China has new capabilities in its “arsenal” as it faces the prospect of another trade conflict with the US, now including “tools” capable of wreaking havoc on global trade and the economy, the Washington Post reports.

Six years after Donald Trump launched the first trade war with China, the US president-elect announced the deployment of anti-Beijing “hawks” in his administration, and threatened 60% tariffs on Chinese goods, a level that would decimate trade between the two countries. The dilemma for China now is that its large trade surplus with the US means any immediate countermeasures may have limited impact.

China has already shown a willingness to use some “asymmetric steps” against tariffs and trade restrictions by both the Trump and Biden administrations. If the new threats become policy, Beijing may have to “dig deeper” into its quiver, risking a conflict that could be even harder to contain.

“Mere trade wars and mutual countermeasures cannot adequately address future China-US disputes,” said Wang Wen, executive dean of Renmin University’s Chongyang Institute of Financial Studies.

The alternatives available to Beijing will not necessarily make China itself immune from the fallout, a concern for an economy already mired in a protracted housing crisis.

Selling US bonds

Probably China’s most devastating action would be to “dump” all or a large portion of its holdings of United States Treasuries – current holdings of about $734 billion. This would likely put upward pressure on US bond yields and cause turmoil in global financial markets.

Risk: China’s sudden dumping of US debt would cause bond prices to fall, reducing the value of its own reserves and reducing the value of foreign exchange reserves. It would also give US exporters a comparative boost due to the cheaper dollar.

Weakening of the yuan

A cheaper yuan would make Chinese exports more competitive, and help offset some of the impact of potential tariffs. During the first trade spat in 2018 and 2019, the yuan depreciated 11.5 percent against the dollar and offset about two-thirds of the tariff hike, according to an analysis by Morgan Stanley economists.

More than half of economists surveyed by Bloomberg after the U.S. election this month said Beijing may weaken the yuan in response to Trump’s potential tariffs. But economists differ widely on the extent of any such devaluation of the currency from the current exchange rate (around 7.2), with estimates ranging from 7.3 to 8 per dollar in 2025.

Risk: A weaker yuan would push up China’s record trade surplus and anger other partners, who may in turn resort to tariffs to address the imbalance in global trade. It can also fuel capital outflows and further discourage foreign investors from putting money into the country.

Restricting exports of precious earths

Last summer, Beijing restricted overseas sales of gallium and germanium, two metals vital to parts of the semiconductor, telecommunications and electric vehicle industries. The move was widely seen as an attempt by China to pressure the White House to remove its own controls.

Months later, China tightened export restrictions on certain types of toner as the US tightened rules to keep advanced chips out of China. Export controls continued with antimony, the latest to be added to the list.

Restrictions on these or other critical minerals, such as rare earths, commodities whose supply is dominated by China, could cut the US off from materials needed to make advanced technologies, at least in the short term. China has an ample list to choose from, being the leading producer of some 20 critical raw materials.

China’s dominance in the production and refining of many minerals gives it enormous influence in commodity markets. Its influence became apparent recently when a cut in tax credits for exporters sent aluminum prices soaring.

Risk: Trading partners stop seeing China as a reliable supplier and find alternative sources, accelerating the diversification of the supply chain away from Beijing.

Targeting US companies

Since the first trade war, Beijing has introduced new legislation, such as the “untrusted entity list” and the “anti-foreign sanctions law” to target companies or individuals it sees as harming China’s development. The prospect of seizing assets or blocking business transactions is a problem for companies such as Apple Inc., Tesla Inc. or Microsoft Corp., which see tens of billions of dollars in annual revenue flow into their coffers from China.

Risk: The US could easily retaliate by targeting Chinese companies, and government-sanctioned consumer boycotts could escalate and quickly spiral out of control.

Building alliances

China has already been courting America’s traditional allies, in part to soften the impact of deteriorating relations with its biggest trading partner. From declaring a desirable “new beginning” with Japan to a diplomatic meltdown with India, Chinese officials have sought to reduce diplomatic friction.

One of the most effective strategies Beijing can pursue in the next phase of a trade war would be “to build alliances in Eurasia, along with trade diplomacy, to convince American allies and partners that US policy is reckless and harmful for peace and prosperity,” wrote Matt Gertken, chief geopolitical strategist at BCA Research.

China’s tightening ties with Russia – and its friendship with Germany, Japan and Australia – show that this is already happening, he adds.

Risk: Countries will want to benefit from the US-China rivalry and will be reluctant to choose sides.