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Trump trade war with China may not be imminent — but it is coming

President Donald Trump (L) and Chinese President Xi Jinping (R) walk together at the Mar-a-Lago estate in West Palm Beach, Florida, April 7, 2017.
Jim Watson | AFP | Getty Images
President Donald Trump (L) and Chinese President Xi Jinping (R) walk together at the Mar-a-Lago estate in West Palm Beach, Florida, April 7, 2017.

So is Donald Trump really about to trigger that trade war with China?

That was certainly the fear emanating from Washington last week when news emerged that the White House was engaged in serious discussions over using another long-dormant trade tool — Section 301 of the Trade Act of 1974 — to retaliate against China over its controversial intellectual property policies.

Section 301 is, as the Financial Times makes clear in an editorial published today, a blunt instrument in trade policy. And its use would be provocative:

"The use of a tool such as Section 301 — the trade diplomacy equivalent of a wooden club — to batter China into submission may be counterproductive. Under the 301 statute, which has not been widely used since the 1995 creation of the WTO, the US would in effect act as judge, jury and executioner on any grievance that it identifies. The use of such an uncompromising weapon would probably be seen by the Chinese as an extreme provocation, thus risking a full-blown trade war."

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But it's also worth pausing to consider a few realities that mean war may not be imminent. The first is that, as has been the case with other provocative Trump trade proposals, some form of moderation may lie ahead. Remember the 45 per cent tariff on goods from China? Or the border tax? Or the president's campaign pledge to pull out of the North American Free Trade Agreement?

The first two haven't materialised and may never do so, while the once-mooted exit from Nafta has turned into a renegotiation aimed at "modernising" the pact with Canada and Mexico. A more recent push for a broad tariff on steel imports in the name of US national security, which in June seemed days away, has morphed into a trade technocrat's dream: an elaborate system of tariffs, quotas and exceptions that looks like it will take months to construct and may never even see the light of day.

Why is that relevant to the Section 301 move now being discussed? The answer lies in the way the law works. What Mr Trump appears ready to announce, possibly in the coming days, is not the immediate imposition of tariffs. It is the launch of an investigation into China's intellectual property policies, much like the national security ones he ordered earlier this year into US steel and aluminium imports. That will rightly generate headlines if it happens. But the real provocation won't come until the end of that investigation, which could take a year, and a decision on what remedies to punish China with.

In the meantime, you can expect plenty of negotiations with Beijing, lobbying by industry groups and debate within the administration. And we have seen some of that already, which also gets at the second reason a trade war may not be imminent: geopolitics.

A push by the administration to get Chinese backing for new UN sanctions on North Korea resulted in an expected announcement of the launch of the Section 301 investigation on Friday being postponed. It also saw the president proclaiming a diplomatic victory — and hailing China's support — after the Security Council voted to impose those sanctions on Saturday.

The message was a notable change from the frustration with China that Mr Trump had expressed in recent weeks after earlier this year establishing China's potential co-operation on North Korea as a reason for holding back on his promised trade attack on Beijing. After the weekend UN vote, it is worth asking whether that logic may hold again for some time, especially with China's leadership preparing for this autumn's 19th party congress and the unveiling of a new top team.

The third important reality is that Mr Trump and the China hawks in his administration are not the only ones calling for a reset in trade relations with Beijing. China was not surprisingly the main target in a new trade manifesto unveiled by Senate Democrats last week. But the calls go beyond politics and across party lines.

Between chasing 301 whispers last week, I had conversations with half a dozen former senior US trade officials from both Republican and Democratic administrations — people who had made China policy and prosecuted major China trade cases. All of them agreed that US trade policy toward China has not worked and that it is time for Washington to get more aggressive. Many in the business community feel the same way. The only real question is what tools Washington should use and when.

Those conversations led me to a simple conclusion. This may or may not be the week that Donald Trump launches his trade war with China. But it is very hard to see how some sort of conflict isn't likely before long. The mood in Washington is calling for it.

Number of the week: 10.7 per cent

President Trump seized on Friday's strong non-farm payrolls report as yet more evidence of the robust economy he is bringing to Americans. But there was another number released Friday that he didn't crow about, which was remarkable for a man with an obsessions about trade deficits.

According to the US Census Bureau's latest data the first six months of 2017 have not been good for the country's balance of trade.

"Year-to-date, the goods and services deficit increased $26.7 billion, or 10.7 percent, from the same period in 2016. Exports increased $64.9 billion or 6.0 percent. Imports increased $91.7 billion or 6.9 percent."

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