China’s Evolving Trade Strategies in the Face of US Conflict
As the possibility of a renewed trade conflict between China and the United States looms, China appears to be expanding its arsenal of retaliatory measures aimed at counteracting potential US tariffs and trade restrictions. The geopolitical landscape, altered significantly since the initial trade skirmishes began under Donald Trump, presents China with both challenges and opportunities. With the current US administration under a president-elect who has named a cadre of “China hawks,” Beijing is compelled to explore strategies that could deeply affect global commerce and finance, making the stakes remarkably high for both nations.
The Uneasy Balance of Trade
One of the most critical dilemmas for China is its trade surplus with the United States, which means that any straightforward retaliatory measures could yield limited benefits. With an eye on the future, experts are emphasizing that “simple trade wars and reciprocal countermeasures cannot adequately address future China-US differences,” according to Wang Wen of Renmin University. This sentiment encapsulates the necessity for China to think beyond traditional trade responses in navigating the intricate web of international commerce.
However, the alternatives available may come with substantial risks. As an economy grappling with a protracted property crisis, China faces the dual challenge of defending its interests while also mitigating any backfire that could arise from increased confrontations.
Weaponizing US Treasuries
One of the most devastating potential actions China could undertake would be the offloading of its substantial holdings of US Treasury securities, amounting to approximately $734 billion. Such a maneuver would likely disrupt global financial markets, driving up US bond yields and causing turmoil across various economies. Since 2017, China has already reduced its Treasury holdings by more than a third — a trend that may continue as it actively seeks to diversify its investments.
The repercussions of a sudden sell-off would be multi-faceted: while bond prices would plummet, and the value of China’s holdings would decrease, it could also lead to a weaker dollar, indirectly benefiting US exporters by making American goods cheaper on the global stage. Ironically, such a drastic move could endanger China’s own financial stability and its foreign exchange reserves.
Currency Devaluation: A Double-Edged Sword
Another option would be for China to weaken the yuan, enhancing the competitiveness of its exports. The depreciation of the yuan by approximately 11.5% during the first trade conflict worked to offset the impact of US tariffs significantly. Following the recent elections, many economists anticipate that further depreciation of the yuan may occur if tariffs are implemented. However, opinions diverge on the extent of this depreciation, with projections ranging from 7.3 to 8 yuan per dollar by 2025.
While a depreciated yuan could indeed alleviate some pressures on Chinese exporters, it could also provoke distrust among trade partners, potentially leading to retaliatory tariffs and increasing capital outflows from China as foreign investors grow cautious.
Strategic Export Restrictions
In recent years, Beijing has effectively wielded its influence over essential resources by imposing restrictions on the export of critical materials such as gallium, germanium, and graphite—elements pivotal to various advanced technologies. Such actions are seen as measures to bolster China’s position in the ongoing technological rivalry with the US, ultimately leveraging these restrictions to push back against American controls.
However, China’s dominance over the supply of these critical minerals puts it at risk of being perceived as an unreliable supplier, which could encourage its trading partners to seek alternatives and diversify their supply chains away from China.
Targeting American Companies
Beijing has also adopted a more aggressive stance toward US corporations operating in China, utilizing new legislation like the “unreliable entity list,” which allows for the targeting of companies viewed as threatening China’s strategic goals. Leading multinational corporations, including Apple and Tesla, could be particularly vulnerable due to their substantial revenue dependence on the Chinese market.
Recent cases, such as the investigation into Tommy Hilfiger’s parent company for cotton sourcing issues in Xinjiang, exemplify the precarious position these companies find themselves in as they navigate the increasingly fraught landscape of US-China relations. The risk of backlash is pronounced; a sharp escalation in hostility could see the US retaliating against Chinese enterprises, spiraling into wider economic conflicts.
Building Strategic Alliances
Amidst the growing tensions, China is also proactively engaging with traditional US allies to mitigate the impact of hostile trade policies. By courting countries like Japan and building ties with nations such as Russia, China aims to counterbalance its trade vulnerabilities through strategic alliances. This approach seeks to portray US policies as reckless while positioning China as a more stable partner for trade and economic cooperation.
Such alliance-building initiatives highlight a broader geopolitical strategy, where nations may tactically choose to remain neutral or seek benefits from the US-China rivalry rather than decisively aligning with either side.
Conclusion
China’s potential responses to a renewed trade conflict with the United States reflect a complex interplay of economic strategy and geopolitical maneuvering. The viability of these strategies, ranging from currency manipulation and the leverage of critical resources to the engagement of foreign allies, underscores the global implications of any escalation. As each nation navigates this sensitive terrain, the overarching challenge remains clear: finding a resolution that averts economic fallout while balancing national interests amid a rapidly evolving geopolitical landscape.