WASHINGTON DC – US President Donald Trump has raised tariffs on Chinese goods worth $200 billion from 10 percent to 25 percent and ordered 25 percent of tariffs on remaining Chinese imports to be prepared. The last round of trade negotiations between the two sides ended without agreement. How can China respond?
Although the head of the Chinese delegation, Liu He, and the main negotiators on the American side said that the meeting was constructive, it was clear that the situation is not easy. The Chinese delegation’s stay in Washington was reduced to two days. In addition, the main stage of the talks lasted only an hour and a half and Trump did not meet with Liu He after the talks. The parties have stated that the negotiations will be pursued at a later date but have not set a date for the new meeting.
Immediately after the introduction of new US tariffs, Chinese Trade Ministry spokesman Gao Feng said that although there are no winners in the trade war, China will be forced to introduce retaliatory measures against the US.
Later, the Chinese Ministry of Finance announced that, as of June 1, it would introduce retaliatory tariffs on $60 billion worth of US goods imports. The amount of customs duties on the different categories of products varies between 5 and 25%.
However, it is unlikely that China will simply introduce countervailing duties. Due to trade imbalances, China can not give a symmetrical answer, but it has other options. One of them is the $1.2 trillion of US government debt. China remains the world’s largest holder of US Treasury stock. If China stops buying new bonds, or starts selling the old ones, it can drop US bond prices.
As a result, the US will have much more difficulty servicing their debt and businesses and individual borrowers will have more difficulty in getting credit. However, China can only take this measure as a last resort. There is virtually no investment alternative to US Treasuries in the world. In addition, China itself needs foreign exchange reserves to maintain the stability of its financial system, said Liu Ying, a researcher at the Chunyang Institute of Financial Research at People’s University of China.
China’s GDP is 90 trillion yuan, its GDP is more than $3 trillion and China has a big economy. Now the problem between the US and China is not the trade deficit.
He added that it can not be said that if China were to have the trade deficit now there would be no trade war. China may have a trade surplus, but profit would still remain in the US. This situation of the trade balance is the result of the international division of labor, which is a result of the complementary of the productive chains.
“The dollar is the world currency, and only in conditions of balance of payments deficits can we export dollars, so there are more than a hundred countries in the world with which the US has trade imbalances, the United States can not wage commercial wars with all. And then, in any case, the balance of payments can not change in the opposite direction, which is also completely excluded in the case of China.,” he explained.
Liu Ying explained that it makes no sense to wage a trade war with China. The US is simply negotiating with China under the pretext of the trade war, trying to get better terms for themselves.
“We have a great economy, a large market, good prospects for development, we no longer depend entirely on exports, domestic demand is becoming the driving force of our growth,” he said.
For the specialist, domestic consumption already contributes more than 60% to GDP growth, the services sector is already approaching industry and is also becoming a motor of growth. This is especially important in the age of artificial intelligence, since the services sector relies heavily on human resources. Therefore, the development of the service sector has great potential.
“We are also counting on the economic growth of the innovations. Science and technology also contribute almost 60% to GDP growth, so in the context of service sector development we also pay attention to market development, economic growth, science and technology, so we are not afraid of a trade war,” added Liu Ying.
For the analyst, China has more than $3 trillion in international reserves. And they are needed. China is a big country and needs huge reserves with exports and imports totaling 30 trillion yuan last year, so China needs to maintain a certain amount of reserves. For him, China cannot, like some countries, get rid of its reserves completely, but it will probably not be limited to a single measure.
Susan Shirk, a former assistant secretary of the US Secretary of State, pointed out that restrictive measures on the supply of US agricultural products are very likely. Similar measures have already been taken by China during the deterioration of relations with other countries. For example, China has banned the supply of Canadian canola seeds, it has suspended the supply of pork from two of Canada’s largest pork producers. It is clear that, in all cases, restrictions on supply were imposed for specific reasons.
However, all these delays coincided in time with the problems in relations between countries. Finally, China can offset the effects of the imposition of duties through the devaluation of the yuan’s exchange rate. According to Bo Zhuang, a TS Lombard economist who is quoted by the WSJ, if 25% tariffs are imposed on all Chinese exports, China would have to lower its yuan rate to 7.6 per dollar.
During earlier rounds of trade talks, China promised the US to keep its exchange rate at a stable level so as not to artificially create competitive advantages for its companies. However, if the rules of the game have changed and no agreement has been reached, nothing prevents the Chinese Central Bank from revising its monetary policy.