China and trade China and trade China and trade

Just because China can, doesn’t mean it will

Picture of user silhouette
Pauline Loong

Managing Director, Asia-analytica

The possibility of a China-US trade war is sucking up the oxygen in financial markets. But before we all hyperventilate at the thought of a global trade conflagration wiping $470 billion off the world economy within two years, let us look at the bigger picture. 

Relations between the US and China have never been warm and fuzzy when it comes to trade. Arguably, the two have been squabbling over the widening bilateral trade gap since China’s exports took off on joining the World Trade Organization 16 years ago.

The Trump Administration’s $50 billion tariff plan announced earlier this week should be seen in the context of an increasingly confrontational relationship with China that has been building up for many years. The current administration is stepping up the pressure and threatening to push the relationship to the brink.

But an all-out trade war, which we define as across-the-board tariffs and quota restrictions aimed at damaging the other country’s trade position, is still some way off.

For a start, it take two to fight. Note that China countered Trump’s $50 billion tariffs threat on Chinese goods with its own $3 billion tariffs on American goods. That is correct: $3 billion, not $30 billion.

That is a clear message from China that it has no wish to escalate tensions. A message that it is looking to do business not to fight. And that it has no wish to race towards mutual destruction.
The $3 billion could well be just the start. China may raise the stakes in the coming days with further tariff announcements depending on the response of Washington and American industries to its current move.

But any decisions to impose new tariffs will be based on hard-headed considerations. Proposals will be judged for their effectiveness in persuading the Trump administration to return to the negotiating table against the not-unlikely risk of provoking a my-stick-is-bigger-than-your-stick response. China wants to get markets, not to get even.

Arguments pointing to the many ways in which China can punch back at the US miss the point. China is grown up. Just because it can doesn’t mean it will. It has no interest in chest-thumping (unless it works).

The so-called nuclear option – China dumping its holdings of US Treasuries – assume that revenge is an overriding motivation in Chinese policymaking.

Massive dumping of US Treasuries would certainly hurt the US but it is just as likely to decimate the value of China’s foreign exchange reserves with bond prices and the greenback doubtless going into freefall from such a massive sale. And this is without even considering the logistics of offloading more than US$1 trillion in US government paper onto the market in one fell swoop.

More to a fight than just tariffs

Acting as a brake against a rapid descent into a bare-knuckles confrontation between the world’s two biggest economies are three important forces: the globalisation of supply chains, pushback from other players, and China’s pragmatic response.

Companies everywhere are going global on both the supply and demand sides of their businesses. Supply chains are now closely interconnected, with different countries involved in different stages of production. China’s manufacturing and assembly base is fed components, sub-components and materials by a global network with several tiers of production taking place outside China.

And for many American companies, Chinese producers are themselves embedded in their supply chains – ask Apple. From inbound logistics and manufacturing through outbound logistics and marketing, the tech giant’s entire value chain goes through China in one way or another.

Retaliatory trade tariffs have a ripple effect that would leave few players unaffected. And aggrieved countries are not going to sit back and wait as tit-for-tat tariffs put companies out of business and people out of jobs.

Not just China

Grabbing headlines is the Trump Administration’s announcement of $50 billion tariffs on Chinese imports and China’s $3 billion response.

But the US is not just going after China. The Trump Administration has so far been acting as if it is quite comfortable going after friends as well foes to redress trade imbalances – given the recent volleys of protectionist tariffs on solar panels, aluminium, steel, and other products and the US President’s stance that trade wars are good and easy to win.

Retaliation from China is one thing. But a backlash from the rest of the world – American allies in particular – would likely trigger widespread domestic opposition from industries hurt by the move and from national security advisors worried about seriously alienating strategic allies.

This is already happening. The Trump administration has now backed away from its “no exceptions” stance to the steel and aluminium tariffs of 25% and 10% announced earlier this month. As at time of writing, it has given Canada and Mexico a provisional exemption from the steel and aluminium penalties set to clobber the rest of the world.

And then there is China. As I said earlier, it is looking for export markets not for a showdown.
Beijing is under no illusion that the bilateral trade gap is a major political irritant in its relations with the US. Chinese data (which exclude Hong Kong) showed the 2017 US-China trade gap ballooning to a record high of Rmb 1.87 trillion ($286 billion at end-2017 exchange rates) in China’s favour. By US reckoning, the trade deficit with China hit a record high of $375 billion last year.

Beijing is aware of the political dimension to the aggressive $50 billion move by the Trump Administration on tariffs. One line of thinking in China is that the trade war posture is a way for Trump to distract the nation from his domestic political problems. Another line of thinking is that targeting industries in Trump country might exert political pressure on the US president to tread more carefully on trade, as I argued in a previous post. 

I also argued that Beijing’s likely response is to try to shift the negotiating focus to increasing Chinese imports of American goods rather than cutting Chinese shipments to the US, and that it is likely to further open up its financial markets. This last move would have the added bonus of sweetening an important lobby in the US: the financial institutions that have waiting for years to break into the potentially lucrative Chinese domestic market.

Chinese Premier Li dropped hints much along those lines in a media address earlier this week.

He said China still has much room for further opening up of its market and will lower overall tariffs on imports. Tariffs on popular consumer goods such as drugs will be slashed and zero tariffs might be phased in for anti-cancer drugs.

More importantly, he dangled hopes of improved market access to the services sector, such as in financial services, medical services and education. He spoke of gradually relaxing and even scrapping foreign-owned equity limits in some sectors and shortening the no-go list for foreign investment. Furthermore, compulsory technology transfers will not be imposed on foreign investment in the general manufacturing sector and intellectual property rights will be protected.

These are the words of a premier who sees no profit in playing tit-for-tat.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.