What leverage does China have against the US?

By Shi Huimin

President Trump insists that the 200 billion US dollars tariffs against Chinese imports are ready to go, although many firm owners expressed their oppositions against it during the public comment period. Meanwhile, on August 3, China announced tariffs on 60 billion US dollars worth of US imports.

If the 200 billion US dollars tariffs against Chinese products are finally imposed, accordingly, the Chinese government's retaliation will be very likely to escalate. The public and firms are waiting for the ongoing trade war between the two leading economies to cease; however, currently, the trade war is likely to be significantly widened.

What does China have against the tariffs from the US? The Minister of Finance of China has already announced that it would retaliate with both "quantitative and qualitative measures" without disclosing the details.

In my opinion, the quantity measures may refer to the width of the US products and the depth of retaliatory tariffs. The quality measures may refer to the structure of retaliation. When trade war upgrades, more US products will be involved and deeper damage will be resulted in.

Among all the possible leverage that the Chinese government could use, the most direct tit-for-tat strategy is to match the tariff dollar for dollar against US exports to China and/or voluntary export restraint if necessary. Under a trade war, due to the increased tariffs, both countries would diversify import sources. However, the adjustment is not without cost. 

[File photo: IC]

First, China could increase tariffs on US products which are have limited alternative buyers.

Second, China could increase the tariff in the areas that could give President Trump more pressure, such as agricultural products.

Third, China could reduce the export tax rebates on the products that the US relies most on from China.

According to an analysis report, among all US imports products, about 70 products all come from China, such as chloroethylene, oyster, frozen cod etc. For 300 products, 80 percent of their value comes from China, such as bamboo-made furniture and its appliance, lamp, and bedding etc. 

For 800 products, 50-80 percent comes from China, such as cantilever cranes, bags, leather products etc. The US may exclude part of them from the 200 billion US dollars tariff plan to protect local consumers. Reducing China’s export tax rebates could burden these areas and could burden US consumers.  

If these areas of economic leverages do not take effect, the retaliation might not be limited to economic areas. For example, China may bring on more political pressure on the US in talks between the Democratic People's Republic of Korea (DPRK) and its southern neighbor. Out of patriotism, the Chinese public may start the movement of anti-US products.

China has many measures against US tariffs. However, like an old Chinese saying goes, you hurt 1,000 enemies at the cost of 800 of your own soldiers. The trade war would only be lose-lose by hurting the producers and consumers for both countries. Hopefully, the reconciliation will finally come.

Note: Shi Huimin is an associate professor at School of Economics, research fellow with the National Academy of Development and Strategy, Renmin University of China. The article reflects the author's opinion, and not necessarily the views of CRI.