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China's Possible Next Steps in the Trade War

 
 

After a short-lived truce, the trade war between Washington and Beijing is back on — however, their weapons of choice are diverging.

Following the White House’s lead, on June 15, both governments announced 25 percent tariffs on $50 billion worth of each other’s exports before U.S. President Donald Trump threatened an additional 10 percent tariff on $200 billion of Chinese goods. Unable to match Trump’s terms — total Chinese imports from the United States are well below $250 billion — China’s Ministry of Commerce instead threatened to “strike back” with “quantitative and qualitative” measures.

The meaning of “quantitative” in this context is obvious: more tariffs, and possibly quotas. “Qualitative,” though, is less clear. In order to get a sense of what qualitative measures would look like in a trade war, it is helpful to look at five instruments of economic coercion that China has utilized in recent years. Moreover, due to differences in their domestic institutional structures, China is likely to find it easier than the United States to leverage such measures in a trade war — both as forms of retaliation and, eventually, as bargaining chips in future trade talks.

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The first possible measure is customs delays. Beijing could instruct customs officials to ratchet up inspection requirements to create costly bottlenecks. Although not a new strategy in the context of trade disputes — in 1982 France required all Japanese electronics enter via a single understaffed customs house in Poitiers — Chinese officials have significant experience employing it, having obstructed Norwegian salmon (2010) and Filipino bananas (2012) following disagreements. China has already used these measures in 2018, with various U.S. exports — including whiskey, fresh fruit, unprocessed timber, pork, motor vehicles, and recyclables — experiencing disruption in recent months while tensions have simmered. If the trade war heats up, officials might impose further obstacles and target a broader range of goods.

A second category is the discriminatory application of regulatory rules to impose costs on American companies with production facilities or retail outlets on the mainland. Beijing has utilized corruption probes, tax audits, and even daily health and safety inspections to disrupt the operations of foreign firms during political disputes. For example, in retaliation against Seoul’s decision to install the THAAD missile defense system in 2016-2017, Korean supermarket chain Lotte was forced to close almost 90 stores due to alleged fire code violations. Wal-Mart’s 20 stores might experience a similar fate, or carmakers like Ford and General Motors may face unexpected fines or disruptions to their assembly lines.

The third category involves licensing requirements. Licenses are required to engage in most types of business activities in China, and the process for obtaining one is aptly described as “vague, ambiguous, and discretionary” in a recent White House report. Regulators might revoke or delay the issuing of licenses to U.S. firms, a difficulty faced by South Korean video game developers since 2017.

A fourth possibility is controls on outbound tourism. Through a variety of formal and informal measures — such as instructing tour agencies not to sell packages to certain destinations — Beijing has restricted travel to the Philippines (2012), Taiwan (2016), and most recently South Korea (2017, at an estimated cost of $15.6 billion and 402,000 jobs). While the United States may be a harder target because it relies less on package tours, any reduction in numbers would impact the estimated $33 billion Chinese tourists spend there annually. Indeed, the recent issuance of a warning cautioning Chinese nationals against U.S. travel suggests this measure is already being introduced.

A final form might be unofficial boycotts against U.S. goods and companies. As the dispute over the Senkaku/Diaoyu Islands erupted in 2012, for example, Chinese officials and state media incited a boycott of Japanese firms that led to the closure of hundreds of stores, factories, and offices. Boycotts also affected Korean firms in the THAAD dispute. The fact that the United States produces and sells more goods and services in China than it exports to the market creates a serious vulnerability to boycotts that could impose meaningful costs on U.S. companies: consumers might avoid Starbucks’ 3,300 stores and instead opt for UBC coffee, or they might buy a Xiaomi mobile phone instead of an iPhone — cutting into sales in Apple’s third largest market.

As with imposing tariffs, qualitative measures won’t be painless for China — some Chinese workers may lose their jobs and local companies relying on American partners will lose business. However, Beijing tends to selectively target goods and services that can be easily substituted by Chinese consumers or that will have minimal downstream impact for producers. Meanwhile, such measures could cause real damage to U.S. export industries, firms operating on the mainland, and consumers back home if supply chain disruptions lead to price increases. Moreover, local Chinese producers of substitutes could derive an advantage in a longer-term competition over market share.

As noted in a recent report from the Center for New American Security, the informal and extralegal nature of many of the aforementioned measures poses a complex policy challenge. That they are informal and plausibly deniable largely immunizes China from World Trade Organization rules, while also giving Beijing enhanced flexibility to ratchet pressure up or down as political dynamics evolve — flexibility enhanced by the unique control the Chinese state has over its economy. If utilized in the emerging trade war, Beijing’s ability to reverse such measures as a “concession” to Washington would also afford it unique ammunition in any negotiations.

The White House can continue its tit-for-tat escalation of tariffs for a while yet, but it will likely be unable to respond with similar qualitative measures of its own. The depth of legal and other institutional safeguards designed to protect foreign companies’ operations and investments in the United States — and indeed the free flow of most exports and imports — poses real obstacles to regulatory harassment of Chinese commerce. In the context of a trade war involving both quantitative and qualitative measures, however, this may ultimately prove to be a disadvantage.

Victor Ferguson is a Ph.D. candidate in the Australian National University’s School of Politics and International Relations.

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