China is unlikely to take trade diktats from President-elect Donald Trump and instead use ample tools from multilateral trade rules to financial resources to fight back, a leading economist said.
"We will see some sort of action and the risk is that even small actions—given that the China may push back very hard—could very quickly escalate into a tit-for-tat battle that erupts into a trade war," Cornell University economist Eswar Prasad told CNBC.
The notion that the U.S. needs to push back against unfair trade is something that is crucial for Trump to establish some credibility with some actions.Eswar PrasadCornell University economist
Already a verbal sparring war has carried on in the transition to Trump's inauguration on Jan. 20.
This week, Trump's pick of Robert Lighthizer, an official in the Reagan administration and harsh critic of China's trade practices, to be his chief trade negotiator, also caught Beijing's official notice in standard diplomatic language at a daily briefing in Beijing by the foreign ministry spokesman.
"As has been repeated multiple times and proven by facts, China-U.S. economic cooperation is in its essence for mutual benefit and win-win results," China's foreign ministry said in a statement released late Wednesday.
"After years of development, China and the U.S. have been closely bonded by converging interests. For issues that crop up in our economic relations, proper solutions shall be found on the basis of mutual respect and equal treatment. China and the U.S. should work together to ensure the sound and steady development of bilateral economic ties, as this serves the common interests of the two countries and peoples."
So what can China do if the diplomatic route doesn't pan out?
As the second largest holder of U.S. Treasurys, China has a lot of leverage against the world's largest economy, but it's unlikely to use that as a tool against the U.S. since there are few other options for its money, said Prasad.
"The far more potent weapon that the Chinese have is to use either overt or covert measures to restrict the access of American companies to the Chinese market, which is still a pretty fast growing market," he told CNBC's Squawk Box.
"(They can also) disrupt the supply chains that many Americans manufacturers have come to rely on and of which China is a critical component, so that really is one way China can inflict pain on U.S. businesses and on the U.S. economy," he added.
"This could quickly backfire on Mr. Trump and the U.S.economy."