By Clay Chandler
February 10, 2018

Good morning.

This week brought a flurry of anguished reports that China is readying options to strike back against the United States if President Trump makes good on his vow to slap trade penalties on China as punishment for alleged intellectual property theft.

On Sunday, China’s commerce ministry announced an investigation into whether about $1 billion of US sorghum exports to China were dumped or subsidized, a move the New York Times described as “the latest salvo in an escalating trade dispute between the world’s two largest economies.” Days later Bloomberg said China is looking at trade restrictions on soybeans imported from the US, valued last year at $13.9 billion. Wired reports that US tech companies, too, are worried they’ll get caught in the crossfire of a US-China trade fight.

The handwringing may be overdone. Financial Times correspondent Tom Mitchell argues that, in targeting sorghum, an animal feed, Beijing is signaling its “desire to contain bilateral trade disputes to relatively narrow sectors.” Mitchell notes that the measure was a painless one for Beijing because sorghum is a small part of the feed market; if push came to shove, Chinese farmers could easily switch to corn. China, he suggests, would be far more reluctant to raise the stakes by curtailing soy beans because doing so would likely cause as much pain in China as in the US.

Chad Brown, senior fellow at the Peterson Institute for International Economics in Washington, notes that Trump’s two predecessors also talked tough on China and imposed tariffs shortly after entering office, only to back away from conflict later to minimize economic damage to both nations.

Still there are signs aplenty that this time, the two giants are heading for a mutually destructive showdown. US trade representative Robert Lighthizer lit the fuse on trade last August by announcing a Section 301 investigation into whether China’s intellectual property policies harm US businesses.

In the months since, Congress has pressured AT&T and Verizon to abandon plans to sell phones made by China’s Huawei; the federal government’s Committee on Foreign Investment in the United States (CFIUS) blocked the sale of MoneyGram, a money-transfer company, to Ant Financial, an affiliate of China’s Alibaba Group; and Trump announced a 30% tariff on foreign-made solar panels. Trade experts expect Lighthizer to announce results of the Section 301 investigation of Chinese intellectual property practices—along with stiff punitive measures—within the next few weeks.

As if on cue, Chinese customs data released Friday show that China’s 2017 trade surplus with the US surged to $275 billion, the highest on record—although economists generally attribute the trade surplus to stronger growth of the US economy rather than an increase in unfair Chinese trade practices.

Brown argues that if Trump announces a new round of tariffs on China and Beijing retaliates in kind, “the current trade spat could quickly escalate out of control.” He worries, too, that US leaders seem uninclined to turn to the World Trade Organization or other multilateral institutions that helped resolve such grievances in the past.

A tit-for-tat trade fight between the world’s two largest economies coming on the heels of last week’s wild gyrations in global stock markets may not be the end of the world. But it will certainly make the world a much trickier place to do business.

Enjoy the weekend!

Clay Chandler


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