Trading punches: Can China absorb Trump’s latest tariff blow?

The United States has thrown what it hopes will be the punch that forces its main economic rival, China, to change its trade practices. On Friday, US President Donald Trump more than doubled import tariffs on hundreds of billions of dollars’ worth of Chinese goods.

But like a seasoned boxer, China is now in a position to withstand such a beating, and has a range of options to hit back, analysts say. It can use its enormous population and other export markets as alternatives to US demand to cushion the impact of the new levies.

Shortly after Trump raised import tariffs on $200bn worth of Chinese goods to 25 percent from 10 percent, China’s Ministry of Commerce promised to take “necessary countermeasures”, without giving details.

Trump has also threatened to impose additional tariffs on another $325bn of Chinese goods, covering almost everything China exports to the US.

The additional tariffs kicked in while a Chinese delegation led by Vice Premier Liu He was in Washington, DC for an 11th round of negotiations.

Stock markets fell sharply in the days after Trump promised in a May 5 tweet to raise tariff rates in the latest round of the nearly two-year-long trade war, despite the markets regaining some ground on Friday. But analysts say the long-term economic impact on China’s economy is difficult to quantify and may be less severe than the market reaction would suggest.

“The overall impact of the 25 percent tariffs on China’s economy will be limited,” said Chong Terence Tai-Leung, an associate professor of economics at the Chinese University of Hong Kong.

“China’s [economic] growth is slowing down anyway, whether there is a trade war or not. The country’s economy is also shifting to a service industry. Trade will play a less significant role in the future,” he told Al Jazeera.

“China is still producing a lot, and it can just look for other markets to take its goods. If it cannot sell to the US, it can turn to Europe and other countries, or even its domestic market,” he said.

Since last year, the two economic powerhouses have hit each other with tariffs on more than $360bn in two-way trade, gutting US agricultural exports to China and weighing on both countries’ manufacturing sectors.

The two countries are sparring over US allegations that China steals technology and pressures US companies into handing over trade secrets, part of an aggressive campaign to turn Chinese companies into world leaders in robotics, electric cars and other advanced industries.

Despite optimism from officials in recent weeks that the talks were moving towards a deal, tensions reignited this week after Trump administration officials accused China of trying to backpedal on issues already agreed to in the negotiations.

Short-term pain, long-term gain?

Some analysts say the dispute could force China to make reforms that will eventually strengthen its economy.

“In the short term, the tariff hike may be a shock to China’s foreign trade and some industries,” said Yang Chen, managing partner at Chinese law firm Jincheng Tongda & Neal and a specialist in international trade issues. But Yang told Al Jazeera that in the long run, the tariffs may prompt Beijing to reform areas like business regulations, labour and technology, the so-called supply side of its economy.

“Trade frictions between China and [the] US, the two biggest economies in the world, are inevitable and will always exist,” Yang said.

Trump is using the threat of tariffs to push China into a deal. But tariffs may carry a lot less weight than they once did and, conversely, may hurt US consumers, according to analysts.

But some sectors in China are likely to feel the impact of US tariffs more than others.

The brunt of any negative impact is likely to be felt by small and medium-sized enterprises that export to the US or that make goods for export, analysts say.

These types of firms account for about 70 percent of all jobs in the country, says Andrew Collier, managing director of Orient Capital Research, an independent macroeconomic research firm.

The Chinese economy may also be hurt if tariffs drive manufacturers out of China towards South Korea, Thailand, Indonesia or Vietnam.

At the same time, said Collier, “trade is a small part of Chinese [gross domestic product] because it has a very large domestic market.”

Still, “[Chinese President] Xi Jinping is clearly very interested in having a deal. There is enough business with the US to justify continued talks,” Collier told Al Jazeera.

Even if the tariffs become a permanent fixture of the trade relationship – an unlikely prospect, according to observers – they are not likely to bring the Chinese economy crashing down.

The Chinese University of Hong Kong’s Chong estimates that China would lose about $300bn- a small fraction of its $13 trillion economy – if it had no trade with the US. In this highly unlikely scenario, China’s GDP growth could drop to between 3.5 and 4 percent.

“With that said, it is impossible to see no trade between the two countries,” Chong said.

“The 1.3 billion people in China would only need to spend $200 per year [per person] for some $300bn of goods to be sold at home instead,” said Chong. “China’s domestic market could digest the supply.”

Tariffs may backfire

The US tariffs are more likely to backfire than significantly hurt China, some analysts say.

“The Americans will bear the extra costs, as it is not easy for the US to find a substitute for Chinese goods. After all, China still produces a lot,” said Chong. “China’s economy has been little affected by the trade war. In the first quarter, there was still a trade surplus and GDP growth was 6.4 percent.”

Analysts say that China could retaliate in a number of ways.

In 2018, the US imported almost five times more goods from China than it exported to itin US-dollar terms.

That gives China little room to slap additional tariffs on US goods.

But it could make it harder for US firms to invest in China, block mergers and acquisitions or strictly enforce safety regulations on incoming goods.

Nonetheless, Chinese leaders will be wary of letting the economy slow down too much.

Veasna Kong of Moody’s Analytics said in an April note that weak demand at home and abroad sent industrial production growth to a 17-year low in January and February. Retail sales have been falling slowly for the past decade and so has growth in fixed-asset investment.

Kong pointed out that “from Beijing’s perspective, economic growth became uncomfortably weak through 2018, and with the trade dispute with the US threatening to undermine China’s growth prospects further, Beijing has stepped up its efforts to stimulate growth.”

Even if the economy is not crippled by US tariffs, that does not mean China is happy with them. After Trump’s tweet on Sunday, China’s Ministry of Commerce noted that “escalating trade frictions are not in the interests of either country or the world.”

Source: Al Jazeera

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