China Is Running Out of U.S. Goods to Tariff, But It Has Other Trade War Weapons to Unleash

China Is Running Out of U.S. Goods to Tariff, But It Has Other Trade War Weapons to Unleash · Fortune

When President Donald Trump suddenly hiked tariffs on $200 billion worth of Chinese imports last week, China said it would respond with “necessary countermeasures.” But then it announced a tariff increase on just $60 billion of U.S. goods. China simply doesn’t import enough from the U.S. to match tariffs “tit-for-tat,” hence the $140 billion shortfall in its retaliation. However, China has other aces up its sleeve.

Let the renminbi slip

China’s softening economy coupled with the fallout of increased export tariffs will put downward pressure on its official currency, the renminbi, which is also referred to as the yuan. The central government has tended to prop up the renminbi in recent years to spur China’s transition to a consumption-led economy. However Chen Long, a China economist at consultancy Gavekal Dragonomics, argues it is now in Beijing’s best interest to let the renminbi slide.

“The renminbi exchange rate is one of the most powerful weapons Beijing has in the trade war with the U.S.,” Chen wrote in a report released Tuesday. Chen argues that a weaker yuan would support China’s exporters. While China’s importers would be worse off, the benefits outweigh the costs because China is a net exporter. But, more importantly, a depreciated renminbi could rattle global markets and, consequently, pressure Trump to switch tack.

An employee counts 100-yuan notes at a bank in Nantong in China's eastern Jiangsu province on July 23, 2018. (AFP/Getty Images)
An employee counts 100-yuan notes at a bank in Nantong in China's eastern Jiangsu province on July 23, 2018. (AFP/Getty Images)

“If Beijing were not to stand in the way of a 3-5% depreciation in the renminbi, fears would grow that the stuttering Chinese economy was exporting deflation to the rest of world, and global markets—and the U.S. stock market in particular—would likely take fright,” Chen writes, arguing that a “sharp correction” in the U.S. markets could convince Trump that making a swift deal is in his best political interest.

Of all China’s possible means of putting pressure on the U.S., permitting the renminbi to devalue is almost certainly the easiest to implement. All Beijing has to do is wait.

Slow-walk approvals

At the same time, if China really wants to up the pressure, says Hannah Anderson, Global Market Strategist at J.P. Morgan Asset Management, “targeting the operations of U.S. businesses is a reasonable strategy,” she says. “In the U.S., lobbying groups and business organizations do carry a certain amount of influence.”

How would China do that?

Take a look at the tactics it’s employed in reprimanding Canada for Vancouver’s role in the arrest of Huawei Technology CFO Meng Wanzhou last year. Shipments of a major Canadian pork supplier were blocked at Chinese ports due to “labeling” issues, while two of Canada’s largest exporters of canola seed have had shipments blocked from China due to alleged pest infestation.