China vows immediate retaliation if US proceeds with new tariffs

“The Chinese side will have to implement necessary counter-measures,” the State Council Tariff Committee said in a short statement on Thursday. The body did not elaborate on what steps it is going to take.

European stocks turned red after Beijing’s threat with Britain’s FTSE 100 Index losing 1.1 percent and the Stoxx Europe 600 down 0.8 percent. Germany’s DAX weakened 1.23 percent, while France’s CAC 40 fell nearly 1 percent.

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Meanwhile, American markets also indicated deeper losses less than 24 hours after the Dow Jones Industrial Average suffered the worst day of the year on Wednesday. The massive selloff was triggered by a recession signal from the bond market, called inverted yield curve, when short-term bond rates are higher than long-term ones (in this case 2-year treasury bonds were higher than 10-year bonds).

On Thursday, Dow futures fell more than 160 points and S&P 500 futures dropped 0.7 percent while Nasdaq futures were down around 1.2 percent.

Washington has backtracked on President Trump’s threat to impose the latest tariffs on September 1. On Tuesday, the Office of the United States Trade Representative (USTR) announced that it is postponing additional tariffs on some Chinese imports, including toys and certain electronics, until December 15.

Some analysts have characterized the tariff delay as Trump having blinked in the trade war with China after the negative impact on the US markets. Trump justified the delay with the Christmas season to avoid the impact on American customers. The list of items that won’t targeted until mid-December includes Christmas festivities, Christmas tree lights and ornaments among others.

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While Beijing did not disclose how it will retaliate against the new tariffs, China has reportedly halted purchases of US agricultural goods. When the levies come in force, China has several trump cards it can play such as using its vast foreign exchange reserves, that include $1.1 trillion in US Treasury securities, or the export of rare earth elements.

China’s $3.1 in trillion foreign exchange reserves can further allow Beijing to stay afloat and pay for its massive imports despite the yuan having fallen below the key level of 7 against the greenback.

While dumping US Treasuries is clearly a ‘nuclear option’ against the trade war rival, the move could also backfire on China. But Beijing has another, and much less painful, option to hit Washington, rare earths, which are necessary for producing various tech items, from batteries to military equipment. China accounts for more than 80 percent of the global supply of rare earths; most US exports of the vital elements come from China.

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