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With less than a month from the second Trump inauguration, trade specialists are now examining ways in which China is going to react to a host of American trade restrictions. We know that Trump is planning a broad-based increase in tariffs, some speculate as high as 100% on certain manufactured products. In addition, we can anticipate restrictions on technology transfers such as export sanctions affecting memory chips and semiconductor equipment. The US just added over 100 Chinese firms to the its list forbidding US companies from supplying their technology to Chinese manufacturers. But that is only half of the story when it comes to dealing with China. The trade war needs to be looked as a two-way street, especially what we may expect Chinese retaliation. The battle lines have yet to be drawn clearly, but we can glean a lot from the 2018 experience.China’s response to the Trump 2018 tariffs was quick and laser sharp. It struck decisively, banning or restricting the US purchases of critical rare earths and other minerals used in the production of semiconductors, satellites, fibre optic cables and lithium batteries. China’s use of technological weapons is too often overlooked by American politicians, but we should expect that those measures will be tightened further in response to a new set of US trade restrictions.  Figure 1 US Trade Deficit with China, US$ billions Stephen Roach in a carefully reasoned article makes the case for China’s ability to retaliate in a way that will be very harmful to the US consumer and the US government directly. The case for codependency is unmistakable:“It is a reminder that retaliation is the high-octane fuel of conflict escalation. This is not well understood in US policy circles that seem to harbour the mistaken notion of a one-way dependency — that China is uniquely beholden to external demand and new technologies from the US. This leaves out the other half of the equation. The US is also heavily reliant on low-cost Chinese goods to make ends meet for income-constrained consumers; the US needs Chinese surplus saving to help fill its void of domestic saving; and US producers rely on China as America’s third-largest export market. This codependency means the US depends on China just as much China depends on America.”Trump does not appreciate how China will divert production facilities to other countries, especially in South East Asia and Mexico which offer comparable-costs or even slightly higher-costs. The trade diversion just makes it more expensive for US companies using Chinese intermediate products. Roach argues that this trend will accelerate should the US place such high tariffs. He equates this diversion as equal to a tax on US companies and their customers.

Roach goes on to raise the prospects of China using its creditor status to raise havoc within the US bond market.Many dismiss the prospects that China would dump its more than $US 1 trillion Treasuries as suicidal. China need not go to that extreme, but it could refuse to participate in the what is expected to be record-setting bond auctions to support the US government deficits in the coming years. Already, yields on US long-term bonds have risen sharply in anticipation of the new administration’s disregard for rising deficits. Any reluctance on the part of the Chinese in these auctions will only result in higher interests, worsening these deficits.In sum, the intricate trade and investment ties between China and the US will set the stage for the coming economic war, unlike the 2018 dry run.As Roach points out China has many “Trump cards” to play.More By This Author:Pity The Canadian Dollar As It Gets Hit From All Sides
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