China will retaliate if President-elect Donald Trump proceeds with his promise to impose a 60% tariff on Chinese imports, warned Zhu Min, a former deputy governor of the People’s Bank of China (PBOC). Zhu made the remarks during an interview on Bloomberg Television, underscoring the economic and diplomatic repercussions of such a move.
China’s preparedness to respond
“If Trump and the administration really levy a 60% tariff on China, I think China will retaliate,” said Zhu, who currently serves as chairman of the National Institute of Financial Research at Tsinghua University. He indicated that Beijing would likely bring the matter to the World Trade Organization (WTO) while considering a range of countermeasures. However, Zhu refrained from specifying what those measures might entail.
Zhu emphasised the interconnectedness of the global economy, noting that tariffs at such a high level would inevitably affect the Chinese currency, trade dynamics, and capital flows. He also highlighted potential implications for China’s role as a major buyer of US Treasury securities.
Impact on currency and US treasury holdings
China is the second-largest foreign creditor to the United States, holding approximately $775 billion in US Treasury securities. According to Zhu, heightened tariffs could reduce China’s appetite for these assets, further straining economic ties between the two nations.
“Tariffs will affect the exchange rate, China’s capital flow, and how much China will buy in US Treasury bills,” Zhu explained, stressing the broad-reaching impact of protectionist trade measures.
History of trade tensions
Trade tensions between the world’s two largest economies escalated during Trump’s first term, when tariffs of up to 25% were imposed on over $300 billion worth of Chinese imports. These actions provoked retaliatory measures from Beijing, sparking a trade war that disrupted global supply chains and heightened economic uncertainty.
Although President Joe Biden has largely retained Trump-era tariffs, Trump’s latest proposal to increase levies to as high as 60% could mark a significant escalation. Bloomberg Economics has projected that such a move would severely curtail trade between the two economic powerhouses.
A call for dialogue
Zhu cautioned against the economic damage that a further escalation of the trade war would inflict on both sides. “If the trade war were to escalate, it would be tough for both countries,” he said, advocating for renewed dialogue. “It would be nice if both sides can sit down, talk, and cut a deal because, economically, both sides really complement each other.”
Despite rising trade tensions, Zhu noted that China’s exports have performed strongly in recent years, increasing to nearly $4 trillion in 2023 from $2.5 trillion in 2019. Nevertheless, he highlighted Beijing’s “strategic shift” towards reducing reliance on external trade and focusing more on boosting domestic demand. This transition, he admitted, will require time and sustained effort.
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China’s domestic challenges
When asked about Beijing’s recent economic stimulus measures, launched in late September, Zhu sidestepped the question of whether they would be sufficient to counteract deflationary pressures. Instead, he outlined China’s short-term goals: stabilising the housing market, reducing local government debt burdens, and restoring consumer confidence.
The property sector remains a critical concern, with Beijing seeking to manage its vulnerabilities without sparking a wider economic downturn. Strengthening domestic consumption, Zhu suggested, is key to reducing China’s dependence on exports in the long term.
Broader implications
Trump’s campaign rhetoric around heightened tariffs has sparked concerns about the future of US-China relations. Zhu’s warning underscores the risks of further deterioration in trade ties, which could have far-reaching consequences for global markets.
As Beijing navigates its domestic challenges and considers responses to potential US policies, both nations face a pivotal moment. Whether through dialogue or confrontation, the next steps will significantly shape the trajectory of their economic relationship and its broader impact on the world stage.
