Recently, the condition of relations between China and the United States has been on a trajectory of consistent deterioration, being a kind of process containing the risk of crossing the point of no return, beyond which the fundamental degradation of cooperation practices begins, and the future in this case does not have bright colors of more favorable prospects, against which Beijing and Washington are gradually approaching the next phase escalation of tension, which the Asian country is already preparing for.
According to media reports, the Asian country has a range of tools to respond to the threat of tariff increases from the US. Donald Trump, who won the United States presidential election in November and will return to the White House next month, has repeatedly declared his intention to increase tariffs on goods imported from other countries. The relevant plans relate, among other things, to products shipped from China. After winning the election, Donald Trump, in the format of public statements, confirmed his commitment to the relevant intentions. For China, the increase in tariffs will be a factor of sensitive impact on economic indicators, which currently lack upward momentum amid such adverse circumstances as a prolonged downturn in the local real estate market, falling investor confidence, and weak internal demand. The gross domestic product (GDP) of the Asian country in a symbolic sense will become a target, which is virtually guaranteed to be hit by the bullet of Washington’s tightened tariff policy. At the same time, this does not mean that Beijing cannot reduce the scale of the negative impact of the mentioned US measures.
So far, a new phase of escalation of tensions between China and the United States is a potential scenario and not the existing order of things in the space of objective reality. At the same time, the materialization of this scenario is a highly realistic prospect against the background of the logic of the previous stages of the deterioration of relations between Beijing and Washington, and Donald Trump’s declared intentions regarding actions in the foreign policy area in the context of interaction with an Asian country.
Last week, the United States imposed further restrictions on the export of advanced chips and equipment for the production of microcircuits of the corresponding category to China. These measures were an extension of the already existing system of export restrictions. As part of the response to the mentioned decision, China banned shipments of several minerals to the United States. These mutual measures, which clearly do not indicate a positive state of cooperation between Washington and Beijing, are one of the most indicative forms of tension in relations.
The preliminary contours of a potential new trade war between China and the United States began to take shape after the Asian country began to signal its goals in the corresponding confrontation process amid the expansion of restrictions on access to advanced chips announced last week. In this case, it means not only the above-mentioned ban on the export of minerals, including those necessary for the production of drones. As part of the backlash, Beijing has also launched a probe into Nvidia.
China’s ban on the selling of certain goods to the United States applies to companies based in the Asian country and beyond. Against this background, it is obvious that there has been an escalation of tension at a time when, in the form of a kind of background perspective, there is a high probability of further movement of relations between Beijing and Washington along a corresponding destructive trajectory due to the possible tariff hike.
As noted by the media, China’s response to the expansion of the restrictive practice by the United States is intended to declare the fact of a threat to the US economy and at the same time still try to avoid a further reduction in the level of cooperation between the two countries, which is already low, not only from a quantitative point of view but in the context of qualitative indicators. Also, according to some experts, Beijing, imposing export bans, sought not to damage its economic system.
Shipments of several metals from China to the United States have declined significantly this year amid restrictions that took effect before the December measures.
It is worth noting that under the conditions of the export control regime launched by Washington, Beijing is beginning to make efforts to develop the homegrown technology sector, including the chip manufacturing segment. According to media reports, Chinese companies are gradually starting to use domestic microcircuits. Against the background of growing geopolitical tensions, the issue of technological sovereignty has become more urgent for Beijing. Under conditions of external constraints, the ability to independently produce chips and advanced technological devices determines the country’s prospects. In the context of the symbolic gathering of clouds over the space of international cooperation, for Beijing, what can be called industrial autonomy becomes a kind of vital necessity. It is worth noting that the period of the coronavirus pandemic has become an experience for the world as a territory of human civilization, which highlighted the importance of technological sovereignty. During the mentioned period, due to various sanitary and epidemiological restrictions, global supply chains were disrupted, which became a shock factor for the economies of most countries. The escalation of geopolitical tensions worsens the prospects for international cooperation. Against this background, the increase of the importance of technological sovereignty as a factor determining the ability of countries to develop and grow economically in an unfavorable environment formed in the space of interaction between world capitals is logical.
Christopher Beddor, deputy China research director at Gavekal Dragonomics in Hong Kong, stated that the Asian country is currently actually creating bargaining chips against the United States, especially in the context of the Nvidia antitrust probe. According to the expert, this does not mean that Beijing intends to use the mentioned chips right now. Christopher Beddor suggests that in this case, China is preparing for negotiations.
Beijing is combining restrictive measures against Washington with vows for bolder economic support next year. In the context of the relevant strategy, a rare easing of the monetary policy of the central bank of the Asian country was recorded. As for the pledges on economic support in 2025, there are no specifics in this case yet.
Having previously considered the action plan for next year, Chinese policymakers declare the possibility of a depreciation of the yuan. If the corresponding probability is realized, the exchange rate of the national currency of the Asian country will reach 7.5 per dollar. According to media reports, this measure will allow to blunt the impact of tightened tariffs by making Chinese exports cheaper.
It is worth noting that the pressure on the yuan has already increased after Donald Trump’s victory in the United States presidential election. Some investors have conceded the possibility that China will abandon its current policy of maintaining a stable exchange rate and allow it to weaken to help the economy ride out any trade tensions.
Haibin Zhu, chief China economist at JPMorgan Chase & Co, said that promoting stability on the domestic front is probably the best way to prepare for an external shock and acts as a policy signal.
