"We Will Not Sit Idly By" - Here's How China Might Retaliate Against US Tariffs

Posted by Tyler Durden on

As we highlighted last night, China has threatened to respond to President Trump's steel and aluminum tariffs with unspecified actions that Chinese officials said could "seriously hurt the international trade order."

And as Axios warned in a piece published Friday, investors shouldn't interpret their lack of details as a sign of an empty threat: Rather, China actually has far more leverage with which to retaliate against the Trump tariffs than it did when George W Bush briefly imposed tariffs on imported steel in the early aughts. Back then, Bush rescinded the tariffs, it's widely believed, because the European Union threatened targeted sanctions that would hurt swing states like Michigan and Florida - states that Bush needed to carry during his 2004 campaign. Unsurprisingly, the EU is embracing a similar strategy this time around.

But today, China's ability to retaliate now rivals that of the entire European Union - which means this could be the last time the US can "set the agenda" in terms of its relationship with its largest economic rival.

Back in 2002, China produced less than 200 million tons of steel. As of 2016, China could churn out 1 billion tons, forcing Beijing to pare back production or risk a destabilizing glut.


Given President Xi Jinping's decision to abolish term limits, effectively clearing the way for him to serve as dictator for life, the country has the wherewithal and the political will to strike back. Mark Wu, a professor of international trade law at Harvard, said the country needs to do something - if only to save face.

"China has to do something [in response to Trump's tariffs] just to signal its own resolve," Wu said.

However, as Wu said, they likely won't retaliate with the full brunt of their capability, as China would probably be content with watching the Westerners fight it out among themselves.

Ahead of Thursday's announcement, Zhang Yesui, a top diplomat and former ambassador to the U.S., said:

"China does not want a trade war with the US ... [But] we will not sit idly by and will take necessary measures if the US hurts China’s interests."

Since the earliest days of his campaign, Trump has bashed China, citing the US's massive trade deficit with China as a sign that naive leaders and the "free trade" globalist establishment were allowing the US to be ripped off...all to benefit the coffers of wealthy elites. Meanwhile, in a sign that the US could be softening its stance, the Trump administration has reportedly asked China for a plan to shave $100 billion off the US's trade deficit with the No. 2 economy (also known as China's trade surplus).


As Axios sees it, there are two routes China can take: 1) it could retaliate by acting against US projects in China, denying US companies permits to operate in China, essentially blocking US companies from one of the world's most lucrative growth markets...2) it could engage in tit-for-tat retaliatory tariffs against specific US industries and products - much like the EU has threatened to do.

However, not everybody is convinced that China will follow through with a response beyond mere rhetoric: Nathan Chow, a strategist at DBS Group, wrote in a March 9 report that he doesn't expect the US's steel and aluminum tariffs to spark a "trade war" with China. Steel and aluminum account for only 3% of China’s total exports (though this figure masks the rampant trans-shipping whereby Chinese steel is dumped into other countries to mask its origins) and 0.6% of its GDP. Chow also argued that Chinese steel exports to the US are much smaller than the country's top three steel export destinations: South Korea, Vietnam and the Philippines.


But one key difference between the Bush tariffs and the Trump tariffs is that Trump invoked Section 232 of the Trade Expansion Act - the so-called "national security" justification, which leaves the door open for other WTO members to use a similar argument to justify retaliatory tariffs that COULD escalate into a trade war...


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