Working with EU: China’s best option in trade fight with US

HONG KONG - China does not seem to have many effective ways to retaliate in its trade war with the United States without hurting its long-term development, and its best strategy is to continue to open to the rest of the world says Natixis, the French banking group, in a research note.

“Because the EU is the largest economic region outside of the US, we should expect China to be much more willing to collaborate with Europe in the future and probably accept some of the EU’s long standing requests on China to move further on economic cooperation, namely better market access and reciprocity,” Natixis says.

It says an analysis of the products targetted by the US in its second round of tariffs shows that most are intermediate goods - parts and accessories More specifically, nearly 75% of the products involve low to medium technologies and few belong to the very-high technology category.

“This sends a clear signal that the US is now targetting China’s intermediate goods producers independently on value-added. As such, China’s role in the global supply chain is at risk, says Natixis.

It lists these options for retaliatin against the US:

Restricting the US’ investment in China? Not a wise decision. The key motive for the US’ new round of trade war is to attract investment, especially in parts and accessories, back to the US. Disrupting the investment sentiment is only to put China in a more disadvantageous place.

Selloff in the Treasury bond? Not effective. The US can easily respond by postponing the scheduled rates hike while putting some limits on China’s selling action.

Depreciation of yuan? The PBoC needs to carefully balance between the benefit from boosting exports and the loss of confidence in the currency, which could spark capital outflows again.  The memories of 2015 are probably too fresh so we doubt this is the strategy. In fact, at least so far, the PBoC is actually doing the opposite by using the countercyclical measure to fight against the recent depreciation trend, as we discuss in a previous note.

Further opening to the world? It has been the stance that Chinese government has taken for a long time to fight the US protectionism. China signed agreement with Germany on July 9th, and launched the 18th round of investment treaty negotiation with the EU, signalling its willingness towards this direction. We argue that the China will continue in this direction and also pushing for market access by negotiating bilateral trade agreements with as many countries as possible.

www.natixis.com (ATI).