The increase in trade tensions over the last month has become the key focus for markets. The US administration has implemented several new protectionist measures and is intent on imposing even broader ones in the near-term.

However, China doesn’t have much ammunition to retaliate against any restrictions imposed by the US administration. So what exactly can China do if the US comes up with further trade barriers against China?

Will China impose additional tariffs on the US?

If President Trump slaps another $200 billion in tariffs on China, with the threat of another $200 billion, that would bring the total to some $250 billion, consequently the math just doesn’t compute.

Last year the US imported roughly $500 billion of goods from China, yet China only bought $130 billion worth of US goods. Given this mismatch, China can’t really retaliate in kind because it just doesn’t buy enough goods from the US

Will China devalue its currency?

I doubt that China will devalue its currency. If China did so, it would cause massive outflows of capital from China’s financial system and likely impinge the renminbi’s credibility of one day becoming the world’s reserve currency, something Beijing has aspired to for a very long time.

Will China sell US debt?

Selling US debt also should not work given the numbers. It is believed that China has $1.2 trillion of US debt instruments. If China were to sell all of that at one time, it would surely raise rates, but such a move is easier said than done. However, if they did, the buyer of last resort would be the Federal Reserve, who could obviously soak up the selling.

In this event, it is likely that Trump would invoke the 1977 International Emergency Economic Powers Act, which gives the US president all the legal authority he would need to freeze Chinese-owned treasury securities held by US custodians.

Will China target large US companies operating in China?

This appears to be the course China would attempt to take if provoked. China has done this before by boycotting Japanese goods in 2012. However, such actions could create even more problems for China.

In short, China has few attractive options. Retaliatory measures against US companies might damage their targets, but they will also destroy jobs, degrade competition and reduce productivity at home.

That won’t stop Beijing pursing retaliation: it has done so before against Japanese and Korean companies. But the effectiveness of such retaliation will be limited, and the costs high.


While the direct macroeconomic impact of the existing measures will likely be small for now, further escalation may hurt growth by impacting confidence or tightening financial conditions.

My personal view is that Trump is putting up the pressure in order to negotiate a better package for the US. It doesn’t pay any of the countries to enter a full blown trade war. I remain convinced that China and the US will work the trade tiff out over the coming months

On a positive note, the outlook is positive with regard to the global economic environment, despite the foreseeable slowdown that is part of a late stage in an economic cycle. From today's perspective it is too early to talk about the end of the cycle ‒ or to put it in the language of the Football World Cup: we are in the second half of the game, but the end is not yet in sight.

We recommend adding to positions which are trading on attractive valuations as we head into earnings season.




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