https://www.cnbc.com/2018/06/19/china-h ... lainternalChina has a limited number of weapons to use in a trade war with the USThe U.S. and China moved closer to the brink of a trade war after President Donald Trump threatened another $200 billion in tariffs, responding to a lack of progress made in negotiations.
Because it imports far less than it exports, China would face limitations in how it could respond to U.S. duties.
Options include action against U.S. companies in China, currency devaluation, selling Treasurys and easing sanctions against North Korea.
Jeff Cox 20 June 2018As China and the U.S. near a trade war, both nations bring different weapons to the table. For the U.S., it's direct tariffs on the plethora of goods it imports, while for China the calculus is a little different.
China is limited somewhat in the amount of retaliatory tariffs it can apply, simply because it doesn't import nearly as much in American goods compared with what the U.S. takes of Chinese products. China imported just $129.9 billion from the U.S. in 2017, compared with $505.5 billion in exports, according to the Census Bureau.
"China is going to run out of direct reprisals quickly should it look to match the U.S. in tariffs," LPL Research said in a note. "There is also broad agreement globally that China engages in a range of unfair trade practices, which provides some moral high ground for the U.S. to demand concessions."
What China does have at its disposal is a handful of other measures that, while not as likely to be implemented as simple tariffs, remain potentially harmful. Markets are clearly nervous about the possibility of an escalation. The Dow industrials took a big tumble in market action Tuesday while government bond yields and commodity prices also mostly moved sharply lower.
Describing the environment, Craig Erlam, senior market analyst at forex brokerage Oanda, noted that while China "doesn't want a trade war, it's not afraid to engage in one" and thus "it's difficult to see how and when this ends."
In figuring out how it ends, markets will be watching where it's going.
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https://www.cnbc.com/2018/06/25/china-c ... lainternalChina's sudden currency slide sparks rumors of an anti-Trump policy move China's currency in the past week and half has fallen against the dollar, as President Donald Trump ramped up trade rhetoric and threatened more tariffs and other action.
That sparked speculation in the market that China could use its currency as a policy weapon, intentionally cheapening it to make its goods cost less on the world market.
However, analysts do not believe China would intentionally devalue its currency and said it could take other steps, like tariffs, to fight back against the U.S.
Patti Domm
China’s currency has slipped markedly in the last week, to the point where it’s trading at December lows against the dollar, and that’s prompting speculation that China would be willing to use a weakened currency to fight U.S. tariffs and trade threats. But analysts say while the currency has made a clear move lower since trade rhetoric flared, the likelihood of China devaluing its currency to spite President Donald Trump is very low. For now it appears the currency's drop could just be a coincidence.
China has often been accused by the U.S. government of intentionally keeping its currency depressed to cheapen its goods in the world market, making them more attractive than those from countries with stronger currencies. The Trump administration this year stopped short of calling China a ‘currency manipulator,' and China’s currency has actually been fairly steady for most of the year.
“"If a bear is coming at you, why would you wave a red flag in front of it," said Robert Sinche, the chief global strategist at Amherst Pierpont.
But Sinche said while it does not seem China would intentionally drive its currency lower, it may have previously slowed the decline.
“It looked like they were impeding the dollar’s rise against the remnimbi, in line with what you normally expect given the general strength of the dollar. That caught up last week,” he said. “They weren’t letting the currency weaken as much as it should have, so the trade-weighted remnimbi was actually rising in that environment. I think they might have said, ‘The U.S. is not going to play nice, we’ll let the remnimbi trade as it should.’”
Nonetheless, rumors circulated that China could go further and actually become aggressive in forcing a decline in the remnimbi, also known as the yuan. “The yuan is controlled. They allow it to trade in a band. In order to make sure they don’t have a runaway trade. What you’re seeing is the [speculators] took it by the upper limit of its band," said Boris Schlossberg, managing director at BK Asset Management. "I think the market is anticipating something, or they feel it’s going to be a natural policy response if this keeps up.”
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