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China can retaliate with the exchange rate

The exchange rate is one of the most powerful weapons China has in the trade war with the US. A weaker yuan would support China’s exporters. While China’s importers would be worse off, the benefits outweigh the costs because China is a net exporter. A depreciated renminbi could rattle global markets and, consequently, pressure the US to switch tack.

If China really wants to up the pressure, targeting the operations of US businesses is a reasonable strategy. In the US, lobbying groups and business organizations do carry a certain amount of influence. China can also subject US companies operating within China to arbitrary audits, stricter regulations, or slow approvals of the necessary permits and licenses. Another possibility is dumping US Treasuries. China holds roughly a trillion dollars worth of US treasury bonds. Dumping US bonds could push US interest rates up and disrupt the economy. China may also consider an out-and-out US boycott. The US was the ninth most popular destination for Chinese tourists during this year, down from fifth last year. So the US needs to be very careful if it wants to attract affluent travelers.

Meanwhile, the US has ratcheted up pressure on Chinese telecom equipment giant Huawei and Chinese importers cancelled a major order of US pork.

 
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