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How to Avoid a US-China Trade War

With the US targeting China's steel and aluminum exports, and now its weak intellectual property protection, fears of a trade war are mounting. But the biggest threat to US-China trade ties is the recent US tax cut, which will cause the bilateral deficit to widen by as much as $100 billion annually.

NEW YORK – The announcement by the Trump administration that the United States will sanction China for intellectual-property theft is the latest salvo in a deepening trade dispute between the two countries. It follows Trump’s March 8 pledge to place higher tariffs on Chinese steel and aluminum – a move some predict could have dire consequences for the global trading system.

But while these penalties are generating frightening headlines – and rattling investors – it is the recent tax bill passed by the US Congress that will do more to exacerbate trade tensions between the US and China. Unless the implications of that move are fully appreciated, bilateral trade ties could worsen much more before they improve.

The new tax legislation will widen the US government deficit by $1-2 trillion over the next decade, a shortfall in national saving that will not be offset by an increase in private-sector saving or reductions in private-sector investment.