China Has Many Levers to Pull
Importantly, there appears to be a sea-change in the relationship between Washington and Beijing. Washington views China as a “strategic competitor” citing China’s exports and trade policy as threats to America’s economic future. This change has several ominous dimensions. Tariffs was America’s first volley as the White House hopes to cut the annual trade deficit by $100 billion by slapping a whopping $60 billion of tariffs on Chinese goods. China’s initial response to the salvo was levying only $3 billion of tariffs on American imports. So it begins. China also offered to loosen investment rules and purchase American semi-conductors, even after US blocked earlier moves. Yet China has many levers to pull.

First is financial. China is the world’s largest external holder of US debt holding some $3.1 trillion of foreign exchange reserves with more than $1 trillion in US debt despite selling in December and January. China’s large US treasury holding is only one of the levers and the People’s Bank of China (PBOC) has already been publicly quoted as seeking alternatives to the dollar. China is the world’s largest oil importer and has swapped oil for gold, becoming the world’s largest trader in physical gold. China has even begun trading in oil futures in another step towards more financial independence from the dollar.

Second, China is the world largest exporter and the slapping of some $60 billion of tariffs on Chinese products could see wider and more damaging Chinese tariffs on Boeing airplanes, Harley Davidsons, American wine, soybeans or wheat. Consumer electronics, such as Apple products to which American consumers have developed a voracious appetite, unwittingly would become more expensive in a “tit for tat” war, as well as face a potential Chinese boycott on US goods.

Third, China has internationalized the renminbi and purchased gold with its mammoth reserves to lessen the dollar’s hegemony. For over a century, Britain led global trade until its economy was devastated by World War I and eventually became so weak financially that they were forced to abandon the gold standard, causing the American dollar to replace Britain’s pound. Ironically, the US too was forced to end the dollar’s linkage to gold in 1971 under the financial strain of the Vietnam War and Lyndon Johnson’s Great Society. Subsequently, the dollar became a fiat currency allowing the US to accumulate debt on a horrific scale. In fact, the Federal Reserve deserves a share of the blame since its inflationary policies have priced out American goods from global trade, resulting in the trade deficits that so angers Mr. Trump.