Global Economics View
How to start thinking about US-China trade conflict
 US-China trade relations haven’t yet appeared at the top of President Trump’s agenda, but it is likely to be a matter of time before this happens. One of the most consistent themes in Donald Trump’s comments on public policy over the past thirty years has been his opposition to persistent US trade deficits which, in his view, somehow impoverish the United States and enrich its trading partners.
 The most important overall question in thinking about the Trump administration’s approach to the US-China trade relationship is whether it will be ‘soft’ or ‘hard’.  We define a ‘soft’ approach as one governed by WTO rules and which aims to achieve a renegotiation of the trading relationship in a more or less cooperative environment; and a ‘hard’ approach as one that doesn’t hesitate to seek a rebalancing of US-China trade outside a WTO framework.  
 We believe there is certainly a risk that the Trump administration’s approach will be ‘hard’, since Trump officials think China’s membership of the WTO weakens the US’ ability to take action against Beijing’s unfair trade practices because the WTO lacks a proper framework to deal with the subsidies that are provided by China’s SOEs.
 The central question in thinking about China’s response to a more hostile US approach to trade is whether Beijing will respond ‘symmetrically’ or ‘asymmetrically’. A ‘symmetrical’ response in our view is one in which a trade-policy measure is countered by a trade-policy measure: a kind of tit-for-tat. An ‘asymmetrical’ response is one where China’s reaction to a US trade policy initiative might range across the whole spectrum of the US-China bilateral relationship, including both economic and non-economic measures.
 A trade-specific or ‘symmetrical’ set of measures by Beijing might be the first line of response. China could retaliate by bringing cases to the WTO on its own, impose countervailing measures, let its SOEs and other government controlled entities snub American goods and services or remove perks granted to US multinationals in China. But China might also choose to retaliate asymmetrically. Such measures could be of economic nature, e.g. threatening to sell off US treasuries and responding via the exchange rate, but could also extend to non-economic issues.
 A US-China trade dispute would be least disruptive to global ‘animal spirits’ if the conflict is characterized by a ‘soft’ Trump and a ‘symmetric’ China response, but it is easy to imagine that neither of these conditions might hold. For that reason, it is worth being cautious about the effects that such a conflict might have on risk appetite, and on expectations about growth in the largest and second largest economies and beyond. We don’t believe that the market is currently pricing any risk of a ‘hard’ vs ‘asymmetrical’ conflict.