Sat, May 18, 2019 - Page 9 News List

No easy options for China as trade dispute, US pressure bite

China could dump US Treasury bonds and send US borrowing costs higher, but most analysts say that is unlikely as it risks starting a fire sale that would burn its own portfolio

By Kevin Yao and Michael Martina  /  Reuters, BEIJING

Illustration: Constance Chou

China is running out of options to hit back at the US without hurting its own interests, as Washington intensifies pressure on Beijing to correct trade imbalances in a challenge to China’s state-led economic model.

China this week said that it would impose higher tariffs on most US imports on a revised US$60 billion target list. That is a much shorter list compared with the US$200 billion of Chinese products on which Washington has hiked tariffs.

Washington has also turned up the heat on other fronts, from targeting China’s technology firms such as Huawei Technologies Co and ZTE Corp to sending warships through the strategic Taiwan Strait.

As the pressure mounts, Chinese leaders are pressing ahead to seal a deal and avoid a drawn-out trade dispute that risks stalling the nation’s long-term economic development, according to people familiar with their thinking.

However, Beijing is mindful of a possible nationalistic backlash if it is seen as conceding too much to Washington.

Agreeing to US demands to end subsidies and tax breaks for state-owned firms and strategic sectors would also overturn China’s state-led economic model and weaken the Chinese Communist Party’s grip on the economy, they said.

“We still have ammunition, but we may not use all of it,” said a policy insider, declining to be identified due to the sensitivity of the matter. “The purpose is to reach a deal acceptable to both sides.”

The Chinese State Council Information Office, Ministry of Finance and Ministry of Commerce did not immediately respond to Reuters’ requests for comment.

Of the retaliatory options available to China, none come without potential risks.

Since July last year, China has cumulatively imposed additional retaliatory tariffs of up to 25 percent on about US$110 billion of US goods. Based on last year’s US Census Bureau trade data, China would only have about US$10 billion of US products, such as crude oil and large aircraft, left to levy duties on in retaliation for any future US tariffs.

In contrast, US President Donald Trump is threatening tariffs on a further US$300 billion of Chinese goods.

The only other items Beijing could tax would be imports of US services. The US last year had a services trade surplus with China of US$40.5 billion, but China does not have as much leverage over the US as it might seem because large parts of that surplus are in tourism and education, areas that would be more difficult for the Chinese government to significantly roll back, McLarty Associates senior adviser James Green said.

China is more likely to further erect non-tariff barriers on US goods, such as delaying regulatory approvals for agricultural products, said Green, who until August was the top US Trade Representative official at the US embassy in Beijing.

Trade analysts say China could reward other global companies at the expense of US firms, replacing for example Boeing planes with Airbus jets where possible, but there is considerable risk for China in transitioning its retaliation from tariffs to non-tariffs barriers on US companies because doing so would intensify perceptions of an uneven playing field in China and incentivize some firms to shift sourcing or investment outside the nation, they say.

Trump has called for US firms to move production back to the US.

“The medium to long-term ramifications on supply chains are being deeply underestimated. I would be severely concerned if I was China,” Peterson Institute for International Economics non-resident senior fellow Robert Lawrence told journalists in Beijing, where a group from the think tank met with senior Chinese officials.

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