China Has More Leverage Thank You Think in the Trade War

Chinese officials can twist laws and regulations to turn up the heat too. For example, they have used anti-monopoly law against foreign companies in ways that inhibited their business. In one famous case in 2013, Mead Johnson, Danone, and other foreign firms were heavily fined for supposed pricing infractions. The U.S. Chamber of Commerce at the time argued that the anti-monopoly probes “often appear designed to advance industrial policy and boost national champions” and “rely insufficiently on sound economic analysis.” Chinese regulators have already claimed one victim in the current trade dispute—the microchip company Qualcomm, which had to abandon its acquisition of a Dutch firm when Beijing failed to approve the deal.

Another possible tool—though a less likely option—is the Chinese currency, the yuan. Though it floats more freely these days, the central bank still commands a great degree of control over its movements. Chinese authorities could depress its value to make the country’s exports cheaper in global markets, offsetting the extra costs imposed by Trump’s tariffs.

So far, Beijing has kept its powder dry. Careful not to appear the aggressor, China’s leaders have tried to match their retaliation in its timing and scope to Trump’s. But only to a point. Julian Evans-Pritchard, a senior China economist at the research firm Capital Economics, recently noted that government officials have leaned on state-owned enterprises to curtail purchases of U.S. products such as soybeans and natural gas, engineering a sharp decline in those imports. That’s one reason why American exports have proportionately been hurt more than China’s in the trade war. According to data from the U.S. Census Bureau, American exports to China in the first quarter of 2019 dropped by 19 percent from the same period a year earlier, while China’s exports to the U.S. have fallen 14 percent.

One weapon that will likely remain sheathed is Chinese holdings of U.S. government debt. China is the largest foreign holder of U.S. Treasury securities, with $1.1 trillion of them, and that has fed speculation that in a pinch, Beijing would dump this hoard and disrupt American financial markets. That fear was further fueled this week when new data showed that China in March sold the most Treasuries since 2016. Still, selling them en masse is highly improbable, since doing so would also depress the value of China’s own wealth.

Still, could Apple or Coca-Cola end up in the crosshairs like Lotte? Don’t dismiss it. Trump himself has opened the door to targeting individual firms in the course of this dispute, by signing an executive order this month allowing the U.S. to ban telecommunications firms from using equipment from foreign companies that pose a security risk—read Huawei here. As Beijing knows, all’s fair in love and trade wars.

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