Limited Options Push China into Trade 'War of Attrition' with Trump

• Beijing, feeling boxed into a corner by the United States' intensifying tariff assault on China and any country that buys or assembles Chinese goods, is bracing for an economic war of attrition.
• Washington last week imposed import tariffs of at least 10% on almost the entire world, and much higher levies on countries such as Vietnam, where Chinese factories have been shifting production. This drew retaliation from China, followed by new threats of escalation from U.S. President Donald Trump.
• "Whoever surrenders first becomes the victim," said a Chinese policy adviser, asking for anonymity due to the topic's sensitivity. "It’s a matter of who can hold out longer."
• China has no great options, though. It will court other markets in Asia, Europe and the rest of the world, but this may not be much of an escape valve. Other countries have much smaller markets than the U.S., and local economies are also taking a hit from the tariffs. Many are also wary of allowing cheaper Chinese products in.
• Domestically, a currency devaluation would be the simplest way to cushion the tariffs' impact but that could trigger capital outflows, while also alienating trade partners China may try to court. China has so far allowed very limited yuan depreciation. More subsidies, export tax rebates or other forms of stimulus could be on the cards, but this also risks exacerbating industrial overcapacity and fueling more deflationary pressures.
• Analysts have advocated for years for policies that would boost domestic demand. However, despite Beijing's declarations, little has been done to meaningfully increase household consumption, given that the bold policy shifts that would be required could prove disruptive to the manufacturing sector in the short term.
• Hitting back with its own tariffs and export controls may not be very effective, given China ships to the U.S. about three times as much in goods than around US$160.0Bn it imports, but it may be the only option if Beijing believes it has a higher pain threshold than Washington has.
• So far China has responded to last week's additional 34% U.S. tariffs with a similar blanket counter-levy. As Trump threatened escalation with an extra 50% hike, Beijing vowed to "fight to the end". "China cannot inflict as much pain on the U.S. as it receives, since it runs the big trade surplus and, rare earths aside, still has more to lose from export controls," said Arthur Kroeber, head of research at Gavekal.

(Source: Reuters)