In Trade War, How Much Can Beijing Fight Back?
By Saibal Dasgupta May 17, 2019
China's retaliatory measures against the United States in their ongoing trade war have raised questions about the limitations of Beijing's ability to fight back.
Beijing's retaliation did not match the size of Washington's action of raising tariffs on $200 billion worth of Chinese goods from 10% to 25%. China has imposed additional taxes on a wide range of American goods worth $60 billion. But Beijing has left out some crucial goods from enhanced taxation. They include technology-related products and farm commodities like soy beans.
Most of the American products covered by additional taxation will see tariffs rising to 15-20% while only a few will be taxed at 25%.
"Beijing wants to minimize the domestic economic impact caused by tariff retaliation. Thus, commodities that might cause greater domestic repercussions have been excluded," said Zhengyuan Bo, the Beijing-based analyst for consulting firm GRisk.
U.S. pork takes a hit
But China is showing its muscle in other ways. Chinese buyers are cutting back on imports of American pork to the extent of $6.5 billion. This will seriously hurt U.S. pork farmers because China is the second biggest importer of American pork.
Few expected China to take this measure at a time when its domestic pig farms have been hit by African swine fever. Some reports said Chinese pig breeders are at risk of losing one-third of their livestock.
"As a result of the African swine flu outbreak in China, the supply of pork has been affected. In April, pork prices surged by 14.4 percent. In order to push down prices, China will need to import more pork," said Max Zenglein, head of economic research at the Mercator Institute for China Studies, or Merics, in Berlin.
But imports may prove to be difficult because Beijing has cut down on imports from the U.S. and neighboring Vietnam has also been hit by the pig disease. China's Communist leaders are gauging the extent of sacrifices that Chinese consumers are willing to make at a time when the country in engaged in a bitter trade war, analysts said.
Technology mostly off-limits
China is in no mood to take chances with the supply of crucial American technology, which is essential for the survival and growth of hundreds of Chinese companies and joint ventures involving local and U.S. firms.
This is why Beijing has spared many technology-related products in its decision to impose additional taxes.
"Technology is one of the core issues that Beijing is targeting to support high-value jobs and eventually push up the income curve, much like Japan and Korea," said Mark Tanner, managing director of research firm China Skinny.
On top of these measures, China has offered the advantage of tax exclusion for domestic companies that have been hardest hit by the U.S. trade action. The government will subsidize some of the additional import costs, particularly in the import of technology related products.
Analysts said China may have limited capability for tit-for-tat taxing of U.S. goods, but it has other equally strong ways of pressuring Washington.
One of them is its ability to get the Chinese public to adhere to what the authorities want, even if they have to reduce purchases of highly taxed American goods.
"China doesn't have to reduce demand for foreign products through tariffs. It can simply direct that purchases be stopped," said Doug Barry, an executive with U.S.-China Business Council.
Zenglein of Merics said, "Although China imports less from the U.S., American companies are heavily invested in the market and generate significant profits there. This gives China considerable leverage."
Chinese authorities also could consider putting pressure on American businesses operating in China by cutting back on its own buying of U.S. products. Beijing recently moved away from buying U.S.-made Boeing aircraft after two accidents and enhanced its purchase of Airbus jets made in France.
"China also has non-tariff options for making life distressing for U.S. business people, such as more frequent inspections, costly audits, national security reviews and other forms of harassment," Barry said.
Barry said the U.S. industry is heavily dependent on Chinese manufacturers for a wide range of goods and parts, which cannot be easily substituted by supplies from other countries. Chinese companies are accustomed to the requirements of American users after decades of mutual dealings – something other markets cannot learn in a hurry, he said.
The question remains, however, whether Beijing would use this as leverage, because cutting off supplies from China would hurt its companies and cause large-scale disruptions and unemployment.
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