Trump considers punishing China as trade war escalates

US president Donald Trump isn't backing down on his promises to introduce a number of tariffs on imports. Photo/File.

The Trump administration is considering clamping down on Chinese investments in the US and imposing tariffs on a broad range of its imports to punish Beijing for its alleged theft of intellectual property, according to people familiar with the matter.

An announcement following an investigation by the US Trade Representative's office into China's IP practices is expected in the coming weeks, potentially handing President Donald Trump further cause to impose trade restrictions. His announcement last week of tariffs on steel and aluminium imports has already ratcheted up global trade tensions - and led to the resignation Tuesday of his chief economic adviser Gary Cohn, who opposes such measures.

Stocks fell, and Treasuries rose on Wednesday on concern trade disruptions will hurt the global economy. Trump tweeted he'll be making a decision on a replacement soon and that there are "many people wanting the job."

Adding to the administration's angst about trade fairness, the US trade deficit widened more than forecast in January to a post-recession high. The gap increased 5 percent to US$56.6 billion (NZ$78 billion), the biggest since October 2008, from a revised $53.9 billion in the prior month, Commerce Department data showed Wednesday.

The president is now fighting trade offensives on multiple fronts, from targeting strategic rival China to angering allies like Canada and the European Union with threats to erect fresh barriers. While his counterparts have threatened retaliation, concrete action that would herald the start of an all-out trade war has yet to come.

Liu He, President Xi Jinping's top economic adviser who met with Cohn in Washington last week, told delegates at the National People's Congress in Beijing that both sides had expressed a desire to avoid a trade war, according to the Beijing Youth Daily. Chinese officials - who have been studying curbs on US products such as soybeans according to past reports - were otherwise largely quiet on the tariff question Wednesday.

Under the most severe scenario being weighed, the US could impose tariffs on a wide range of Chinese imports, from shoes and clothing to consumer electronics, according to two people familiar with the matter who spoke on condition of anonymity because the discussions aren't public.

The Trump administration could combine the tariffs with restrictions on Chinese investments in the US, which are reviewed for national-security risks by Treasury's Committee on Foreign Investment in the US, the people said. The new measures being considered by the administration could go beyond even domestic security considerations.

"Gumming up the flow of trade, coming at a time of close to full employment for the US, tariffs are more likely to result in higher inflation than higher output," Tom Orlik, chief Asia economist for Bloomberg Economics, wrote in a note. "For the US, there are plenty of reasons to avoid tipping relations with China into an all-out trade war. The damage that would inflict on US firms' supply chains, sticker shock for US shoppers at Walmart and Target, and the risk of higher inflation suggest cooler minds would eventually prevail."

With the probe into China, known as a Section 301 action, US officials are also considering a more targeted approach that would seek to rein in Chinese investments, the people said. The administration is looking at ways to enforce reciprocity with China on foreign investment, meaning the US would only allow takeovers in sectors that US companies can access in China, according to the people.

Treasury Secretary Steven Mnuchin has urged closer vetting of foreign takeovers, and Republican lawmakers are pushing legislation aimed at curbing China's influence.

US officials are still examining various options, and USTR could decide to do nothing, the people said, adding that an announcement is expected next month.

A White House spokesperson declined to comment on an ongoing process, adding that no final decisions have been made. China's Ministry of Commerce didn't respond to a fax seeking comment on the 301 investigation.

Mnuchin, speaking before a congressional panel on Tuesday, said the administration's objective is to achieve a "fair and balanced" trading relationship with China. America's trade gap in goods with the Asian nation surged 8 percent last year to a record $375 billion.

Mnuchin said the US isn't trying to provoke a trade war with the steel and aluminium tariffs, an action that he backed. "The good news" is that Chinese President Xi and Trump have a "very good relationship and communicate regularly," said Mnuchin.

Wide-ranging tariffs on goods made in China may provoke a backlash from US retailers such as Walmart and Target. The retail industry successfully pushed back last year against a proposal by Republican leaders in Congress to apply a border tax on imports.

USTR has argued that Beijing uses a range of practices to force companies to transfer IP, and Chinese entities engage in widespread theft of US trade secrets, as it seeks to become a leader in advanced manufacturing and artificial intelligence. US businesses in China have long complained about being forced to hand over technology as the price of gaining access.

US companies have been urging the Trump administration to negotiate with Beijing before imposing any penalties, according to industry lobbyists. Vice Foreign Minister Zhang Yesui said this week that China will host talks on trade issues with US officials.

Last year, an independent commission on US intellectual property estimated that the annual cost to the economy in counterfeit goods, pirated software, and theft of trade secrets from all sources exceeds $225 billion and could be as high as $600 billion.