The US-China trade war is arguably more than just a tussle between two big economies. The ongoing economic conflict has been keeping all stakeholders on the edge of their seats and important developments are expected to unfold this Friday. While the US seems to have the upper hand, China also possesses certain tools in its economic arsenal.
Let us briefly discuss why or why not China may use some of the biggest weapons in this rivalry against America, should the latter decide to proceed with raising tariffs on $200 Billion worth of Chinese products.
One of the most obvious steps may be to devalue Yuan in order to keep Chinese products competitive should an event of higher tariff arises. Yuan has already lost 1.5% value since the last weekend when Trump announced his plan of a higher tariff. Since 2018, Yuan’s value decreased by 4.5% and it has angered America.
However, it may not be as obvious of a choice as it seems since China has had a love-hate relationship with devaluing its currency in the past as, for example, the country saw a large-scale fleeing of capital after Yuan took a massive dip in 2015.
China is the biggest importer of US soybean. Interesting, the Midwestern states which grow most of the soybean crop also form Trump’s electoral base. China has already slapped 25% tariff on soybean. According to some analysts, China can choose to massively cut down its purchase of soybean, gravely impacting all those associated with the crop.
Since April, there has been an 11% drop in Futures value of soybean. It is also seen as among the easiest options for China and hence most likely.
With $1.1 Trillion, China is the biggest debtor of the United States. Reducing Chinese holding in a total of $16 Trillion asset class can be equivalent to the economic-nuclear weapon.
The last year report that China is looking to slow down Treasury purchases massively shook the bond market.
In spite of having such a deadly weapon in its arsenal, it may not be the most obvious choice for China to use in an event of America imposing higher trade restrictions or tariffs.
It is primarily because of the fact that China currently has only a limited number of options to park its foreign currency reserves of over $3.1 Billion. However, any such move will present a serious risk for foreign exchange and financial stability in the near future.
Similarly, China may have few other options or strategies but most come with inherent risks of their own. Only time will tell how (un)/successful China is going to be in this biggest trade war of the century.