Why China may have the upper hand in a trade war with the US

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China’s quick, harsh retaliation for proposed U.S. tariffs may show that the mainland could get the upper hand in the Trump administration’s trade war.

The mainland’s move to impose retaliatory tariffs on U.S. exports to China came less than a day after the U.S. published the list of Chinese goods it was planning to target with tariffs. It’s an escalation of what has until now been mainly a rhetorical battle. But it may also show that the Chinese have less to lose if the Trump administration proceeds with its protectionist agenda.

Julian Evans-Pritchard, the senior China economist at Capital Economics, said that after examining the newly published U.S. list of product categories, he didn’t think it posed a significant threat to China’s economy.

“Many of the most widely imported products being targeted are electronics, where China has a dominant market position. Indeed, for a number of these products China is responsible for a significant share of world exports,” he said in a note on Wednesday. “This will make
it difficult for U.S. firms to find alternative suppliers, limiting the downside for Chinese exports.”

Additionally, he noted that China has taken the unusual step of saying it would impose tariffs on imports of U.S. soybeans, among other products.

“This retaliation would come at a cost to China by pushing up the price of its imports. In particular, imposing tariffs on soybeans looks problematic given that China’s soybean imports are greater than the entire exports of non-U.S. producers,” he said. “China appears to have
decided that it needs to make clear that it is willing to respond in kind if necessary.”

To be sure, China uses most of its soybean imports as animal feed, so it has a bit of flexibility to substitute corn instead. Additionally, Thailand is set to export chicken to the mainland and it could manage to steal some market share in meats from the U.S.

Evans-Pritchard noted that there’s a lot of uncertainty over how this will play out. While none of these tariffs are written in stone, let alone actually imposed yet, he noted that U.S. President Trump could chose to escalate the situation further with even broader U.S. tariffs, instead of seeking compromise.

In any negotiation, however, China will likely be looking to preserve face. Trump, however, does have a long history of making extreme threats, only to retreat later, a far-from-secretive and somewhat dubious negotiation tactic his biographer described in detail in “The Art of the Deal.”