The second trade war between the United States and China has so far been more of a snack than a slap-up meal. President Donald Trump campaigned on a repeated promise to impose tariffs of 60% or more on imports from the People’s Republic. In office, however, he has so far raised levies by just 20 percentage points. Beijing has responded with targeted and asymmetric measures. If Trump escalates, China has a banquet of spicy options to choose from.
When it comes to a straight tariff fight, China’s capacity to retaliate is limited. The world’s second-largest economy exported goods worth almost $440 billion to the United States last year, vastly more than the $144 billion it imported, making Washington’s levies more painful. Authorities in Beijing have instead responded by imposing tariffs of 10% to 15% on $21 billion of largely agricultural goods from the U.S. That’s not enough to stop trade, but sufficient to squeeze American soybean farmers, who sold more than half their total exports to Chinese buyers in 2024.
China also has a menu of non-tariff options for dealing damage to the American heartland. After the latest U.S. tariffs took effect on March 4, Chinese bureaucrats suspended import licences for three U.S. soybean companies, including farmer-owned cooperative CHS, on the grounds that they had detected harmful fungus on shipments.
Regulators can also impose wider bans like the one they recently slapped on U.S. lumber, ostensibly due to detection of pests. China allowed customs registration to briefly lapse for American pork and poultry exporters, while those for hundreds of beef suppliers remain listed as “expired”, Reuters reported on Tuesday.
Customs officials have a history of throttling imports by holding up shipments for inspection, as they did for Australian lobsters in 2020 after the government in Canberra called for an inquiry into the origins of Covid-19. Yet as China’s $19 trillion economy struggles with sluggish growth, President Xi Jinping may be wary of dramatic moves that invite further disruption for the vital export sector.
MAIN COURSES
A better option could be to sample from options that strike at companies reliant on the Chinese market and manufacturers. After the latest U.S. levies took effect in February, Beijing announced antitrust probes into search giant Google and chip designer Nvidia (NVDA.O). These had little obvious effect. But a ban on imports of gene sequencers from Illumina (ILMN.O), which became official on March 4, hit harder. Shares in the San Diego-based company are down 35% this year even though China only accounts for 7% of revenue.
The measures could be read as a warning to U.S. companies which are much more dependent on access to China, such as Tesla (TSLA.O) and Apple (AAPL.O). Beijing could make life difficult for the $800 billion automaker, which is the biggest foreign electric vehicle company in the country and a key source of wealth for Trump adviser Elon Musk. Last year, Tesla sales rose almost 9% in China despite falling elsewhere, while its Shanghai megafactory accounted for roughly half the company’s global production capacity. Home-grown champions like BYD (002594.SZ) have overtaken Musk’s firm, making it a more viable bargaining chip.
Squeezing big U.S. manufacturers would damage China’s attempts to present itself as being open to foreign business. Given the recent damage Trump’s policies have done to longtime American allies and trading partners, however, those countries may be less troubled by retaliation.
AND FOR DESSERT?
If Chinese policymakers really hunger for trade retribution, they can turn to the exchange rate. They have so far kept the yuan stable against the U.S. dollar in the face of new levies, but would probably let it weaken if Trump follows through on his 60% tariff threat. Bank of Singapore Chief Economist Mansoor Mohi-uddin estimates the People’s Bank of China could permit a drop of as much as 10% in a worst-case scenario. But he adds any fall would be carefully managed to prevent runaway depreciation, and officials will likely draw the line at around 8.2 yuan per dollar – the level of the dollar peg that China ditched in 2005 in favour of a managed exchange rate.
The last and potentially most damaging option on the menu would be for China to throttle exports of the rare earth metals that are central to manufacturing everything from semiconductors to electric vehicles. China accounted for roughly 70% of production of the metallic elements in 2024, according to the U.S. Geological Survey, and has in recent years been establishing a system to better monitor and control their exports, although actual restrictions have been rare.
Restrictions on the export of gallium, which is used in chipmaking, offer a taster of what may be to come. Since China halted direct sales to the United States on December 3 in response to chip export controls imposed by President Joe Biden’s administration, global spot prices have risen by a fifth to $663 per kilogram, per LSEG figures. But the direct impact on U.S. industry appears limited because China mostly sells gallium to component makers in countries like Japan and South Korea, who then ship their goods to American buyers. That accords with a USGS analysis in October which found that, without taking possible disruption to external supply chains into account, a complete ban on exports of Chinese gallium would shave just $3.1 billion, or about 0.1%, off U.S. GDP.
The same basic scenario holds true for rare earths. To exert real leverage, Beijing would have to threaten manufacturers in Japan and South Korea with punitive measures if they sell products containing Chinese rare earths on to the United States. This would effectively mirror the U.S. approach to high-end semiconductors.
An escalation is not inevitable: Trump and Xi may yet strike a grand bargain which avoids an ugly conflagration between the world’s two largest economies. If they do go ahead, the outcome will be painful indigestion on both sides.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)
