China Meets Trump’s Tariff Hardball With Pledge to Endure

(Bloomberg) -- After a weekend of claims by U.S. President Donald Trump that he has the upper hand in the trade war with China, Beijing responded through state media by saying the nation is ready to endure the economic fallout.

China is prepared for a “protracted war” and doesn't fear sacrificing short-term economic interests, according to an editorial in the nationalist Global Times on Sunday evening. “Considering the unreasonable U.S. demands, a trade war is an act that aims to crush China's economic sovereignty, trying to force China to be a U.S. economic vassal.”

The exchange of barbs between the two sides follows the release late Friday in Beijing of a tariff list designed to retaliate against the U.S. threat to impose new duties on $200 billion of Chinese imports. The worsening of the tension comes amid a slowing of China's economy, declines in the currency and a bear market in stocks.

Trump told an audience of diehard supporters on Saturday that playing hardball on trade is “my thing.”

“We have really rebuilt China, and it's time that we rebuild our own country now,” Trump said Saturday during about an hour of free-wheeling remarks at a rally outside Columbus, Ohio. China's market declines weaken that nation's bargaining power in the escalating trade war, he added.

Trump continued his focus on tariffs Sunday morning, tweeting that the duties are working “big time” and that imported goods should be taxed or made in the U.S. He also suggested duties will allow paying down “large amounts of the $21 trillion in debt that has been accumulated” while reducing taxes for Americans.

“Every country on earth wants to take wealth out of the U.S., always to our detriment,” Trump tweeted, “I say, as they come, tax them.”

The yuan pared some gains following a rally triggered by a surprise China central bank move to make it more expensive to bet against the currency. China stepped in Friday to try to cushion the yuan after a record string of weekly losses saw the currency closing in on the key milestone of 7 per dollar.

Yuan Gains After PBOC Move, Asian Stocks Climb: Markets Wrap

China's current account returned to a surplus in the second quarter after a surprise deficit in the first three months of the year. “Policy makers will pay more attention on the changes in current account as it approaches a balance near zero, signaling less room for currency appreciation,” according to Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Bank Ltd. in Hong Kong.

Duties ranging from 5 percent to 25 percent will be levied on 5,207 kinds of imports from America if the U.S. delivers its proposed taxes on another $200 billion of Chinese goods, the Ministry of Finance said in a statement on its website late Friday.

Including the new tariffs already in force, China has now identified almost 6,000 items for higher import taxes, including liquid natural gas, soybeans, and other products. That covers more than two-thirds of the value of China's imports from the U.S., but it excludes products such as big aeroplanes and some computer chips, which China struggles to produce domestically.

“Chinese buyers don't have any bargaining power on these products. Even if the trade war escalates, China would rather lift the 25 percent tariffs to 50 percent, instead of imposing any tariffs on integrated circuits or big airplanes,” according to Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “What's the point of imposing tariffs? Chinese companies would have to pay all the additional costs.”

In addition, more than 500 goods on the lists aren't traded at all, and China imported less than a million dollars worth of about another 2,000 items, according to a Bloomberg analysis of 2016 trade flows. Hu says one speculation about these phantom items is that the government is bluffing to create a longer list.

President Trump last week ordered officials to consider imposing a 25 percent tax on $200 billion worth of imported Chinese goods, up from an initial 10 percent rate. The move was intended to bring China back to the negotiating table for talks over U.S. demands for structural changes to the Chinese economy and a cut in the bilateral trade deficit, but China's response suggests that tactic hasn't worked.

“In the face of the bullying of the Donald Trump administration, Beijing must remain sober-minded and never let emotion override reason when deciding how to respond,” according to an editorial by the China Daily, the flagship state-run English newspaper. “Given China's huge market, its systemic advantage of being able to concentrate resources on big projects, its people's tenacity in enduring hardships and its steadiness in implementing reform and opening-up policies, the country can survive a trade war.”

--With assistance from Xiaoqing Pi and Natalie Lung.

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Chris Bourke

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With assistance from Editorial Board