The possibility of a trade war between the United States and China loomed large over the horizon after the U.S. electoral college confirmed Donald Trump's presidency on Monday. China is expected to take a series of defensive and retaliatory measures to counter any U.S. moves to restrict the role of Chinese goods and currency movements in the American economy, as Trump has promised to do.
"In the event of a trade war with the United States, China’s response would go well beyond tariff increases," said Mark Williams, Chief Asia Economist for Capital Economics. "U.S. companies would find their products and operations in China subject to tighter regulation that hampered their capacity to do business there."
"U.S. exports of cars and aircraft would be in the firing line," he said. China might also subject U.S. companies to tighter regulation that hampers their capacity to do business. Beijing may also encourage its exporters by offering tax rebates to overcome any reduction in export demand in the U.S., Williams said.
In informal discussions, Chinese officials say there is a lot of uncertainty about how the new U.S. president will handle relations with China, and preparations are being made to deal with varied scenarios.
WATCH: China Assesses Future Relations With US Under Trump
Mixing politics and economy
In the past, China has responded with trade restrictions on several countries for political reasons. For example, Norway for awarding the Nobel Peace Prize to a dissident writer or giving a visa to Tibet's Dalai Lama. Trump's recent tweet questioning the One-China policy concerning Taiwan has already caused a stir in the Chinese Communist Party.
Talking about investments by China's companies in the United States, Trump recently said, "They haven't played by the rules, and I know it is about time they are going to start". Some members of the U.S. Congress have also called for a review of the policies concerning Chinese investments.
This elicited a strong response from Wang Jianlin, China's richest man, who acquired movie studios and other properties in the United States. He says restricting Chinese companies would hurt American jobs instead of helping the country. Wang said he has invested $10 billion and employs 20,000 people in the United States, who will have "nothing to eat" if restrictions are placed on Chinese businesses.
During the election campaign, Trump also promised to declare China a currency manipulator. The Chinese yuan has considerably devalued, owing to market pressure. Analysts are divided on whether he would still go ahead with his threat after the recent devaluation.
"I am sure that the U.S. under Trump will focus unrelentingly on the exchange rate," Kerry Brown, Professor of Chinese Studies and Director of the Lau China Institute at King's College, London. "It is a huge anomaly in the 21st century that the world's second biggest economy does not have a market set exchange rate ... In that sense, China is really a freeloader, in the eyes of its American opponents, and they will want to see a quick move to rebalance the Chinese currency, and do something about this anomaly".
US business concerns
More than 1,500 Chinese companies established operations employing 80,000 workers in the United States, according to the American Chamber of Commerce in China.
U.S. businesses operating in China have their own fears of moves that cause instability to trade and investment relationships.
"Isolating or penalizing China will not serve America’s interests, and only with engagement and commerce will the two largest economies of the world make progress to reach a consensus on contentious issues such as national and regional security, market access and industrial policies, internet censorship, cybersecurity, and terrorism," James Zimmerman, chairman of AmCham, China told VOA.
"We do indeed recognize that talking tough is a lot easier than thinking tough and making tough decisions, which is what presidents actually have to do," he said adding, "The chamber has long supported maintaining stability in the region, and we expect the new U.S. administration to respect the status quo".
Who suffers most in the case of a trade war? China would be the first to be hit, and more severely because the United States is a major market for Chinese goods. America buys three times more than what it sells to China.
But Beijing can take solace in the fact that Trump would end up hurting the American consumer if he imposed a 45 percent duty on Chinese goods, as he has promised to do.The most important items in the Chinese export basket are mobile phones, tablets/laptops and network equipment. A higher tax on these goods would ultimately be paid by U.S. consumers, Williams of Capital Economics said.
Williams does not see the incoming President slapping the 45 percent tax on Chinese goods as he had promised, but hostilities can break out anytime, he warns.