How China could hit the US where it hurts

China knows how to fight a trade war — and it has nearly 1.4 billion people to help in the effort.

When Beijing was upset over South Korea’s decision last year to deploy a U.S. missile system, it ratcheted up pressure using a tool ripped from the playbook of Western consumer activists: consumer boycotts.

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A series of government-encouraged boycotts sent sales of South Korean-made Hyundais in China plummeting by more than half, decreased Chinese tourist traffic by more than 60 percent and temporarily shut down 55 supermarkets in China run by the large Korean retailer Lotte.

As the Trump administration escalates its own trade dispute with China, the U.S. should expect much the same. Whether it’s encouraging Chinese consumers to give up their Big Macs, or making it harder for U.S. companies to open bank accounts, Beijing could rely on a number of tactics that have served it well in previous trade spats to turn up the heat on U.S. companies wanting a piece of China’s massive and lucrative market.

With a booming middle class and rising incomes, major U.S. companies have tied their future fortunes to the Chinese market. U.S. investment in China nearly doubled in the six years between 2009 and 2015 and represents a $550 billion market for U.S. goods and services.

“It could get quite ugly,” said Deborah Elms, founder of the Asian Trade Centre, a trade consultancy based in Singapore. “The nightmare scenario for firms might not even involve the government. What happens if Chinese consumers start boycotting American products? Stop drinking Starbucks? Wanting iPhones?”

“Between now and then, the government can easily ask for more careful customs inspections, look over documentation more slowly and enforce a myriad of rules on the books that are never used.”

China’s response to President Donald Trump’s tariff threats, now totaling more than $250 billion worth of Chinese goods, has so far been to threaten its own tariffs on U.S. imports of soybeans, aircraft and other products. But with far fewer U.S. imports to tax compared to what the U.S. could target, Beijing could exercise leverage in other ways — some of which could exact even greater pain on U.S. businesses.

The government could simply send the signal that it would like Chinese consumers to “stop shopping at KFC or stop buying American products whatever they might be,” said Bill Reinsch, a senior adviser at the Center for Strategic and International Studies.

That could put a crimp in Starbucks’ plans to double the 3,300 stores it already has in China, dent General Motors nearly 8 percent growth it reported in the country last quarter and derail any number of business plans by U.S. companies.

“The auto companies are particularly vulnerable, Ford and GM,” the industry official added, although any move against the American firms would also hurt their Chinese joint venture partners.

Chinese regulators also could make life difficult for such companies through anti-monopoly and counterintelligence laws that give them broad power over company operations. They could invalidate patents, or issue compulsory licenses allowing generic production of pharmaceuticals.

In a similar vein, China could try to interfere with U.S. company supply chains in order to disrupt shipments back to the United States, Reinsch said. In the case of Apple iPhones, that could involve inspecting Foxconn’s production facility and finding violations to justify shutting them down for three months, he said.

Beijing could also increase tax scrutiny on earnings of U.S. companies in China.

“China could basically block corporate remittances, or what they could also do is claim that U.S. firms are liable for taxes in China,” said Hosuk Lee-Makiyama, director of the European Center for International Political Economy, a think tank based in Brussels.

The government could also make barely noticeable changes that could have a major impact on day-to-day business.

“When you walk into a bank as an employee of a foreign or U.S. company, you could experience small regulatory changes, just in terms of how your own account is handled,” said Karla Klingner, CEO of Palindromes, Inc., a holding company that does business in the agriculture and logistics sectors in China.

Klingner said she has already seen evidence of small changes to the banking system from where she’s based in Shanghai.

The White House said it is prepared to see China retaliate beyond simply imposing tariffs, but offered only broad reassurances to U.S. companies on Tuesday, saying China had more to lose in a trade war.

“This president will have the back of Americans, whether they are here on a farm in Iowa or in Shanghai trying to operate there,” White House trade adviser Peter Navarro told reporters.

The U.S.-China Business Council, which represents American companies that do business in China, said the market is actually much larger than just $130 billion in goods exports that the Trump administration appears to be most focused on. U.S. companies also exported about $60 billion in services to China last year and $40 billion worth of goods to Hong Kong, much of which finds its way into China.

On top of that, American companies with operations in China sell hundreds of billions of dollars worth of goods and services to their Chinese customers. When all that is combined, China is about a $550 billion market for American firms, said Erin Ennis, senior vice president at the U.S.-China Business Council.

“There are a variety of ways that China could escalate,” Ennis said. “Licensing could begin to be slowed down. Companies could face higher levels of scrutiny for their products at ports coming in.”

China could also selectively open its market in certain areas for European Union or Japanese firms, but exclude the United States, she added.

But Ennis rejected the premise that China could “win” a trade war against the United States, because “I think everybody loses in that scenario.” A protracted trade bout between the world’s two biggest economies could shave a couple of percentage points off world economic growth, she said.

But some have cautioned that China may not want to be seen as going too far out of bounds in its response and flouting international trade rules. So far, Beijing has promised a strictly proportional response, warning Monday that it would adopt “comprehensive measures combining quantity and quality” in response to Trump’s latest tariff threat.

“I think China still has an interest in trying to be seen here as playing by the rules,” said Edward Alden, a senior fellow at the Council on Foreign Relations. “Proportional responses make it easier for you to argue that you have been operating within the spirit of World Trade Organization rules.”

U.S. companies are well aware that tariffs are only one way that China can retaliate, said Rufus Yerxa, a former U.S. trade official who now serves as president of the National Foreign Trade Council.

At a meeting Tuesday with NFTC’s board of directors — which includes companies like Walmart, Coca-Cola and Facebook — there was “significant concern” from a number of members that Beijing might lash out by “making life miserable for U.S. companies operating in China,” he said.

“What are the Chinese going to do when they retaliate? They’re going to say, we can easily take this U.S. company out here because we’ve got a Japanese company, or a Korean company, or a European company ready to come in and do the same kind of business here,” he said. “I think that’s a very credible scenario of how all of this plays out."

Megan Cassella contributed to this report.