How Will China Retaliate Against US Trade Penalties?

Here are the washing machine tariffs just imposed by Trump.

Together with the rest of the world, I've long been waiting for the real Donald Trump--as his Twitter handle describes--to show up in the international trade arena. There is much on his plate at the start of 2018, from deciding of courses of action to take on the dumping of several products as well as determining the future of US trade agreements like NAFTA and the Korea-US Free Trade Agreement (NAFTA)--both of which are under discussion with American counterparts.

On Monday, we got our first installment of the trade-hating Trump as the US Trade Representative (USTR) unveiled fairly substantial tariffs on imported goods US manufacturers made complaints about--namely, solar cells and washing machines. Tariff rates of up to 50% are nothing to sneeze at. To be sure, these are not exclusively China-exported goods. Other affected countries like Mexico and South Korea are expressing discontent. (Quite a few Korean-brand washing machines made in Mexico are destined for the US market.) Actually, China is not among the largest exporters to America of washing machines. That said, trade observers have little doubt which country was in the USTR's crosshairs when announcing these tariffs to stop a "surge" of dastardly imports:

The Chinese Commerce Ministry on Tuesday expressed "strong dissatisfaction" over the move, saying it "aggravates the global trade environment."

The tariff of 30% on foreign solar panels is a blow for China, the world's biggest supplier of the products. Beijing has been widely accused of heavily subsidizing its domestic solar industry and flooding global markets with cheap panels...

The Chinese Commerce Ministry called the U.S. process that led to the tariffs "an abuse" of the trade measures available to the Trump administration. In its investigations, the U.S. International Trade Commission determined that imports of solar panels and washers had hurt American companies.

Once more, consider the loaded term "trade war." To correctly be described as such, we need a couple of things to happen. First, there needs to be tit-for-tat retaliatory action by the concerned parties. So, how can China get back at America? Let's just say there are countless ways, beginning with actions on US goods as the obvious targets:

China hasn’t been shy about threatening U.S. corporate interests. A Communist Party newspaper warned in late 2016 that a trade war would have economic consequences. "Boeing orders will be replaced by Airbus," the Global Times said in an editorial. "U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted."

The list of primary targets include U.S. exports to China of airplanes by Boeing Co., Apple Inc. products and soybean, says Michael Every, head of financial market research at Rabobank Group in Hong Kong.

"Chinese think-tanks are likely scrambling to identify the industries in the President’s support base that will lose out the most should it come down to a bare-knuckle fight," says Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong. Boeing, the largest U.S. exporter, has long been a key bellwether for trade relations. Xi gave Boeing a $38 billion order on a 2015 plant visit in Seattle.

Keep in mind that many of the buyers of American goods are inevitably state-owned enterprises given their sheer number and centrality in China's economy. Additionally, even privately-owned Chinese firms can be leaned on more readily by the authorities to stick to the party line on not complaining about retaliatory actions pursued by the government even if these actions go against private firms' economic fortunes.

Another way China can go about exacting punishment that Western observers haven't talked about by and large is to discourage Chinese tourists from visiting your country. See the case of South Korea and China's displeasure over it deploying American-made missile defense systems (THAAD).

Out of those nearly 76 million foreign visitors to the US in 2016, fully half came from Canada and Mexico. China accounted for just 3 million. But then look at the spending: those Chinese tourists spent US$33 billion – almost as much as Canadians and Mexicans combined.

If the 3 million Chinese who visited the US in 2016 spent US$33 billion, the arithmetic is clear: for every 1 million Chinese that choose not to travel to the US, but to travel elsewhere, that implies a US$11 billion annual loss in tourism revenue to the US economy.

The Chinese can easily pick and choose how to retaliate against American--or, perhaps more accurately, Trumpian--protectionism. My impression is that the Chinese are shrewd rather than stupid; they know which industries to target to get back the most at Trump voters to inflict maximum pain on the person they consider their chief antagonist here. The excuses for taking action are many, but (public) safety has been a perennial PRC favorite, especially for food imports. Failing to comply with PRC licensing requirements is another.

The tourism route is particularly interesting since service exports like it are where the United States has a surplus to help make up for its chronic goods deficit. A benefit of running a state where firms are more mindful of the will of the state is that trade measures are more easily facilitated. So, the Chinese authorities could easily pressure package tour operators like the case of South Korea into getting rid of the US as a travel destination.

It's really up to the United States how much farther they want to ratchet up this trade skirmish, with Trump's decision on other products pending like steel and aluminum which are being considered on "national security" grounds.

The US has mounted its opening attack and established its positions. Meanwhile, the Chinese are monitoring how far the Yanks will go before deciding how to push the foreign devils back. In trade war as in conventional war, I am afraid there are no real "victors."