Illustrations: Peter C. Espina/GT

All parties suffer during the trade war, a game of "killing 1,000 enemies while losing 800 of our own." 

Many institutions have forecast the impact of increased tariffs on China's economic growth to be around 1 percentage point. While there is no need to panic, we should also prepare for worst-case scenarios. 

Everyone is concerned about how trade frictions will escalate. First will come escalated tariffs. In the early days of the trade war, American consumers shouldered much of the burden of tax increases. According to my estimates, the US may have suffered more at the beginning, but China's losses could be bigger later. But whatever happens, the US tariff increase has hurt American consumers and entrepreneurs. I believe there will be forces within the US to correct the wrongs of the Trump administration.

Second could be an investment war. As labor costs in China are rising, some foreign investors have already started to make adjustments. The trade war is speeding up the process - some foreign companies will pull out of China and Chinese companies may relocate overseas. However, in 2017, 3,500 foreign companies moved to South China's Guangdong Province, while only 2,200 withdrew. As long as the right policies are made, China can keep foreign investment and bring in more. 

Third is the US is trying to strangle China's high-tech industry by cutting off the global value chain. This began with ZTE and now Huawei is targeted. China has three options. One is to be self-dependent by decoupling from the global value chain. Another is to embrace the global value chain. The last is for Chinese companies to have their own backups in case the US cuts supply. 

The US is pushing China to the first option. Whether the second option will work for us, the ball is not in our court. But one positive factor is that China has already integrated with the global value chain. For the third option, some of China's high-tech firms can buy some time. 

The fourth scenario is a currency war. It is difficult to imagine what excuses the US could find to fight a currency war with China, but this could happen if Trump insists. If we don't intervene in the yuan and let it devalue, will the US again claim China is a currency manipulator? I think it is possible.

One problem confronting us presently is a slowdown of China's economic growth. China should adopt a more expansionary fiscal policy, complemented by loose monetary policy. Lower interest rates will put the yuan under rising depreciation pressure. The central bank has recently succeeded in stabilizing the yuan through the issuance of central bank bills in the offshore market, but what if the depreciation pressure continues?

The fifth scenario is the imposition of financial sanctions - arguably a powerful shot. The US can take advantage of the so-called long-arm jurisdiction to do whatever it wants. Once a company makes the US Specially Designated Nationals list, it will be kicked out of the US settlement system, meaning it can't use the US dollar, or its dollar assets might be impounded.

In this worst-case scenario, no one, including Chinese domestic businesses, would dare do business with a company targeted by such sanctions. We have to consider countermeasures. The so-called "blocking statute" is being deployed in Europe to nullify financial sanctions by the US. It might not be very effective, but it puts the rules in place. China should step up legislative efforts to protect the interests of Chinese enterprises.

The sixth scenario could be freezing China's overseas assets. This would certainly smack of a war. I will say the US is unlikely to go that far. Some entrepreneurs have concerns over petroleum embargoes. I think the US government understands there should be limits on playing with fire.

China, for its part, is also in need of an overhaul. In the short-term, we have no choice but to strike back as the US launches a trade war against China. But that needs to be reason-based and somehow restrained. Our goal is not to spread the flames of war but to extinguish them. 

My belief has always been that China needs to take an active role in negotiations, but can't accept ultimatums or sacrifice its sovereignty and dignity. Meanwhile, we have to implement an active fiscal policy and loose monetary policy to offset the adverse impact on China's economy.

Efforts are also required to press ahead with exchange rate reforms, improve management of cross-border capital flows, and improve the competitive environment for foreign investment. Instead of pushing foreign investment out of the country, we should try our best to retain it.

The country needs to revise its long-term strategy to focus more on the domestic market, as there is room to cut our dependence on overseas markets.

Additionally, China has to fine-tune its position on global supply chains. How should that be done? I reckon Huawei has already answered the question. The government needs to provide support to businesses and offer a cushion when suffering from its repositioning in global supply chains.

Last but not least, regardless of the Trump administration's provocations, China will surely adhere to reform and opening-up, its two-pronged unshakable faith.

The article was compiled based on a speech by Yu Yongding, an academician and senior research fellow of the Chinese Academy of Social Sciences, on CF40-NRI China-Japan Roundtable Seminar on Saturday. bizopinion@globaltimes.com.cn
Newspaper headline: US may escalate trade war in six ways and the nation needs to be prepared