June 5, 2019 / 8:20 PM / 4 months ago

EXPLAINER-U.S.-China trade war - the levers they can pull

    WASHINGTON, June 19 (Reuters) - The escalating trade war
between the United States and China has gone beyond tariffs as
the countries increase pressure on each other to cede ground.
    Beijing has said it would retaliate after President Donald
Trump blacklisted Chinese telecom giant Huawei and the United
States extended tariffs to cover almost all Chinese imports. 
    Chinese state media has warned that Beijing could use rare
earths for its next strike in the trade war. The United States
relies on China for supplies of the rare earths to make a host
of high-tech products, from satellites to electric car
batteries.                          
    Here are some other possible pressure points for each side.
        
    POTENTIAL CHINESE RESPONSES
    HIKING TARIFFS FURTHER 
    China could impose tariffs on around $10 billion of U.S.
goods that as yet carry no retaliatory tariffs. 
    Beijing removed some tariffs on U.S. car imports in
December, and could reimpose them.
    China could raise tariffs from 25 percent on some U.S. goods
such as soybeans. China was the top U.S. buyer of soybeans until
the trade war, which came close to halting the flow altogether.
If it raises tariffs again, Chinese soy importers will seek more
supplies from Brazil and elsewhere, as they did in 2018, which
would hurt U.S. farmers. These are targeted tariffs, aimed at
the U.S. farming community that supported Trump's 2016
presidential election victory.
    High-tech items, such as semi-conductor manufacturing
equipment and chips, would be unlikely to feature on a list for
higher tariffs, because China cannot easily find alternatives.
    China has so far spared Boeing        passenger jets, its
single most valuable U.S. import, from tariffs. Chinese carriers
are expanding rapidly to meet rising demand, so tariffs on
Boeing could slow development of the domestic travel industry.
    China could buy more aircraft from France's Airbus         
instead of Boeing, which would make it more reliant on Europe
for a few years until it completes development of homegrown
commercial aircraft, COMAC's C919.
        
    DUMPING TREASURIES
    China is the biggest holder of U.S. government debt, with
about $1.12 trillion in U.S. Treasuries. Beijing buys Treasuries
as a safe-haven for foreign exchange reserves.
    The editor-in-chief of China's influential Global Times
tweeted in May that "many Chinese scholars are discussing the
possibility of dumping U.S. Treasuries and how to do it
specifically."
    A selloff would hurt U.S. markets, driving up interest rates
and pushing up borrowing costs. The U.S. central bank could
lower its benchmark interest rate or buy debt to counter the
move.
    China sold the most long-dated U.S. Treasuries in almost
2-1/2 years in March. But most China experts say Beijing is
unlikely to undertake a big selloff because that would lower the
value of China's foreign exchange reserves. The Chinese would be
hard-pressed to find a safe alternative investment with a good
yield.            
    
    DEVALUATION
    Some analysts have floated the idea of a one-off devaluation
of the Chinese currency to make the country's exports more
competitive despite U.S. tariffs. But that would spook foreign
and domestic investors and give the United States ammunition to
sanction the country for currency manipulation.
    "That is not retaliation. That is escalation of the trade
war," said Gary Hufbauer, a senior fellow and trade expert at
the Peterson Institute for International Economics. 
    The Chinese currency has weakened nearly 4 percent since
July 2018, when U.S. authorities began collecting the first
China-specific tariffs. That has absorbed some of the impact of
tariffs on Chinese exporters.
    
