Published:  12:46 AM, 16 May 2019

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

No easy options for China as trade war, US pressure bite Containers are seen at the Yangshan Deep Water Port in Shanghai, China.-Reuters

China is running out of options to hit back at the United States 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 said this week it would impose higher tariffs on most US imports on a revised $60 billion target list. That's a much shorter list compared with the $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 tech firms such as Huawei and ZTE 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 war that risks stalling China's long-term economic development, according to people familiar with their thinking.

But 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 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 State Council Information Office, finance ministry and commerce ministry 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 $110 billion of US goods.

Based on 2018 US Census Bureau trade data, China would only have about $10 billion of US products, such as crude oil and big 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 $300 billion of Chinese goods. The only other items Beijing could tax would be imports of US services. The United States had a services trade surplus with China of $40.5 billion in 2018.

But China does not have as much leverage over the United States 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, James Green, a senior adviser at McLarty Associates, told Reuters.

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 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 incentivise some firms to shift sourcing or investment outside the country, they say. Trump has called for US firms to move production back to the United States.

-Reuters, Beijing

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