China’s response to the trade war: from tic-for-tac tactics to domestic growth, external alliances and technological upgrade

• In the run-up to the Trump-Xi Summit under the aegis of the G20, it seems increasingly clear that even if an agreement were to be reached, it would be more of a truce than a final settlement of the trade war. The reason is simple: the US and China have become strategic competitors and will continue to be so for the foreseeable future, which does not justify any long-term settlement of disputes.
• China’s recognition of the much more structural features of the US-led trade war has also brought about a drastic change in China’s response to the US. From the tic-for-tac tactics, based on retaliatory measures on trade, China has changed its strategy to focus on three dimensions: sustaining long term domestic growth, finding alliances externally and accelerating China’s technology capacity.
• Internally, China has pushed for more aggressive monetary, and to less extent fiscal, policies to support investors’ confidence. However, the tools so far have not been effective as the liquidity seems to have been trapped in the interbank market. We expect more stimulus measure to follow in the upcoming months. This may lead to even weaker RMB albeit the PBoC’s intention to stabilize exchange rate.
• Externally, China tries to build more alliance outside of the US, especially in the EU aside from the existing “16+1” platform China has built before.
• Finally, self-reliance needs to be achieved by upgrading China’s technology capacity. The most obvious way to do so is to buy companies abroad from the high-end spectrum of producers. The increasingly wary attitude of the U.S administration (along with other developed countries like Japan or Korea) makes the EU an easier target although protection against China’s M&A is also on the rise in the EU.
• In a nutshell, China’s realization of the structural nature of its competition with the US has led the Chinese authorities to a more strategic, rather than tactic, response. More specifically, from the tic-for-tac tactics, China is now focused on pushing growth domestically and finding alliances externally while it accelerates its technological self-reliance through acquisitions of technology, especially in Europe.

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