There's reason to believe the trade wars have already begun

One of the biggest economic risks of a Trump presidency is his stance on protectionism, and his threats to enact punitive tariffs that could start a tit-for-tat trade war with the world’s second largest economy, China.

What’s worse, it seems last week the stage was being set for such a conflict.

Both the US and China took punitive trade actions against each other. For its part, China took a swipe at one of the most powerful lobbies in the US, the corn-ethanol industry.

On January 12, China hiked anti-dumping duties (42.2% to 53.7%) and anti-subsidy tariffs (11.2% to 12.0%) on distiller’s dried grains (DDGs), a form of animal feed. DDGs are a byproduct of corn/ethanol production and a big profit source for the industry. China accounts for a whopping 50% of the US’s DDG sales, according to a report from Deutsche Bank.

US Grains Council President and Chief Executive Officer Tom Sleight said the measures were “effectively stopping a growth market for US farmers and ethanol producers,” in a statement following the news.

Further, on Tuesday at the World Economic Forum in Davos, Switzerland, Chinese President Xi Jinping warned the Trump administration not to turn away from globalization.

“Whether you like it or not, the global economy is the big ocean you can’t escape from,” Xi said. “No one will emerge as a winner in a trade war.”

Indeed, as Deutsche Bank pointed out in a recent report, there are plenty of US industries that export billions of dollars of goods to China, offering several ways that China can retaliate against possible US trade restrictions. Check them out in the chart below:

Last week the United States also took action, and filed suit against
China with the World Trade Organisation, accusing the country of illegally helping its aluminium industry with subsidies and breaks on energy costs. Additionally, it seized $25 million worth of aluminium connected to a Chinese tycoon accused of allegedly violating anti-dumping regulations.

The Obama administration has filed more WTO suits than any other in US history, but it has been able to maintain a dialogue with China. A full on trade war could jeopardize that, and as Gene Ma, Chief Economist at the Institute of International Finance pointed out to BI last month, there are still things the two countries need to work on together.

For example, the US-China Bilateral Investment Treaty is currently under negotiation. Ma told us that he’s concerned that an escalation of this volley of trade spats could impede the treaty’s progress.

So the ultimate question is whether or not cooler heads can and will prevail, and whether or not the incoming US administration has the ability to de-escalate situations if and/or when they reach a point that could be damaging to millions and millions of Americans.

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