China's US dollar reserves could be used as a weapon in the trade war with America. Photo: iStock

As the trade row between the United States and China heats up, a previously dovish senior Chinese government economist has taken the gloves off, quoting Mao Zedong in an interview with SpiegelOnline: “You lead your war, and I lead mine.”

Mei Xinyu, a member of the Commerce Ministry’s Chinese Academy of World Trade and Economic Cooperation, warned that the two economic giants might be on the brink of a “financial war” with a potential outcome that is “beyond our imagination.”

He told the German website that the dispute over tariffs with the US, which he provocatively dismissed as a country that is going “downhill” and has “lost its fighting spirit,” had undeniably escalated into a full-blown trade war.

“We’ve been in a trade war for about two months. US President Donald Trump has imposed punitive tariffs on Chinese imports worth $50 billion and threatens to expand by $200 billion. If this is not a trade war, what else?”

Asked about US Secretary of State Mike Pompeo’s allegations that Beijing is pursuing a “predatory” economic policy, that China’s dealings with intellectual property are “theft of unprecedented proportions” and that its promise to open markets is a “joke,” Mei said, “It shows that the US is no longer on the way up. It goes downhill. An economy that is on the upswing would not have time to comment on others.”

‘The US is no longer on the way up. It goes downhill. An economy that is on the upswing would not have time to comment on others’

On the subject of China subsidizing its own companies, making it difficult for foreign companies to enter the market, and forcing them to transfer technology, Mei said, “I’m sorry for the Americans. Because their reaction shows [that] America has lost its fighting spirit. Every country has the right to promote its own development and wonder what it can learn from other countries.”

Asked about what weapons China will deploy in the conflict, Mei told SpiegelOnline, “China has responded to the first installment of US punitive tariffs by imposing countervailing duties in comparable product categories. Should the US now impose tariffs on imports of another 200 billion, China will extend the conflict to other fields.”

He warned that China could sell its US government bonds (it owns more than $1 trillion worth) and dollar reserves, even if doing so is economically painful.

He said, “The US and China are the largest economies and largest financial markets in the world. But in the US, the financial sector plays a much bigger role than in China. In that sense, the US is vulnerable here, so of course, that’s an option.”

He added, “In good times, our competition is that we try to grow faster than the US. But when times get worse, it’s about who loses faster. That would be a financial war – and what such a financial war between the two largest economies looks like is probably beyond our imagination.”

Asked what role the size of the Chinese economy plays in the trade war with the US, Mei said, “When we had our first trade conflicts with the US in the 1990s, the US economy was 15 times bigger than the Chinese. Today it is 1.5 times bigger. Not that we wanted a trade war back then – we could not afford it. Today we can do that.”

Mei said China was in a much stronger position now that it has reduced its dependence on exports.

“The export share of our gross domestic product has dropped to below 20% since the peak of the early 1990s. At the same time, the share of domestic consumption has grown strongly. This strengthens our position.”

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