Trump Set for ‘Antagonistic’ China Relations, Citigroup Says

  • Bank expects ‘increasing trade frictions’ between the two
  • China may respond with range of options against U.S. measures

Winners and Losers in a U.S.-China Trade War

Donald Trump’s administration may be on course for a fraught relationship with China amid disputes over trade policy, according to Citigroup Inc., which warned the new U.S. government could introduce more protectionist measures against manufactured goods from Asia’s top economy.

“There are growing signs that the Trump administration is heading for antagonistic relations with China,” the bank said in a report that examined how commodities including metals and farm goods may fare in the upcoming lunar year. While the bank stuck with its view that a trade war could be avoided, it did anticipate “increasing trade frictions” between the two.

U.S. President Donald Trump speaks at the CIA Headquarters in Langley, Virginia, U.S., on Saturday, Jan. 21, 2017. Trump assured employees at the CIA of his strong support and said he would unleash them to defeat Islamic terrorists after previous presidents had held the intelligence community back during the nation's 16-year-old war with extremists. Photographer: Olivier Douliery/Pool via Bloomberg
Donald Trump.
Photographer: Olivier Douliery/Bloomberg

Trump made trade relations a central theme of his election campaign, maintaining that the U.S. was getting a raw deal from agreements ranging from Nafta to the putative Trans-Pacific Partnership. The new president hammered on an “America First” message in his inauguration speech, and his administration immediately vowed to withdraw from the Pacific deal.

“We are more likely to see the U.S. aggressively targeting China in sectors where the U.S. runs a large deficit with China or with significant SOE presence,” Citigroup said, using initials for state-owned enterprises. China has options to react, including bringing cases to the World Trade Organization, using countervailing measures and possibly banning exports of strategically important commodities such as rare earths, it said.

Playing Field

Trump has nominated billionaire investor Wilbur Ross for commerce secretary. In testimony on Wednesday in Washington before the Senate Commerce Committee, Ross called China the most protectionist of the world’s major economies and vowed to level the playing field with the Chinese on trade, especially in reducing overcapacity in its steel industry.

For a QuickTake explainer on possible U.S.-China trade war, click here.

Trump has pledged to use “every lawful presidential power to remedy trade disputes” with China, including tariffs. He once broached a tax of 45 percent on Chinese imports, then denied bringing it up. Still, the president has already walked back from some criticisms and so far hasn’t followed up on a pledge to label China a currency manipulator on his first day in office.

There have been mixed signals from China’s media. After the inauguration, the Global Times, a Chinese newspaper run by the Communist Party, said the speech signaled a “high possibility” of trade frictions. Still, the official Xinhua News Agency congratulated Trump on his inauguration and said it hoped for "win-win" cooperation between the two nations, and an editorial run by state-backed newspaper China Daily took a similar tone.

Not everyone foresees a full-blown trade confrontation. Australia’s Finance Minister Mathias Cormann has said he doesn’t expect an all-out trade war between the U.S. and China. Trump’s focus on making the U.S. economy strong is “going to be good for the world,” he told Bloomberg on Friday.

Other themes listed in the Citigroup note were:

* Increased speculative activity in Chinese commodities futures markets
* Further scope for supply-side reforms in China
* ‘Steady boat’ economic policy during year of political transition in China
* The possibility for further yuan depreciation
* Infrastructure investment
* Measures to promote environmental enhancement
* Financial deleveraging
* Commodities stockpiling by the government
* A slowdown at so-called teapot refineries

— With assistance by Jake Lloyd-Smith

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