China prepares for war of attrition over tariffs

Beijing, feeling boxed into a corner by the United States’ intensifying tariff assault on China and any country that buys or assembles Chinese goods, is bracing for an economic war of attrition.

Washington last week imposed import tariffs of at least 10% on almost the entire world, and much higher levies on countries such as Vietnam, where Chinese factories have been shifting production. This drew retaliation from China, followed by new threats of escalation from US President Donald Trump.

China has no great options, though. It will court other markets in Asia, Europe and the rest of the world, but this may not be much of an escape valve.

Other countries have much smaller markets than the US, and local economies are also taking a hit from the tariffs. Many are also wary of allowing more cheap Chinese products in.

Domestically, a currency devaluation would be the simplest way to cushion the tariffs’ impact but that could trigger capital outflows, while also alienating trade partners China may try to court. China has so far allowed very limited yuan depreciation.

More subsidies, export tax rebates or other forms of stimulus could be on the cards, but this also risks exacerbating industrial overcapacity and fuelling more deflationary pressures.

Analysts have advocated for years for policies that would boost domestic demand.

So far China has responded to last week’s additional 34% US tariffs with a similar blanket counter-levy. As Trump threatened escalation with an extra 50% hike, Beijing vowed to “fight to the end”. Besides its own sweeping tariffs, Beijing can use its control over some strategic commodities and parts of the corporate world to hit Washington where it hurts the most, according to a Reuters report.

China offered a taste of that on Friday, when it added seven rare earths to its export control list, a move that threatened to cut off the supply of materials US defence and technology sectors depend on. Beijing retains the option to expand the controls to 10 other rare earths or ban exports to the US outright. In the corporate world, Trump has expressed interest in a spin-off of short video app TikTok’s US business.

But China also has leverage there, thanks to rules it implemented in 2020 that require the company to obtain a technology export licence before transferring its “secret sauce” algorithm abroad. China indicated it would not approve the deal following the tariff announcement, sources told Reuters. Beijing can also target US companies with sanctions or add them to an unreliable entity list, which so far includes mainly firms which it says sell arms to Taiwan.

With Washington and Beijing trying to inflict increasing pain on each other and the rest of the world seen as collateral damage in their trade war, it is hard to imagine how a grand deal to de-escalate would look like.

Economists say Trump’s goal of balancing trade with China is unfeasible in the short-to-medium term, given that one side is the world’s leading producer while the other is the biggest consumer.

If a quick deal proves elusive, then it may turn into a battle of political wills, where some analysts believe Beijing has the upper hand.

Thousands of protesters gathered in Washington and cities across the US at the weekend to protest against Trump, who is also facing heavy criticism from Wall Street for the global market turmoil his tariffs caused.

Chinese President Xi Jinping is unlikely to face similar resistance in his tightly controlled country, and can line up monetary and fiscal stimulus for later this year to ease some of the social stress if needed. Zhiwu Chen, professor of finance at HKU Business School, said, “Trump has to face, or at least Republican politicians have to face a lot of electoral pressure, and the American media are still pretty much free,” he said. “So I think Trump’s ability to fight politically with China is not that great.”