HONG KONG—No matter how some pundits frame current U.S.-China relations, Beijing wants no part in armed conflict with America. Open war—whether framed as escalation of tensions across the Taiwan Strait, in the South China Sea, or due to geopolitical head-butting—is not a feasible option for either side. The globe’s two largest economies not only share intimate economic ties; their fates are intertwined. But the occasional bloody nose is unavoidable. The battlefield where China and America trade blows may well be trade.
President-elect Donald J. Trump has repeatedly said he will “get tough on China” once he takes his seat in the Oval Office—a promise that previous administrations have pursued and failed to realize. Trump’s pick for top diplomat, Rex Tillerson, has even singled out the South China Sea as a critical juncture during his senate confirmation hearing, dictating that China should be banned from accessing its artificial islets built in choppy waters. (Tillerson failed to lay out an executable plan that would achieve this objective, and Reuters reported that a Trump transition advisor tried to dial back Tillerson’s comments by saying a naval blockade was not an option.)
But what exactly does being “tough on China” mean? Trade wars are fought on paper, in cargo ports, in factories, and even in supermarket aisles. Punitive tariffs—like those promised by Trump during his improvisational presidential run—and import quotas are the basic weapons that can be deployed. A devastating scenario would be a devaluation of the Chinese currency by Beijing.
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The rule of thumb is that the country with a trade surplus—in this case, China—has more to lose in a trade war, but the circumstances we face are anything but common. If Trump and his cronies indeed do decide to slap the People’s Republic with punitive measures, Beijing will feel pain, but it will not go down without a fight.
Chinese economists have spent decades honing their craft, and have taken their nation’s economic model through a rapid evolution. Their countermeasures for retaliation are elegant for one reason: China remains the largest financier of American debt. If the People’s Bank of China chooses to sell down its share of U.S. Treasuries, the value of T-bills would fall, leading to a dive in the global economy. That would hurt America far more than its competitor across the Pacific Ocean, if we follow the metric that ranks the U.S. at the largest economy in the world. Stateside, we could see inflation and softened domestic consumption. This means that if Trump follows through with his tough talk, America will bear the brunt of the economic collision.
We have already seen a much lighter version of this play out. In July, China’s holdings of U.S. treasuries fell to a three-year-low. That marked a $22 billion dive in one month—a mere taste of what could come with a bungled China strategy under Trump.
Pick a product—any globally available product dreamed up by an American—and compare its sales numbers in America with those in China. The blunt truth is that, economically, the U.S. needs China more than the other way around, and Beijing knows it.
China exports have faltered for the second year in a row in 2016. Last month, Chinese president Xi Jinping even said Chinese leadership is now open to divorcing the nation’s (fudged) numbers from the annual 6.5 percent economic growth objective—in part due to the economic volatility introduced by Donald J. Trump’s upcoming residency in the White House—and the need to avoid what Graham Allison calls the Thucydides Trap: in 12 of 16 past cases over the last 500 years in which a rising power has confronted a ruling power, the result has been bloodshed.
No doubt Trump reads all of this as a victory that fuels his own bravado, but that is a miscalculation.
Trump and his chums make the mistake of thinking that China is still a factory-state, one that may not have the ammunition or appetite for trade war tactics. That notion is outdated. It has a number of arrows in its quiver.
The option of devaluing the yuan is always possible for Beijing, especially if weakening an America that no longer sees itself as a partner to China is the end goal. A bonus in the yuan’s devaluation is that China’s export competitors would be effectively neutered, again boosting China’s status as a global trader of all goods and commodities.
For the moment, there is room for cooler heads to prevail. The Chinese public realizes that the U.S. is China’s most important partner. At the end of 2016, China’s most-read newspaper, the People’s Daily, conducted a straw poll to determine public opinion about China’s global relationships. The results were clear—79.8 percent recognized America as their nation’s paramount relationship. Days later, state media called China “invulnerable to trade war.” While mixed messages from Beijing are nothing new, the persistent edge of anxiety is.
While those in the upper echelons of the Chinese Communist Party remain confident that they can handle America’s new president, there are silent jitters about Donald J. Trump’s unpredictability. His bluster and no-holds-barred rhetoric, often seemingly detached from reality, has rattled Beijing.
But for the Chinese, there is one comforting thought—Trump and his family’s business empire depend heavily on China. The president-elect’s son-in-law, Jared Kushner, joined the new White House staff as senior advisor to act as Trump’s “gatekeeper” for foreign policy, even as he chased a massive Chinese deal.
This potential conflict of interest plays perfectly into the hands of the CCP. The People’s Republic might be riddled with corruption, often with mounds of cash funneled toward princelings and those around them, but in this new context, it means they understand very well what’s going on with the next first family in America.
