(Bloomberg) -- The first punches have been thrown in a potential trade war and now Xi Jinping is poised to match Donald Trump blow for blow.
The next flurry of jabs may be imminent. In his announcement of tariffs on Chinese goods on Friday, Trump vowed additional duties if China retaliated -- which Beijing immediately did. Details of U.S. restrictions on investments from China will follow in the next two weeks, according to Trade Representative Robert Lighthizer.
Analysts increasingly expect the confrontation to be a war of attrition. While China has shown a willingness to make a deal on shrinking its trade surplus with the U.S., it has made clear it won’t bow to demands to abandon its industrial policy aimed at dominating the technology of the future.
“The Chinese view this as an exercise in self-flagellation, meaning that the country that wins a trade war is the country that can endure most pain,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. China “thinks it can outlast the U.S. They don’t have to worry about an election in November, let alone two years from now.”
The two nations moved to the brink of a trade war on Friday after the Trump administration announced new tariffs on imports would take effect from July 6. A 25 percent tariff will be imposed on $34 billion in goods imports, with further duties on another $16 billion in imports under consideration. In response, China said it would charge tariffs of the “same scale and intensity” on goods from the U.S., adding that all trade commitments made during the previous weeks of negotiations are now off the table.
“We could be dangerously approaching such a trade war,” Jack Reed, the ranking Democrat on the Senate Armed Services Committee, told Fox News Sunday.
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“At a rough estimate, about a third of the value of exports comes from imported components – so even if all $50 billion in exports disappeared the blow to China’s GDP would be just 0.2 percent. Given the likelihood Chinese firms would find other markets, the final impact would be even smaller. For the U.S., the $50 billion at risk from China’s reciprocal tariffs is also about 0.2 percent of GDP.”
--Tom Orlik, chief economist at Bloomberg Economics.
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S&P 500 Index futures dropped 0.5 percent and the yen strengthened in early Asian trading on Monday as concern about the trade spat sapped risk appetite. While equity markets in China, Hong Kong and Taiwan were shut for a holiday, shares across the rest of the region fell. South Korean chipmakers, which make parts used in Chinese products, retreated.
"China does not want the trade war, but facing a capricious Washington, China has no choice but to fight back vigorously in defense of its national interests, the trend of globalization and the world’s multilateral trading system," according to an unsigned commentary in the state media Xinhua.
Aside from slapping tariffs on American products, China’s arsenal of potential retaliatory measures is formidable, and it could inflict heavy punishment on the more than $200 billion of investment by American companies in China. Increased safety inspections and delays in approving imports are possible tools, as is consumer boycotts of American goods sold in China’s rapidly growing retail market, or stemming a flow of free-spending tourists to the U.S.
China’s punishment of South Korea for allowing the U.S. to station a missile defense system on the peninsula cost that nation billions of dollars, and it has used similar tactics against the Philippines and Japan as well. China also has a pivotal role in Trump’s goal of disarming North Korea because without its participation, sanctions have little chance of success.
“We have very legitimate reasons to be concerned about China’s trade practices,” Susan Rice, former national security adviser to President Barack Obama, told CNN’s Fareed Zakaria GPS on Sunday. “But the way to resolve this is not at the expense of American workers and manufacturers and farmers, by getting into a trade war that has potential, real global ramifications.”
In a longer-term, worst-case scenario, there also are actions such as selling down its massive stockpile of U.S. treasuries or devaluing the yuan, moves that would send shock waves through global markets.
“The next several weeks will be critical for determining how bad the tit-for-tat gets, which will rest crucially on the relationship between the two leaders, and how they perceive their advantages," said economists including Michael Hirson, Asia director at Eurasia Group in New York. “Xi is not looking to escalate the trade dispute, but is not afraid to climb the escalation ladder with Trump."
Watch for Beijing to ramp up threats of informal retaliation against U.S. businesses in China, Hirson says, adding that it’s likely American firms will see some delays in various approvals in coming days. Tougher measures such as disruptive regulatory actions would follow, especially if Trump appears headed towards a second round of tariffs, he said.
Trade is just a way to contain China from moving up the technology ladder, according to Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. Trump’s ‘America First’ policy is against every nation, but it includes a tech arms race against China, and China will respond by trying to build ties with other nations, and buying technology from wherever it can, she said.
In a story early on Monday, the state-run China Daily said the nation’s response with tariffs would show the U.S. the price of its actions. It added that "China’s stance has been consistent: It welcomes dialogue but is not afraid of a trade war."
©2018 Bloomberg L.P.
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