BREAKINGVIEWS-China treads a fine line with its trade warning

By Ka Sing Chan

HONG KONG, July 10 (Reuters Breakingviews) - Beijing faces some tough choices when it comes to hitting back at Donald Trump's trade deals. The People's Republic has vowed to retaliate against nations that heed the U.S. president's desire to cut the world's second-largest economy out of supply chains. Yet wielding a stick at its Asian trading partners could backfire, and Beijing may find offering them carrots hard to reconcile with its other strategic priorities.

China fears a "grand encirclement" which U.S. Treasury Secretary Scott Bessent describes as Washington striking deals with allies to isolate China. Yet this is becoming a reality. Earlier this month, Trump said he'd struck a deal with Vietnam to impose 20% levies on its U.S. exports alongside a tariff twice that level for trans-shipments from third countries through the country. It bodes ill for Chinese manufacturers that ship goods or parts to the Southeast Asian nation.

It is risky, though, for Beijing to respond aggressively to Vietnam and other Southeast Asian countries that follow this tariff template. In 2020, China imposed a raft of restrictions on exports from Australia after a diplomatic spat, only to see the country ship its wine, beef and lobsters to new markets and lessen the economy's trade dependence on China.

A safer option may be to offer more incentives. Last month, for instance, China said it will remove all tariffs on African exports. If Beijing also drops tariffs for Southeast Asia, that would be mostly symbolic given up to 90% of trade between the two partners is already tariff-free. But it could force Washington to change its approach: After meeting with the leaders of five African countries on Wednesday, Trump suggested they could be exempt from heightened U.S. reciprocal tariffs, adding "we treat Africa far better than China or anybody else".

China also could sweeten any proposal to its trading partners with infrastructure investments. At the sideline of the BRICS summit this week, Vietnamese officials called on its larger neighbour to prioritise railway cooperation, including projects like an $8.3 billion cross-border railroad.

How much Beijing can ultimately offer will depend on how much technology it is willing to transfer and the financial terms it seeks on investments. On both fronts there are signs that China is turning wary. In the meantime, countries caught between the two big economics powers may be more demanding. That ensures any retaliation for China will be a fraught exercise.

CONTEXT NEWS

"China firmly opposes any side striking a deal that sacrifices Chinese interests in exchange for tariff concessions," the official People's Daily said in a commentary published on July 8. "If such a situation arises, China will not accept it and will respond resolutely to protect its legitimate interests."

Vietnamese Prime Minister Pham Minh Chinh and China's Premier Li Qiang have agreed to boost trade and investment ties between the two countries during a meeting on the sidelines of the BRICS summit in Brazil, Vietnam's government said on July 8. The move came days after U.S. President Donald Trump announced a 20% tariff on all Vietnamese exports to the United States and a 40% levy on transshipments through Vietnam from third countries.