Who is Huohuade Lutenike? The Chinese rendition of Howard Lutnick, the billionaire nominated to lead the US Commerce Department, is not well known in China. But that may eventually take shape US trade policiesEver since Donald Trump announced his choice, Chinese investors and policy-watchers have been clamoring for information. More than anything they want to know whether Mr. Lutenike would slap Mr. Trump’s proposed 60% tariff on all Chinese imports. The urgency of such efforts has increased since the President-elect launched an initial attack on November 25, announcing that he would start with an additional 10% tariff on Chinese goods from his first day in office – a figure that is expected to increase. is likely to.
Other nominees are considered better. Incoming Secretary of State Marco Rubio has tried to force Chinese companies to delist from U.S. stock exchanges and impose sanctions on him in response to his helping Chinese officials as a senator. Mr Trump’s choice for national security adviser, Mike Waltz, boycotted the Beijing Winter Olympics. New Trade Representative Jameson Greer was the architect of Mr Trump’s first trade war with China.
in the face of such arroganceChinese officials have maintained silence. But the formula for trade talks has started emerging in the country. China’s leader Xi Jinping set out “red lines” in a meeting with President Joe Biden on November 16. The essence was that the Communist Party’s rule and China’s claim on Taiwan should not become a bargaining chip in the talks. Then on December 1, the tax exemption on aluminum and copper ended. Prices of battery and photovoltaic products fell from 13% to 9%. This is an amazing change. Last year, China rejected claims that it was exporting batteries and solar products at artificially low prices. Martin Linge Rasmussen of Exante Data, a research firm, says the discount cuts are the first time authorities have taken action to reduce the strength of such charges. Analysts at broker Sinolink Securities call it a “pre-emptive strike.”
At the same time, Chinese officials want to increase trade with the rest of the world. The Commerce Ministry said on November 19 that it would promote export credit and insurance and support logistics services for Chinese companies. The ministry wants to increase the number of countries from which short-term business visas can be granted. It has promised to help companies respond if “unfair foreign-trade restrictions” arise. This month it will remove tariffs on imports from some of the world’s poorest countries.
Mr Trump could target companies that help Chinese companies assemble or reship goods to third countries. For example, solar companies have set up factories in Indonesia and Laos to circumvent US tariffs on exports passing through Mexico and Vietnam. To help small businesses sell goods overseas through e-commerce platforms, Chinese local governments have set up service centers. Shanghai is setting up a “Silk Road e-commerce pilot zone” to facilitate trade with Central Asia.
The tariff workaround means existing US measures have not prevented China from increasing exports. Since the start of Mr Trump’s trade war in 2018, China’s trade surplus has more than doubled to $820bn (or 6% of GDP). Its surplus with the US remains at $340bn, roughly the same as in 2018. If Mr Trump is willing to strike a deal including limited increases in tariffs, his measures could lead to a manageable 0.4 percentage point reduction in annual Chinese GDP growth between 2027 and 2029. According to Oxford Economics, a research firm. CF40 Research, a Beijing-based think-tank, estimates that “moderate” tariffs of 10-20% would slow China’s year-on-year export growth to 1.5% next year, with no tariffs below 2.2%. Mr Trump’s promised 60% tariff hike could reduce exports by 6.5% next year, which would have a devastating effect.
Will China oppose tit-for-tat retaliation? During the first phase of the trade war, officials responded to the tariffs by imposing similar penalties on U.S. imports. This strategy was ineffective because the US is much less dependent on Chinese demand than other methods. Some expect China to allow its currency to devalue against the dollar. Although doing so would make its goods more affordable, a large decline in the yuan risks draining capital.
Instead, Chinese trade experts expect the government to focus on domestic policies as a means to counter US pressure. Lian Ping, an influential economist, has recommended that China boost wages and consumer demand to fortify itself against US economic attacks. He wrote, “Only when your body is strong and healthy can you withstand external attacks.” This could be part of China’s plan. The government has promised stimulus to improve the gloomy sentiment affecting the Chinese economy. Bankers in Shanghai quipped they were celebrating Trump’s victory in anticipation of more government spending.
business concerns
There is more to the President-elect’s China policy than tariffs. The US and China are still in the middle of a tech war that was started by Mr Trump, escalated by Mr Biden and shows no signs of stopping. Mr Biden has attempted to cut China off from inputs needed for advanced technology such as artificial-intelligence chips. Hundreds of Chinese companies have been added to the Commerce Department’s list of entities, restricting US transactions with them. In October the Treasury imposed a sweeping investment-control regime that would block most U.S. investments in Chinese AI, semiconductors and quantum computing. The Biden administration is believed to be drafting a definition of what types of AI chips companies can sell to China. Mr. Trump can make it much stricter.
Chinese companies may also soon be subject to sanctions from the Office of Foreign Assets Control (OFAC), which, unlike the Commerce Department’s list of entities, restricts their ability to use dollars. Imposing OFAC sanctions on a Chinese bank would prevent dollar transactions with other banks and possibly lead to its collapse. A former US trade official says they have been used rarely until now, but the nominations of Messrs. Rubio and Waltz suggest such measures may become more common.
China’s ability to defend against attacks is limited. Authorities have invested tens of billions of dollars in the semiconductor industry in an effort to make China self-reliant. Although it has shown progress, especially in chip-making machines, the country still does not make the most powerful chips and sources less than 15% of its chips domestically. China also depends on the dollar-based financial system. Transactions in yuan have increased over the past two years, but most still use Swift, a messaging network that is vulnerable to US influence.
Mr Xi would likely retaliate if such drastic action was taken or his red lines were crossed. For example, on December 1, China implemented new dual-use export-control rules, creating a list of military-use items that face export restrictions. Over time, China could use these to restrict exports of minerals needed for high-tech gear, such as gallium and germanium, where it dominates production. To increase pressure, Chinese regulators could identify other goods whose exports they could block without affecting domestic industries. Some antibody precursors that are used by pharmaceutical companies come particularly from China and may make good candidates.
Chinese regulators have been keen to highlight the harm this is causing. Last month China used a new tool, the foreign anti-sanctions law, to bar Skydio, America’s biggest drone maker, from selling Chinese batteries because it sells batteries to Taiwan. This law could be used to deprive dozens of American companies of the Chinese-made components they rely on. American companies may also face setbacks in China. In October an industry body called for an investigation into Intel, a US tech company, due to alleged security vulnerabilities in its chips.
China’s Commerce Ministry recently used its “unreliable entities” list to investigate PVH, the US owner of brands such as Tommy Hilfiger, because it complied with the US Uyghur Forced Labor Prevention Act, which requires companies to export their products from Xinjiang. There is a need to stop using cotton. The original bill was sponsored by Mr. Rubio. With him as Secretary of State, it is easy to see the possibility of many more skirmishes and possibly complete disregard for China’s red lines. Mr Xi is ready to talk with Mr Trump on trade. Anything beyond that runs the risk of getting out of control very quickly.
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