MNI: China To Hit Back Against US, Seek Europe Ties - Advisors

China is likely to respond with proportional tariffs on U.S. imports in retaliation to 34% reciprocal tariffs on Chinese goods, but it will prioritise strengthening its relations with the European Union and other nations, advisors told MNI, with Europe in particular offering potential for taking goods previously sent to the U.S.

Beijing’s response this time is likely to be more proportional, unlike that to the first wave of tariffs, which was "disproportional" and targeted mainly agricultural goods linked to Republican voters, said Wang Dong, professor and executive director of the Institute for Global Cooperation and Understanding at Peking University. China’s response will still be measured, he said, speaking after the Ministry of Commerce vowed retaliation.

U.S.-made imports which can be easily substituted by either Chinese or alternative foreign suppliers, such as cars, will be prime targets, said Ding Yifan, researcher at the World Development Research Institute of the State Council. Retaliation should cover all types of American goods, though it will be hard to match the U.S. move in value, said the Chinese Academy of Social Sciences’ Lu Xiang, an expert on the China-U.S. relationship. 

China should quickly negotiate temporary tariff reductions with the European Union and members of ASEAN and the Regional Comprehensive Economic Partnerships if full trade and investment agreements take too long, said Lu, adding that such arrangements could boost commerce rapidly. Negotiations with the U.S. look challenging, given the Trump administration’s desire to use tariffs to make up for shortfalls in government revenue and to boost domestic manufacturing, Lu said. (See MNI: China To Leverage U.S Tariffs, Target Deals With EU, Asia)

CHINA’S EU PUSH

While it will be difficult to redirect goods previously exported to the U.S. to southeast Asia, China should work for the resumption of negotiations for a China-EU investment agreement, by making full use of EU rules and sending a lobbying team to win over EU member states one by one, said Zhao Yongsheng, director of the French Economic Studies Center at the University of International Business and Economics. Negotiations on the China-Japan-South Korea Free Trade Agreement are also likely to accelerate, he said.

“If China and the EU, which is subject to 20% U.S. reciprocal tariffs, can take joint actions in countermeasures, it may have a greater deterrent effect,” said Zhao. China needs to take additional targeted moves against U.S. agricultural products in particular while applying levies to all U.S. imports, he said.

Zhao noted that China and European officials have been in close communication recently. Officials in Brussels stress that the EU remains divided over closer trade ties with China, while European Central Bank officials have noted the potential disinflationary effect of diverted Chinese exports. Trade Commissioner Maros Sefcovic visited Beijing immediately after his attempt to persuade the U.S. to back down last week. (See MNI: U.S. Policies Will Push EU, China Closer - Senior Advisor)

The fresh U.S. tariffs came on top of the 20% levies imposed earlier this year, bringing the total charges to 54%, close to the 60% Trump had threatened on China while on the campaign trail. 

While some Chinese regions and industries will suffer significant losses, the overall impact on the economy can be largely offset by official policies to boost domestic demand and diversify global markets, said Lu, adding that allowing the yuan to depreciate would be insufficient to offset the U.S. tariffs and might be counterproductive.