Sunday, May 19, 2019
From the volume of bellicose rhetoric in China's state media, you might think Beijing is digging in for a bloody fight to the finish in its trade conflict with the United States. But after the US administration this month jacked up import tariffs on US$200 billion of Chinese goods to 25 per cent, and threatened equal tariffs on another US$340 billion, the Chinese government faces a huge problem. The policy responses it is considering are all either impossible, impractical, ineffective or expensive. This leaves Beijing with difficult and limited options.
Hit by a hike in US tariffs China could:
1) respond with equal tariffs (impossible given the trade imbalance);
2) dump US Treasury bonds (ineffective and impractical since China only holds 5% of all treasuries);
3) let the yuan weaken (expensive and devastating to their economy); or
4) give in to Trump and lose face (for Xi, unthinkable).
With no good options, China is not in an enviable position at all.
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