- Unlike Canada and Mexico, China hasn’t yet announced retaliatory tariffs after Trump unveiled his long-awaited levies on Saturday. Beijing may not have to go that route as it has a “trick up its sleeve” in the form of currency devaluation, a former IMF adviser said.
President Donald Trump’s tariffs were quickly met with vows from Mexico and Canada to retaliate in kind, but China has been more vague with its response and may not have to follow suit.
Beginning just after midnight on Tuesday, Mexico and Canada face 25% tariffs, though Canadian energy will be hit with a 10% levy. Chinese imports will carry a 10% duty.
Canadian Prime Minister Justin Trudeau has announced a 25% tariff on $105 billion of US goods, and Mexican President Claudia Sheinbaum said her country would retaliate with tariffs. By contrast, China said it would file a complaint with the World Trade Organization and take “corresponding countermeasures.”
“Now faced with 10% tariffs, Beijing has a trick up its sleeve: currency devaluation,” Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center and a former adviser to the International Monetary Fund, wrote on Saturday.
“Watch to see how the yuan moves this week. It’s likely that most of this increase can be absorbed through exchange rates—and that’s one reason why Beijing’s rhetoric will be sharp but its economic retaliation will potentially be more muted.”
China’s central bank establishes a reference rate for the yuan that limits its upside and downside by 2%. Last month, the yuan hit the key milestone of 7.3 to the US dollar, potentially signaling that Beijing is willing to let the currency devalue to boost exports.
Amid China’s economy slowdown, President Xi Jinping has focused on stimulating more production, which has flooded global markets with cheap exports as domestic demand remains weak.
That’s stirred a backlash from trading partners around the world, not just from the US, thought Trump on Saturday demanded China do more to curb fentanyl.
Still, Chinese leaders must be “breathing a sigh of relief” over the fact that Canada and Mexico received must steeper tariffs, the Atlantic Council’s Lipsky said, though the 10% is on top of earlier tariffs Trump imposed during his first term that President Joe Biden kept in place.
A separate analysis from the Council on Foreign Relations also pointed out that China is less dependent on trade—and with the US—compared with Canada and Mexico.
In fact, imports and exports account for only about 37% of China’s GDP versus more than 60% in the early 2000s. Meanwhile, China has ramped up trade with other economies, like the European Union, Mexico, and Vietnam. Its share of global trade has grown 4% since 2016, while the US’s has shrunk.
“Combined, these factors will lessen the shock of an additional 10% tariff on Chinese exports to the United States,” the analysis said.