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What's at Stake in a U.S. Trade War With China

An investment strategist at Matthews Asia believes Trump will be reluctant to launch a trade war with Beijing.

  • By Allen Cheng

The chances of a trade war between the world's two largest economies are quite small, according to Andy Rothman, a China investment strategist for San Francisco-based fund manager Matthews Asia. 

While Rothman sees U.S. President Donald Trump's advisors advocating for a confrontational approach to trade with China, he's not convinced the president shares that view.  

"Trump will be reluctant to launch a trade war against America's largest trading partner because that could have a negative impact on U.S. economic growth and on U.S. equity markets," Rothman said in an email. "I also think the president understands that if he takes significant protectionist steps, Beijing would retaliate." 

Rothman, who spent 17 years as a foreign service officer in the U.S. consulates in Guangzhou and Hong Kong, and at the U.S. Embassy in Beijing,  is expecting calmer minds will ultimately prevail in the U.S. and China.  He was based in China as a U.S. State Department economist and diplomatic officer from 1983 to 2000.

China was America's No. 1 trading partner last year, buying $130 billion worth of U.S.-made goods or commodities, while exporting $506 billion worth of mostly finished products to the U.S., according to data from the U.S. Census Bureau. China, the world's second largest economy, is a major importer of American farm products, particularly soy beans grown in the U.S. Midwest.

"An early move would likely be to limit purchases of U.S. soybeans, in favor of crops grown in South America," Rothman said.  With China buying about one-third of the U.S. soy crop, he says retaliation from Beijing would hurt farmers in the Midwest — the heartland of Trump supporters — potentially helping Democrats win mid-term elections this year.

According to Rothman, there are 24 Republican members of Congress who represent districts producing about 60 percent of the nation's soybeans. Democrats need a net gain of 24 seats to take control of the House of Representatives.

"Trump is more likely to apply penalties or restrictions to a very limited range of Chinese goods, while claiming that he has taken dramatic action to make his political points," said Rothman. Recently imposed tariffs on Chinese solar equipment and washing machines are examples of this kind of move, according to Rothman, who believes Washington doesn't have as much leverage with Beijing as U.S. politicians might think.

"Even if Trump were to  take more aggressive steps, investors should keep in mind that China is no longer an export-led economy, and that only about 20 percent of  their exports go to the U.S.," he said. "As China's economy is driven by domestic consumption, the damage to the Chinese economy from rising trade tensions with the U.S. should be limited." 

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