As US escalates tensions and initiates investigation, global economic prospects are about to take a turn

As the White House is about to escalate trade friction along with nuclear risks, global economic prospects will become more clouded and markets more volatile.

On Aug 21, United States President Donald Trump called for an investigation of China over US intellectual property practices and technology transfers. As a result, US Trade Representative Robert Lighthizer started an investigation of China under Section 301 of the Trade Act of 1974. Although this will not lead to immediate sanctions, it could result in steep tariffs on Chinese goods.

The US is escalating economic tensions at a time when strategic risks loom, from the Democratic People's Republic of Korea in Asia to Charlottesville in Virginia. Now, trade pragmatism is dead and the path has been paved for trade wars.

After President Xi Jinping met with Trump in Florida in early April, China and the US announced a 100-Day Action Plan to improve bilateral trade ties. That was the official status quo.

But a simple scenario, a major trade conflict, now overshadows US-China ties. A more nuanced scenario is that, while the Trump administration was willing to penalize the Sino-US Comprehensive Economic Dialogue last month for "slow progress" in deficit reduction and the DPRK nuclear issue, it also wanted to use the dialogue as a "demonstration effect" in the impending North American Free Trade Agreement talks and trade reviews.

So will the US impose excessive tariffs on China, NAFTA member states and its NATO allies?

Washington's NATO allies are not the only ones rattled. Washington's NAFTA partners, too, have been monitoring the debacle closely. If Trump plans to use steel as a national security threat, Canada and Mexico know the real focus will soon be on NAFTA rather than just China or Germany.

China produces about half of the world's steel, but its US market share in steel is marginal - less than 2 percent. In North America, the largest steel importers include Washington's NAFTA partners, Canada (about 17 percent) and Mexico (about 9 percent). So, if Trump is really determined to impose excessive tariffs on steel, it is the US' NAFTA partners that will be the first to feel the heat.

But as Trump plans to move further to imported aluminum, semiconductors, paper and household appliances, China and other major exporters to the US will also become targets. The new debate on intellectual property and technology transfers indicates that this is now the likely scenario.

Also, US Commerce Secretary Wilbur Ross could submit to Trump his report on steel and its alleged national security implications in the coming weeks or by late fall. If Ross finds that steel imports threaten to impair US national security, Trump has to determine within three months whether he agrees with Ross' findings, and what actions should be taken.

The intimate linkage between the investigation and the US intelligence community, which gives new meaning to the term "trade war", is reflected in the fact that even Admiral Dennis Blair, co-chair of the Commission on the Theft of American Intellectual Property (IP Commission), is involved in the debate. Blair is former US director of national intelligence and a retired navy admiral who was the commander of US forces in the Pacific.

"This is just the beginning," Trump told reporters after signing an executive memorandum. If that really is the case, Trump is about to broaden the tariff debate from steel to intellectual property and technology, thus escalating broader and deeper risks - first with China, then with its NAFTA and NATO allies.

Global economic prospects are about to take a turn to a chill that could get a lot worse by the fall.

The author is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).

(China Daily European Weekly 08/25/2017 page13)