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China has upped the ante in its trade dispute with the United States. By allowing the yuan to fall on foreign exchange markets, Beijing has shown how far it will go in response to existing U.S. tariffs on Chinese goods, as well as additional ones now threatened by President Trump. (Today, the White House announced that these new tariffs would go forward as expected on September 1 but delayed levies on certain products, including electronics, until December.) But China’s moves, bold and headline-grabbing as they are, also signal weakness: Beijing can no longer play the tit-for-tat tariff game with which it once engaged the Trump White House. And because the devaluation has raised the risk of capital flight from China (and with it, longer-term economic difficulties), the currency move also hints at desperation to find immediate relief from the economic pain that the tariffs are inflicting.
With or without the devaluation, Beijing is in a tough spot. On one side, the Communist Party can ill afford a trade war, since it has an implicit contract with the Chinese people to deliver prosperity in exchange for autocratic rule. But Beijing cannot countenance Washington’s demands that China import more from the United States, cease cyber theft, and let Americans do business in China without Chinese partners. These aren’t new demands, but the Trump White House wants them guaranteed in Chinese law. This last point, China’s leadership claims, is an affront to the country’s sovereignty—already a sensitive issue, given the turmoil in Hong Kong.
China has always held the weak economic hand in this dispute. Its export-dependent economy depends on overseas sales, which comprise one-fifth of its gross domestic product (GDP). More than one-quarter of those exports go to the United States, meaning that fully 5 percent of China’s economy is exposed in this trade dispute. By contrast, the United States counts on exports for about 12 percent of its GDP, and barely 8 percent of its total exports go to China—leaving just 1 percent of the U.S. economy exposed to retaliatory Chinese tariffs. Moreover, some 30 percent of U.S. goods sold in China are off limits to tariffs, as they constitute components, mostly to computer and iPhone assemblies, that support Chinese exports.
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See Also:
(1) What Hong Kong unrest tells us about China’s plans for the rest of the world
(2) China Agrees to Restart Trade Talks as White House Delays New Tariffs
(4) Airline Cathay Pacific fires two pilots over Hong Kong protests amid pressure from Beijing
(5) China slowdown persists as industrial economy posts worst growth since February 2002