    HARASSING U.S. COMPANIES OR SLOWING VISA APPROVALS
    China's Commerce Ministry said on Friday it will draft a
list of foreign companies, organizations and individuals that it
deems "unreliable" for harming Chinese companies, state-run
China National Radio reported.
    The move does not single out any countries or companies, but
the report cited a ministry spokesman as saying the "unreliable
entities list" will apply to those that flout market rules and
the spirit of contracts, block supplies to Chinese companies for
non-commercial reasons and "seriously harm the legitimate rights
and interests" of Chinese companies.             
    China could target high-profile U.S. companies such as Apple
        , although that could backfire as millions of Chinese
people depend on the tech firm for their jobs.
    Goldman Sachs estimates that banning Apple products could
slash profits of the iPhone maker by almost a third. Apple and
other U.S. firms are also vulnerable to consumer boycotts in
China. There is precedent for this: South Korean companies faced
boycotts when deployment of a U.S. anti-missile system angered
China's government.
    Beijing could make life difficult for American banks,
restaurant chains such as Starbucks         , courier companies
such as Fedex         and commodity suppliers by opening tax
inquiries, withholding licenses and other similar bureaucratic
moves.
    Big U.S. businesses, however, have been among those pushing
for a more moderate stance in Washington, so it would not help
Beijing's case to alienate them. Many American brands in China
have joint ventures with Chinese partners, and these would also
be hurt by government pressure.
    Both sides have already slowed visa approvals for academics;
authorities could do the same for executives and government
officials. 

    DIPLOMATIC RECALCITRANCE AND MILITARY POSTURING
    Beijing could reduce cooperation with the United States on
thorny international issues, such as North Korea and Iran. It
could also step up military gestures in the South China Sea and
around Taiwan, an unofficial U.S. ally. 

    RARE EARTH METALS 
    President Xi Jinping visited a rare earth firm in Southern
China earlier in May, fueling speculation China could cut off
supplies of the metals, a key ingredient in high-technology
consumer electronics and military equipment, to the United
States as part of the trade war. China supplies 80% of U.S. rare
earths.             
    
    U.S. RETALIATION AGAINST CHINA
    
    HIGHER TARIFFS 
    The United States could increase tariffs on Chinese imports.
Authority for that rests with Trump, who has described himself
as tariff-man.
    One option would be to raise levies on $50 billion worth of
Chinese technology goods, including machinery, semiconductors,
autos aircraft parts and intermediate electronic components on
which tariffs were imposed last July and August. The products,
taxed at a 25% rate, were selected to avoid hitting U.S.
consumers and to hamper China's technology development.
    
    SANCTIONS AGAINST SPECIFIC COMPANIES
    The United States could sanction additional Chinese
companies flagged for a host of issues, from alleged
intellectual property theft to sanctions violations or human
rights concerns.
    One option would be placing more companies on a blacklist
that bars U.S. suppliers from selling to them without special
permits, as the Trump administration did with Huawei
Technologies last month. 
    Washington is already considering sanctions for Chinese
video surveillance firm Hikvision and equipment maker Zhejiang
Dahua Technology. They are involved in surveillance at Chinese
detention centers for ethnic Uighurs and other Muslims.  
    The downside would be hurting U.S. companies that do
business with the targeted firm.
    Administration officials could further increase pressure on
foreign governments to exclude Huawei from their 5G networks.
    
    JUSTICE DEPARTMENT CRACKDOWN
    The Justice Department is likely to continue to crack down
on Chinese spies and hackers for stealing technology and trade
secrets from American corporations, as part of its China
initiative to counter Chinese economic and security threats. 
            
    FOREIGN POLICY AND DEFENSE LEVERS? 
    Tension has already risen as the United States undertakes
freedom of navigation operations through the Taiwan Strait and
South China Sea. China has been increasingly assertive about its
sovereignty over Taiwan, which it considers Chinese territory to
be brought under Beijing's control by force if needed.
    U.S. warships have sailed through the Taiwan Strait at least
once a month since the start of this year. The United States
restarted such missions on a regular basis last July. 
    Trump's government could impose sanctions on prominent
Chinese officials seen as complicit in human rights violations
of the Uighur population. Congress has urged Trump to impose
such sanctions.
    Washington could also deepen a crackdown on Chinese
companies that fund or supply North Korea's nuclear programs. 

 (Reporting by Alexandra Alper; Additional reporting by David
Lawder and Tony Munroe; Editing by Simon Webb and Leslie Adler)
  
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