Three Ways China Can Pummel the US Economy in a Trade War

Last Friday, the US government officially slapped 25% tariffs on $34 billion of Chinese imports.  The Chinese government responded immediately by slapping counter-tariffs on a similar amount of US goods.  The US-China trade war is on.

Dueling tariffs are bad news.  This trade war has the potential to grow exponentially from here and has the potential to smash the global economy.

Indeed, President Trump has already promised a blistering response to China’s reprisal.  He recently highlighted that the US is ready to slap tariffs on a staggering $500 billion worth of Chinese goods.

To put that in perspective, that essentially means the US would slap tariffs on ALL Chinese imports.  It would be a mistake to assume this is bluster because President Trumphas already gone further than anyone assumed.

This would also be an epic escalation and would make this the largest trade war in history.  China will inevitably respond to the second round of US tariffs.

The only question is how?

Last year, China only imported about $129.9 billion worth of US goods.  That means China can add tariffs on only about $96 billion worth of US imports.

Accordingly, the Chinese can’t slap on similar counter-tariffs on US goods.  Instead, it must resort to other punitive measures against the United States.

Three Ways China Can Attack the US in a Trade War

Tariffs are not the only way to fight a trade war.  The Chinese know that and are already preparing a devastating counterstrike to the US economy.  And there are three main ways they can do this.

First, China is the US government’s largest foreign creditor.  Indeed, the country owns a staggering $1.177 trillion worth of US government debt.

China owns US government debt

Until now, the Chinese government has declared it will not use its vast stockpile of US debt as a weapon.  But now that the gloves are officially off, this debt is likely to come into play.

The Chinese can flood the market with US debt by selling down their holdings.  This would hurt the US by forcing borrowing costs up for the US government and private sector.  If the Chinese sell aggressively enough, it could even invert the yield curve and trigger a US recession.

China Can Also Target Corporate America

Another way to  China could target the US is by locking corporate America out of its vast domestic market.  Many US companies, like Apple, Ford, Boeing, McDonald’s, and many more, have extensive operations throughout the Chinese market.

The Chinese government or possibly even a populist backlash by Chinese customers could target these companies.  Indeed, we’ve already seen this dynamic at play recently.

A Chinese court just banned sales of some products by US microchip manufacturer Micron.  The ban will have limited repercussions on the company but it sets up a precedent for the future.  The Chinese government can and will target US companies through its courts.

Moreover, the Chinese government controls much of the countries media and can stoke a populist backlash against US companies.  It has already done this in disputes with South Korea and Japan.  Angry Chinese have boycotted Japanese cars and South Korean retailers.

It could now be the turn of American national champions like McDonald’s, Coca-Cola, and Apple.  All of these companies and many more have sizable operations in China.

Restricting their operations in China would hit their bottom line.  It could also send the stock market into a tailspin as investors understand US corporate earnings are going to get targeted in the trade war.

Finally, China could hurt the US economy by devaluing the Chinese yuan.  A weaker yuan would offset US tariffs by making Chinese goods cheaper.

It would also mean that Chinese goods would eat into US exports to third countries.  That’s because China would gain an even steeper cost advantage against US exports.  Weaker US exports mean slower growth.

Each one of these moves would hurt the US marginally.  However, taken together these actions would be enough to hurt the US economy and send the stock market reeling.

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Al Basoglu

I am a financial services professional with over a decade of experience in various roles. I've lived and worked abroad in 5 different countries while pursuing personal and professional challenges. My interests include markets, history and different cultures. I tend to weave all of my interest into my analysis and articles.