How China will strike back at Trump

In the face of hawkish appointment including Huohuade Lutenike, Marco Rubio, and Mike Waltz 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.

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. 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.

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.

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