The trade war is back on. This week, China vowed to raise tariffs on $60 billion of US goods, retaliating against tariffs the US government imposed on May 10. The White House is now threatening to levy 25% duties on all remaining Chinese goods the US imports.

With both sides girding for battle, it’s worth taking stock of their respective weaponry. The US buys huge quantities of stuff from China, importing a record $540 billion worth of goods and services in 2018, despite the imposition of tariffs that year. That limits US president Donald Trump to the fairly straightforward response of simply hiking tariff levels on Chinese goods higher and higher, but risking a backlash at home from consumers and businesses.

China’s options are a bit more complicated. China imports a relatively small volume of branded goods from the US, but is still a huge market for US agricultural products and other commodities. Beijing does, however, have other, less conventional weapons at its disposal that Trump does not. Let’s review some.

Fire up the China propaganda machine

The Chinese Communist Party boasts the firepower of the planet’s biggest propaganda machine, as Quartz described last year. Authorities can easily whip up anti-US sentiment through the state-run news broadcasts and newspapers that are the main source of information for most Chinese citizens, inspiring mass boycotts of US imports and American brands.

There are signs the propaganda apparatus is already swinging into action.

Chinese state media were mysteriously quiet when Trump threatened to raise tariffs again on May 5, but since then they’ve come out swinging, wielding 5,000 years of Chinese history as a weapon to prove the nation can weather any dispute with the US. In the trade war, “the US side fights because of greed and arrogance … China is fighting back to protect its legitimate rights and interests,” declared an editorial in the official Xinhua News Agency and the Communist Party paper the People’s Daily May 13. “This is a real people’s war,” it concluded.

The purposefully belligerent Global Times, also backed by Beijing, went further, mocking the White House’s “tall tales” on trade, and calling Trump an irrational gambler.

It is rare for Beijing to mobilize Chinese citizens in global conflicts and trade issues, notes Jorge Guajardo, former Mexican ambassador to China and a consultant on trade in DC. “That they are doing so now means that they are gearing up for the long term,” and makes it less likely that Chinese president Xi Jinping will make concessions to the US, he said in an interview. “The sole fact that they are bringing it to the attention of domestic audiences means that they are at DEFCON 5.”

What a “People’s War” looks like

Judging from recent history, when Beijing tell China’s 1.4 billion citizens it’s time for a “people’s war” against another country, the results can quickly show up in the bottom line of that country’s companies.

Japan has been a frequent target. In 2012, the Chinese government responded to a territorial spat over the Senkaku/Diaoyu islands by igniting anti-Japanese propaganda. Sales of Japanese-branded cars plummeted by about half within weeks, and hadn’t fully recovered a year later.

The US tech hardware sector, one of the few manufacturing sectors where the US remains the global leader, appears to be the most exposed to China. In an April report, Morgan Stanley listed Qualcomm, Broadcom, Texas Instruments, and Micron Technology as the US companies with the highest percentage of their sales in China.

US consumer brands have been investing in China for future growth, but don’t derive the bulk of their revenues from China yet. General Motors, for example, sold more cars in China last year than it did in the US, but its profits are still mostly from North America. That doesn’t mean that a China boycott won’t hurt, of course.

Apple and Starbucks are among the S&P 500’s biggest companies outside the tech sector that derive 20% of their sales from China:

It’s not just the technology and consumer sectors. Beijing can pressure state-owned enterprises—which are the biggest importers of energy and agricultural commodities—to cut their purchases of American goods. This, for example, is what likely pushed down China’s soybean imports from the US to zero in November—and, conversely, what allowed them to rebound after trade tensions relaxed late last year.

Like soybeans, many of the imports that the government might target through state-owned companies could impact states Trump needs to win in 2020, including the liquified natural gas export hub of Texas, making it a particularly potent weapon.

Beyond boycotts

American companies have spent tens of billions of dollars in China in recent years, on everything from building out regional headquarters to massive advertising campaigns to opening thousands of new stores. Even during the trade upheaval of 2018, US investment in China doubled.

Beyond boycotts, Beijing can make things hard (and expensive) for American-headquartered companies operating in China with bureaucratic foot-dragging, exercising its control over business licenses, and initiating regulatory crackdowns.

This, too, has precedent. After South Korea’s Lotte Group, a massive conglomerate with a wide range of consumer businesses, allowed the US to install an anti-missile system on one of its golf courses near Seoul, Beijing fined the company in China over its advertising practices, and cracked down on Lotte supermarkets in China for reasons like fire-code violations. Chinese companies withdrew their products from its stores, Chinese protesters showed up outside some Lotte businesses, and hackers believed to be from China blocked Lotte’s Chinese website.

After investing $9.6 billion in China, Lotte said in March it was exiting the country amid losses from the boycott.

However, harassing foreign companies risk driving them out, warns Wei Yao, an economist at Société Générale. Beijing is already worried that more foreign-owned manufacturing firms crucial to boosting its long-term productivity growth and technological advancement will decamp for Vietnam and other more peaceful places.

The “most fearful aspect is that trade tensions could accelerate the offshoring of manufacturing companies or reduce foreign direct investment into China,” said Yao in a recent note. “These could do long-lasting damage to productivity.”

