China got a head start on a looming trade war with the US by showcasing a new range of tools it’s prepared to use if Donald Trump makes good on his threat to punish the world’s second-biggest economy with tariffs.
Restrictions imposed this month by the Biden administration on China’s access to vital components for AI chips provoked Beijing into providing the world a preview of its targets in a second trade war. Days after the curbs, President Xi Jinping opened a probe into Nvidia Corp. and banned the export of several rare materials with military applications. Beijing has also limited sales to the US and Europe of key components used to build drones.
Beijing’s response took a page out of the American and European playbook, extending its export control regime to include a ban on selling some goods to the US by applying it to companies both inside and outside China.
The retaliation appeared calibrated to threaten the US without rocking the fragile bilateral relationship, or inviting blowback on China’s own economy. Most of the swipes seemed symbolic: Exports of the affected metals to America largely dried up this year after earlier curbs, while Chinese companies are already moving to source domestic chips.
“The Chinese government is essentially creating bargaining chips against the US, especially with the anti-trust probe of Nvidia,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics in Hong Kong. “It doesn’t mean they’re going use those chips just yet, but they’re preparing for negotiations.”
With an eye on growth, China’s decision-making Politburo paired the warning shots with vows for bolder economic support in 2025, easing its monetary policy stance in a rare shift. While those pledges were light on details, more clues could come from an annual economic summit set to begin Wednesday in Beijing.
Looking ahead to next year, policymakers are also considering allowing the yuan to depreciate, possibly to around the 7.5 per dollar level, to blunt the impact of tariffs by making Chinese exports cheaper, Reuters reported on Wednesday.
Pressure on the Chinese currency has already intensified since Trump’s re-election, and some investors have speculated Beijing could abandon its current policy of maintaining a stable exchange rate and allow it to weaken to help the economy ride out any trade tensions.
‘Domestic Front’
“Promoting stability on the domestic front is probably the best way to prepare for the external shock” of tariffs and acts as a policy signal, said Haibin Zhu, chief China economist at JPMorgan Chase & Co.
While Beijing appears to be bracing for battle, there are some in China who favor a softer response at a time when the economy is battling its longest streak of deflation this century and a housing crash about to enter a painful fourth year.
Retaliatory actions are “never a good choice” from an economic perspective, former central bank Governor Yi Gang said earlier this month at the annual Beijing-Tokyo forum in the Japanese capital. “But there’s not much policymakers can do about that.”
Beijing has devoted the four years that Trump was out of office to fashioning a new toolbox to retaliate against US actions. That includes adding targeted export controls, and a series of laws that give the government greater control over domestic business deals in the name of national security.
While that risks making any renewed conflict between the world’s biggest economies both broader and more damaging for other countries caught in the cross-fire, the latest steps also represent a balancing act for China. Even with the country’s manufacturing dominance, it’s so far doling out measures that carry little sting.
Harry Harding, professor at the National Chengchi University in Taiwan, called the Communist Party’s recent steps a “very cautious retaliation.”
“It does mean that China will respond negatively and try to, in a sense, punish people for pressuring it, but they’re going to do so in a very calculated and deliberate way,” he told Bloomberg TV.
China’s move against Nvidia is a case in point. While the investigation was a surprise, prompted by suspicions that the US chipmaker broke anti-monopoly laws around a 2020 deal, it’s unlikely to hamper growth of the world’s second-most valuable company.
Nvidia has already gradually shifted focus to other markets after Washington launched waves of restrictions on the sale of advanced semiconductors to China. This year, Beijing compounded those problems by pushing local firms to stop buying from Nvidia, which it labeled a national security threat.
Still, Nvidia could be fined more than 20 billion yuan ($2.76 billion) under Chinese antitrust law, which could dish out a penalty up to five times of the company’s annual sales if the violation led to serious results, according to Liu Xu, a research fellow at the National Strategy Institute of Tsinghua University.
“China hopes to use a series of powerful countermeasures to prevent the incoming Trump administration from imposing more severe measures to suppress Chinese companies and its trade,” said Liu, who added that even companies such as Apple Inc. are at risk.
First Round
In the first round of the trade war in 2018-2019, China reacted to US tariffs with its own taxes on imports from the US in a tit-for-tat strategy. It initially tried to match the size of Washington’s actions and then made more symbolic moves, given it imports so much less from the US than it sells.
If Trump were to impose tariffs again, China could once more respond in kind, hitting US exports of machinery or agricultural exports of soybeans, corn, pork again. Companies are already rushing to get as many goods across the Pacific Ocean and into the US before the presidential inauguration on Jan. 20.
China has also upped its use of anti-dumping and countervailing trade investigations in the past few years. With the US pumping billions of dollars of industrial subsidies into the tech industry during the Biden administration, that may open up new avenues for Chinese response to the US.
“We are entering a new phase of US-China tech competition,” said Kevin Xu, a tech investor and founder of US-based Interconnected Capital.
“China is more willing to flex its strengths in the supply chain, like in drone manufacturing and rare earths, to push its own export control on Western firms, while also more willing to inject stronger stimulus to make up for the losses Chinese companies will inevitably incur,” Xu added.
Beijing has attempted to use restrictions to stop its own technology from being exported.
In December last year the Ministry of Commerce banned the export of a range of rare-earth technologies including techniques to process ore and produce magnets. That decision may have been motivated by a desire to stop companies in the US and its allies from rebuilding their own capacity to process the minerals and supplant Chinese dominance.
Beijing has a narrow window to send Trump a message while Biden remains in office with little time — or power — to respond, according to Kendra Schaefer, a partner at consultancy Trivium China.
“It is increasingly becoming a political imperative for Beijing to respond strongly,” she said. “Whether or not it is wise to do so.”
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