A dealer handles playing cards on a table at the Macao Gaming Show in Macau, China (Photographer: Xaume Olleros/Bloomberg)  

China Has the Cards to Call Trump's High-Stakes Trade Bet

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(Bloomberg Gadfly) -- When a card player doubles down on a high-stakes bet, is that a sign of strength, or an over-played hand?

That's what investors have to ask after President Donald Trump threatened to impose tariffs on a further $100 billion of Chinese imports.

In one sense, such a move -- if enacted -- could turn the tide of this conflict in Washington's favor.

Reciprocating tariffs from Beijing, when added to the $53 billion in trade that's already under threat, would max out China's ability to retaliate through conventional means. Chinese imports from the U.S. have exceeded $153 billion in only two years since it joined the World Trade Organization in 2001 -- and then only by a few billion or so.

Meanwhile the U.S. would still be able to threaten another $350 billion or so of trade in the other direction, thanks to its yawning trade deficit with the People's Republic.

That assumes, however, that China would only resort to conventional means. Recent experience suggests otherwise.

Take the experience of Hyundai Motor Co. The South Korean carmaker had been the second-biggest marque in China for much of the past decade before rising tensions over Seoul's decision to deploy a missile shield against North Korea boiled over early last year.

With lightning speed, state-owned media and social media accounts whipped up an unofficial boycott of Korean products. Yang Bingyang, a former model who's known online as Ayawawa, took a break from dispensing beauty and relationship advice to call for her 2.7 million Weibo followers to join the boycott.

"I will cancel my trips to South Korea and stop cooperating with Korean companies … every penny we spend is a vote on our future world!", the state-owned Global Times quoted her as saying.

Events took an even darker turn when tensions between China and Japan ramped up in 2012 over the ownership of disputed islands northeast of Taiwan. Nationalist crowds ransacked a Toyota Motor Corp. dealership and set a Panasonic Corp. factory ablaze.

There are plenty of ways that China could bring pressure to bear in that way. The U.S. is the largest investor in China from outside Asia, with about 3 percent of the foreign direct investment stock, worth about $41 billion in 2016. As Hyundai has learned to its cost, assets held in China can rapidly lose their value if you're in Beijing's bad books.

The impact could be felt well beyond the usual suspects. Most U.S. businesses with substantial revenue in China have so far been spared from the country's retaliatory wrath, but tech companies such as Apple Inc., Qualcomm Inc. and Intel Corp. are directly in the firing line if things heat up.

Boeing Co., General Electric Co. and United Technologies Corp., whose substantial Chinese aerospace businesses have so far been largely spared, could also be targeted. Caterpillar Inc. risks getting locked out of the Belt and Road infrastructure bonanza. 

Other firms could be damaged by local action that barely touches on formal goods trade. 

Las Vegas Sands Inc., controlled by 2016's biggest conservative political donor Sheldon Adelson, doesn't technically export anything much to China -- but if Macau authorities decided to strip away the license for his casinos that's up for renewal in 2022, the company could lose three-fifths of its revenue in a flash.

Only a few thousand of the four million cars that General Motors Co. sells in China each year are imported from the U.S., but Hyundai's experience illustrates that the locally made remainder could nonetheless be hit hard. Coca-Cola Co. has only about 5 percent of its net assets in China thanks to the use of local bottlers owned by Cofco Corp. and Swire Pacific Ltd., but wouldn't want to suffer a consumer boycott in the Coke system's third-biggest market.

On paper, the U.S. may have the stronger hand. Still, any poker player knows that you don't win by getting the best cards, but by knowing your opponent's weaknesses. Beijing's most powerful weapon -- harming prominent companies to make President Trump lose face with the U.S. business community -- has barely been touched so far in this conflict.

If the stakes get higher, China has some potent cards up its sleeve.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

©2018 Bloomberg L.P.

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