Well that escalated quickly.
Merely a week after America officially slapped tariffs on $34 billion worth of Chinese exports (with China quickly hitting back by imposing duties on $34 billion of American goods), President Trump has announced taxes on another $200 billion worth of Chinese exports.
This second round of tariffs won't hit right away; they require a two-month review process with hearings in late August. But they show how rapidly this trade war can expand.
This creates what at first seems to be a problem for China: Beijing may soon run out of American goods to tax.
A big part of Trump's beef with Beijing is America's large trade deficit with the Chinese — China sends far more goods to America than America sends to China. But that trade deficit also means China will run out of imports to tax long before America does.
So what can China do? It will have to get creative — and be patient.
In 2017, America imported roughly $500 billion in Chinese goods, while China imported about $130 billion in American goods. But there's also services: The U.S. now provides a little over $50 billion in services to China, while China does far fewer services for us. America actually enjoys a trade surplus with China on that score. But obviously that's swamped by the trade in goods.
Trump has already slapped 25 percent duties on $34 billion in Chinese goods. And China fired back by mirroring those numbers. The new round would be a 10 percent tariff on another $200 billion in Chinese goods. At that point, America would be taxing just under half of the goods we import from China; we'd still have room to keep launching new fusillades. But with only $130 billion in goods coming in from America, the Chinese wouldn't even be able to match the $200 billion figure, much less anything above that.
If the Chinese want to keep up the tit-for-tat strategy, they'll have to come up with other ways of inflicting economic pain.
Bloomberg explored a few of China's options. While China has fewer goods to tax, they could certainly just jack up tariff rates beyond the 10 percent or 25 percent that Trump is imposing. In particular, they could target things like U.S. energy exports. While China has long sought foreign energy providers to fuel its massive growth, it's becoming more self-sufficient. In particular, if they hit American liquefied natural gas with tariffs, the Chinese could undercut investor plans to build a more robust and long-term domestic infrastructure.
China could also exploit its strong hold over the rare earth metals market, which is crucial to U.S. electronics — and especially to our military technology. If China clamped down on its exports of these materials, America would doubtless turn to other sources, or start reinvesting in its own production. But it would definitely mess with America in the short term.
China could also get very tough with American companies. Remember, this is a heavily state-run, communist-capitalist hybrid economy, and the government imposes all sorts of limits and regulations on the American companies — think Walmart and General Motors — that operate there. In fact, this is part of the White House's justification for the trade war: China essentially forces foreign companies to hand over trade secrets and intellectual property to Chinese state-run enterprises as the price for doing business there. Trump wants them to stop. But if he angers the Chinese enough, they may actually double down on these hardball tactics.
Then there's what the financial press is calling "the nuclear option." China owns about $1.7 trillion in U.S. Treasuries. It's the largest single holder of our debt in the world. They could theoretically sell some or all of that off and drive up our interest rates.
But we don't actually need China (or anyone else) to buy our debt. Like most advanced economies, the U.S. government controls the supply of the currency it borrows in: the U.S. dollar. If China sold its Treasuries and drove up interest rates, the Federal Reserve could just print the money to buy them all up again, and bring interest rates back down. Doing so could cause inflation, but only if the U.S. economy was already badly overheating — in which case, higher interest rates would probably be a good thing.
On top of that, selling off China's Treasuries would lower the value of the U.S. dollar relative to the Chinese yuan. That would make U.S. exports more competitive and close the trade deficit. It would actually give Trump what he wants! (And would be good for the U.S. economy on the merits, to boot.) As a nuclear option, it's a bit of a dud.
On the other hand, if the Chinese bought up more Treasuries, they could make the U.S. dollar even more expensive, and widen the trade deficit further.
In the end, China's best option here might also be the simplest: Just try to outlast Trump.
Any tariff on a foreign country's exports is ultimately a tax on your own businesses and citizens. They're the ones buying the exports, after all. A trade war "is a little bit like two kids who go underwater to test who can hold their breath the longest," The Atlantic's Derek Thompson told CBS. "How long can we hold out until my opponent changes its strategy?"
But China is a massive country with enormous resources. More importantly, its government is willing to subsidize and shore up its own companies in a way American policymakers — still wedded to free-market principles — would never dream of doing. Nor is China a democracy. If Trump's trade war jacks up prices for his rural voters, or raises input costs for his business supporters, they might retaliate in the midterms and in 2020. China's officials face no such referendum from voters.
As Thompson put it: "China can hold its breath longer than anybody." And that means Beijing may well be able to outlast Trump in this ill-conceived trade war.