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Selling bonds, dropping bombs: How China could respond to Trump's Taiwan talk
December 13, 2016 / 8:01 AM / 10 months ago

Selling bonds, dropping bombs: How China could respond to Trump's Taiwan talk

(Reuters) - U.S. President-elect Donald Trump has upset China by speaking to the president of self-ruled Taiwan and saying the United States did not necessarily have to be bound by its long-standing position that Taiwan is part of China.

U.S. President-elect Donald Trump looks towards the media as he arrives at a costume party at the home of hedge fund billionaire and campaign donor Robert Mercer in Head of the Harbor, New York, U.S., December 3, 2016. REUTERS/Mark Kauzlarich

Taiwan is arguably the most sensitive part of the China-U.S. relationship, and China has never renounced the use of force to bring the island it regards as a renegade province under its control.

Here are 10 things China could do to retaliate against the Trump administration if he continues to push the Taiwan issue.

- Cutting ties with Washington

If Trump offers any type of formal diplomatic recognition to Taiwan, China would likely severe its own diplomatic ties with the United States, in what would be an extreme and highly disruptive move. China refuses to have diplomatic ties with any nation that also has diplomatic relations with Taiwan. Cutting ties with Washington would likely be a final resort by Beijing.

- War games near Taiwan

China could signal its resolve over Taiwan by holding war games close to the island, for example by effectively closing off air and shipping routes by lobbing missiles into waters close to Taiwan’s densely populated western coast, a move that would deeply unsettle the region. Chinese state media have even suggested military means may now be needed to settle the Taiwan issue once and for all.

- South China Sea face-off

China has been angered by U.S. freedom-of-navigation patrols in the disputed South China Sea, where China has been reclaiming land on the islands and reefs it occupies and building airfields and other facilities.

So far, China has responded to U.S. patrols by shadowing them and issuing verbal warnings. China may take more forceful measures to future U.S. patrols. In 2001, a U.S. spy plane was forced to land in China after colliding with a Chinese fighter over the South China Sea.

Beijing would be reluctant to see a military clash as China needs a peaceful South China Sea to keep its trade lanes open.

- Sanctioning U.S. companies involved in arms sales to Taiwan

In 2010, Beijing reacted with fury to the Obama administration plans for a new round of weapons sales to Taiwan, threatening to sanction the U.S. companies involved. The threats ultimately did not come to fruition.

- Cut its holdings of U.S. Treasuries

China is America’s biggest creditor, holding $1.16 trillion dollars worth of U.S. Treasuries as of September.

If Beijing decided to suddenly liquidate a big chunk of its holdings, it could do severe damage to U.S. debt markets, forcing the United States to scramble for funds. A big retaliatory sell-off of U.S. government debt by China would not be a precision strike, though. Such a move would roil global markets and likely even rebound on China’s own, making this, in some analysts’ minds, a worst case scenario short of war.

- Ease up pressure on North Korea

The United States has repeatedly urged China to “get tough” on nuclear-armed North Korea, and while China is Pyongyang’s most important economic and diplomatic backer, it has also been infuriated by its nuclear and missile tests.

While China could ease up on United Nations sanctions on North Korea to express displeasure with the United States, it could boomerang and end up giving succour to Pyongyang and its missile and nuclear programmes, something Beijing does not want.

- Pressure on U.S. companies

Indirect levers exist for hitting companies via state-run media and consumer organisations, or just stoking popular sentiment.

After China lost an international ruling earlier this year over its claims in the South China Sea, several U.S. brands became targets for short-lived anti-U.S. protests and boycott calls, including Apple Inc and KFC-parent Yum Brands Inc.

U.S. companies could also face higher tariffs as well as outright substitution of their products, such as aircraft, in favour of Chinese or other foreign competitors.

China might throw bureaucratic obstacles in the way of U.S. firms in the country. A senior executive in China at a large American consumer goods firm told Reuters any strike back against U.S. firms would likely involve local authorities clogging up approval processes or slowing down paperwork, rather than a loud and brash response.

- Alternative agricultural supplies

China, the world’s top consumer of commodities from copper, to corn to crude oil, could hit the United States if it sought alternative supplies of agricultural products.

Volumes of U.S. agricultural imports from corn to soybeans into China hit a record 47.9 million tonnes in 2015.

- Kill momentum for market access

A Trump departure from a one China policy would almost certainly undermine bilateral investment treaty talks. Trump may not be a fan of those to begin with, but greater market access under a Bilateral Investment Treaty tops the U.S. business community’s wish list for China.

The U.S.-China BIT had long been viewed within the broader foreign business community to be the vanguard of liberalizing investment deals with China. If those talks stall, it’s possible China will promote investment treaty talks with Europe.

- Undermining the consensus on cyber issues

If Trump goes back on One China, it’s possible there could be a Chinese reversal on cyber security commitments made between Xi and Obama in 2015, which U.S. government advisers and security experts have credited with reducing China-led cyber-espionage.

Reporting by Ben Blanchard, Michael Martina, John Ruwitch, Jo Mason and Adam Jourdan; Editing by Lincoln Feast

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