’s commerce ministry recently used its “unreliable entities” list to probe PVH, the American owner of brands such as Tommy Hilfiger, because it has complied with America’s Uyghur Forced Labour Prevention Act, which requires companies to refrain from using cotton grown in Xinjiang. The original bill was sponsored by Mr Rubio. With him as secretary of state, it is easy to see the potential for many more clashes and possibly even a total disregard for China’s red lines. Mr Xi is prepared to talk trade with Mr Trump. Anything beyond that risks very quickly spiralling out of control. ■
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