Beijing, as a political center, is demonstrating readiness for a potential new trade war with Washington, the hypothetical reality of which is already rapidly approaching the boundaries of the space of objective facts. At the same time, there are proponents in China of a softer approach to the process of preparations for tougher tensions. Their point of view is based on the fact that currently the Chinese economic system, which is the second largest in the world, is experiencing the longest streak of deflation in the present century. According to proponents of a softer approach, the mentioned situation is an argument in favor of the fact that China should not follow the path of harsh measures. They also pay attention to the downturn in the real estate market.
This month, at the annual Beijing-Tokyo forum held in Japan, former governor of the People’s Bank of China Yi Gang said that retaliatory actions are never a good choice in terms of economic prospects. In this case, measures are meant as a reaction to the decisions of the United States regarding the Asian country. Yi Gang also noted that there is not much policymakers can do about that. In the context of this thesis, attention was drawn to mounting domestic pressure and growing concerns among international industrial players. Moreover, Yi Gang stated that retaliating as a kind of necessity for Beijing is formed based on factors such as increasing protectionist measures from Washington and the need to give the public an account.
China has devoted four years since the end of Donald Trump’s first presidential term to forming a new toolbox for retaliating against the actions of the United States. In this case, a set of measures is meant, including targeted export controls and a series of laws that give the government of an Asian country more authority over domestic business deals under the pretext of ensuring national security.
According to some experts, Beijing’s actions generate the risk that any renewed conflict between the world’s largest economies carries the risk of becoming more destructive and broader for other countries caught in the crossfire. At the same time, in this case, China is trying to provide a kind of balance for itself in the face of a potential escalation of tensions. In the relevant context, it is worth noting that the Asian country, having a dominant position in the space of the global manufacturing sector, within the framework of retaliate actions, takes measures that are not maximum in terms of its capabilities. Moreover, Beijing does not derive significant benefits from such decisions.
Harry Harding, a professor at the National Chengchi University in Taiwan, described China’s recent steps as a very cautious retaliation. It was also noted that it does mean that Beijing will respond negatively and try to, in a sense, punish people for pressuring it. According to the professor, China is going to do so in a very calculated and deliberate way.
The above-mentioned Beijing investigation against Nvidia came as a surprise. In this case, the Chinese authorities suspect the US developer of graphics processing units, necessary for training and ensuring the process of subsequent operation of artificial intelligence systems, of violating anti-monopoly laws within the framework of the deal in 2020. The investigation is unlikely to become an impact factor on the performance of Nvidia, which is one of the beneficiaries of the so-called AI boom. This year, the company’s market capitalization has crossed the $3 trillion mark. Beijing’s actions do not seem to be something that can stop or slow down the growth of Nvidia, the second most valuable brand in the world.
The mentioned company gradually shifted its focus to other markets after the United States imposed restrictions on the sale of advanced semiconductors to China. Beijing has made the circumstances even more unfavorable for Nvidia, forcing local firms to stop buying from the US brand under the pretext of threatening national security.
Despite everything, China continues to be one of the largest markets in the world by objective indicators. For this reason, for any company, the termination of interaction with the relevant commercial space will have significant and sensitive consequences, reflected in the economic performance of its activities. Also, many firms are striving to continue their presence in China, even in the narrow territory of opportunities formed by Washington’s restrictive policy towards Beijing. In this context, the example of Nvidia is illustrative. Last year, it became known that the company was developing a special version of one of its gaming processors for the Chinese market. This product has a lower performance in order not to violate the US export control regime.
Liu Xu, a research fellow at the National Strategy Institute of Tsinghua University, said Nvidia could be fined more than $2.75 billion as part of the investigation in China. According to the expert, Beijing hopes to use a series of powerful countermeasures to prevent the incoming Donald Trump administration from imposing more severe measures to suppress companies from the Asian country and its trade.
As part of the first round of the trade war between the United States and China in 2018-2019, Beijing reacted to tariffs from Washington with its own taxes on goods imported from the US. In this case, the Asian country acted on a kind of symmetrical response principle. Initially, in the first round of the trade war, China sought to make decisions that were equivalent in force to measures on the part of Washington. Then Beijing’s actions became more symbolic. In this case, the impact factor was the fact that China exports much more to the United States than it imports in the opposite direction.
Beijing’s likely response to the tougher tariff policy of the new Donald Trump administration, which will begin operations next year, includes decisions affecting US exports of machinery or agricultural exports of soybeans, corn, and pork. Chinese companies are eager to ship as many goods as possible to the United States before Mr. Trump’s January inauguration. The firms expect that appropriate tactics will allow them to minimize or at least somehow decline the damage from tariff increases.
Over the past few years, China has also upped the use of anti-dumping and countervailing trade investigations.
Kevin Xu, a tech investor and founder of US-based Interconnected Capital, talked about the gradual beginning of a new phase of technological competition between Beijing and Washington. According to the expert, China is more willing to use its strengths in the supply chain, for example, in drone manufacturing and rare earths, to push its own control on Western companies, and to inject stronger stimulus to make up for the losses Chinese firms will inevitably incur.
Beijing attempted to stop the export of its own technologies as part of the implementation of the practice of restrictions. Last December, the Ministry of Commerce of the Asian country banned external shipments of a range of rare-earth technologies including techniques to process ore and produce magnets. It is possible that these measures were related to Beijing’s desire to stop companies from the United States and countries that are US allies from rebuilding their own mineral processing facilities, which is a potential threat to Chinese dominance in the relevant area.
Kendra Schaefer, a partner at the consultancy Trivium China, said that the Asian country has a narrow window through which to send a message to Donald Trump. It was also noted that for Beijing, it is increasingly becoming a political imperative to respond strongly, whether or not it is wise to do so.