Clampdown on tourism to the US

Chinese visitors are vital to the US tourism industry, and spend more money vacationing in America than people from any other country in the world:

Overall, tourism contributed to sales worth 7.8% of the US’s GDP in 2018, according to the World Travel and Tourism Council, and supported 15.6 million jobs directly and indirectly. Beijing’s ability to use its massive tourist spending power as a weapon isn’t just a hypothetical threat. When Beijing targeted Korea over its accommodation of the US’s anti-missile system in 2017, it instructed Chinese tourism operators not to sell travel packages to South Korea. Chinese tourists plunged more than 60% over the next six months.

In 2018, after growing by an average of more than 20% a year for the past decade, the number of Chinese travelers to the US was flat, the council reported, citing “trade tensions” for the decline.

Sell off Treasuries

Then there’s the perennial threat of the “nuclear option“—the notion that China will sell off its $1.1 trillion in US Treasury bonds. This is implausible for the simple reason that it’s hard to manipulate the Treasury market, Yao says.

If China’s central bank sells too few, nothing will happen, says Yao. If it sells too much, yields will rise and hurt the US as intended by pushing up corporate borrowing costs. But it could backfire, too. Higher US yields will suck foreign capital out of China, pressuring the yuan to weaken, said Yao in an interview. And while a little of that rebalancing would likely be welcome—it would help offset some of the loss of Chinese export competitiveness thanks to US tariffs—depreciation can quickly spiral out of control of the central bank.

Devalue the yuan

If the nuclear option of bond sales is an empty threat, China’s real atomic artillery might be yuan devaluation. The exchange rate is one of China’s “most powerful weapons” in the trade war with the US, says Chen Long, economist at Gavekal Dragonomics, a Hong Kong-based financial services firm. If the yuan weakened between 3% and 5%, says Chen, “fears would grow that the stuttering Chinese economy was exporting deflation to the rest of the world, and global markets—and the US stock market in particular—would likely take fright, just as they did following China’s devaluation in the second half of 2015.”

Of course, a market-driven depreciation could have the same effect. In the last year, every time trade war tensions tighten, the yuan loses value against the dollar. It’s since stabilized, likely thanks in part to careful management by the authorities.

But fears about a slump in Chinese exports—not to mention a slowing economy that might result—are already putting pressure on the yuan to weaken. The central bank intervened in foreign-exchange markets this week to offset depreciation. But if things deteriorate, a sharper drop is likely, says Freya Beamish, economist at Pantheon Macroeconomics, a UK research firm.

“[I]f it becomes clear that the two sides are moving further apart, markets seem likely to do the bulk of China’s retaliation for it, by sharply weakening the [yuan],” Beamish wrote in a note yesterday. “China will lean against that depreciation, but it won’t, and probably can’t, keep the currency stable in that context.”

And indeed, Trump is so sensitive to declines in the US stock market, that investors now talk about a “Trump put.” That is, when the stock market drops enough—like it did in the final months of 2018—the president’s commitment to sign a trade deal with China suddenly revives.

While it’s not clear how far shares must fall before Trump re-engages in deal-making, but as Chen notes, the president does seem to see fluctuations in the S&P 500 and/or the Dow Jones Industrial Average as real-time measures of personal approval. And the market seems unduly sensitive not just to the yuan, but also to more general bad China news. (For example, the markets yawned last week after Trump blasted the Chinese side for ruining the negotiations and raised tariff levels. But the Chinese announcement of much tinier duties caused market panic on Monday morning.)

A weaker yuan could cause more problems for the US, of course, than just stock price turbulence. Notably, China’s outsize role in Asian supply chains means a weakening of the yuan will likely prompt its neighbors to let their currencies fall against the dollar too, as Brad Setser, economist at the Council on Foreign Relations, observes.

Dollar strength between 2014 and 2015 proved brutal for factories in the US, and is likely in part to blame for the stalling of US manufacturing exports since 2014 (paywall). The sector is already in somewhat shaky state; last month, the ISM manufacturing index hit its lowest level since October 2016. And workers in manufacturing are as an important a part of Trump’s base as soybean farmers.

China is still in a tough spot

Clearly, China has options. But will they use them?

It certainly seems like China’s propagandists are already starting to rile up nationalist ire. That sort of thing is ugly, hard to control, and can definitely hurt a handful of companies. China’s leaders can act as if they’re standing up to American imperialists—something even more important than usual given that it’s the the 70th anniversary of the nation’s founding—while not putting the negotiations at stake.

Then again, these things can easily backfire. As Andrew Polk, economist at Trivium China, a Beijing-based research firm, points out, “The last thing they want to do is ratchet up tension (remember they still want this trade war to go away) or to make US companies start pulling out.”

Any and all of these retaliatory measures could weigh on Chinese growth when China can least afford it. In the past, when the economy was growing faster, the government might have been able to risk inflicting self-harm to improve its bargaining position with the US, knowing that it had the domestic policy tools to prop up the economy if it happened to slip.

Now, though, the economy is already slipping. Companies are already pulling back investment, something trade tensions will only exacerbate.

Worse still, China’s leaders have built themselves into a nasty dilemma: they have the political priority of keeping headline growth aloft, while also trying to shrink the $30-plus-trillion debt that they’ve racked up in the process. If both the US and China further escalate a trade war, China could find its economy seriously out of balance.