While the U.S. has made China the primary target of its erratic trade war, it’s increasingly clear that China has the upper hand in a prolonged conflict, according to a new report from CIBC World Markets.
When the U.S. first launched its tariff fusillade against China, it boasted that it was China that needed a trade deal with the U.S., not the other way around. However, it was the U.S. that blinked first and reached out to China to kickstart negotiations.
“[President Xi Jinping] is playing hard to get for a good reason,” the report said — China may well have the stronger hand when it comes to trade negotiations, for a variety of reasons.
For one, while a trade disruption “will badly hurt the already weak Chinese economy … it’s also clear that the tolerance to pain in autocratic China is notably higher than in the (still) democratic U.S.,” the report noted.
Moreover, China has diversified its exports away from the U.S. in recent years, reducing its dependence on that relationship.
“China’s exports to the U.S. are now around 2.5% of GDP — very close to the share of U.S. exports to Canada and Mexico. And if the U.S. feels that its low exposure to Mexico and Canada means some immunity from tariffs, China can claim the same re the U.S.,” the report said.
Additionally, China has other strategic advantages, including its dominance in the production of rare earth minerals, which are essential to the manufacture of numerous high-tech products. China accounts for roughly 60%–70% of global production and 80%–90% of the world’s refining capacity in rare earths, it noted.
“An even larger vulnerability is in the field of pharmaceuticals,” the report said, with the U.S. relying on foreign suppliers for about 75% of its essential drugs, such as antibiotics.
“China’s dominance is mind-boggling,” the report said, noting that it accounts for almost 90% of the world’s supply of antibiotic ingredients, “so any disruption can be very problematic.”
Finally, China has also expanded its toolkit of retaliatory measures beyond basic trade tactics.
“Today, China is ready to deploy an arsenal of legal and regulatory tools, often mirroring U.S. export control rules, sanctions and investment restrictions aimed at imposing targeted pain on companies and countries it sees as acting against its interests,” it said. “All indications are that if needed, China will rely more heavily on that newly oiled retaliatory machine.”
Against that backdrop, it’s become increasingly clear that China may have the high ground in its trade talks with the U.S.
“China was and is Trump’s main target, but the significant pain that Beijing can potentially unleash on the U.S. means that come July 9 (the end of the 90-day tariff pause), the administration’s tone towards China might be much gentler,” it said.