China would win in a trade war with U.S., analyst says

NEW YORK, Jan. 10 (UPI) -- China would win a trade war should the United States choose to exert regulatory pressure on the world's second-largest economy, a U.S. analyst said Tuesday.

Nicholas Lardy, senior fellow at the Peterson Institute for International Economics, said the Chinese are in a better position to withstand the pain that comes with a trade dispute.

Lardy's comments at a panel, hosted by the National Committee on U.S.-China Relations, come at a time when analysts from both countries are bracing themselves for new measures from the Trump administration targeting Chinese competitors.

Speaking at the same panel held at the New York Stock Exchange on Tuesday, Lu Feng, an economist at Peking University, suggested the current U.S. administration might not be able to fulfill its goal of closing the trade deficit.

That's because U.S. demand for Chinese goods is "still strong," which, according to Lu, is the real reason the trade deficit has widened for the United States.

"I'm worried trade issues could be politicized," Lu said, adding the global economic recovery remains "very fragile."

Daniel Rosen, an expert on the Chinese economy at the Rhodium Group, expressed similar concerns.

"We are underestimating the trade war potential that others have talked about," Rosen said. "I think we have a really fraught situation in terms of global trade activity that could just as easily be negative for China in 2018, than it's likely to be a big windfall of growth for China on the export side."

Other analysts at the forum expressed skepticism about a U.S.-China trade war.

Huang Yiping, a professor at Peking University, said he was "surprised" that a trade war had not taken place, adding he previously thought the dispute would start on day one of Donald Trump's presidency, a reference to Trump's strong campaign rhetoric that blamed China for the widening U.S. deficit.

But Huang's view, possibly shared by his Chinese colleagues, might be an example of Chinese underestimations of prevailing U.S. misperceptions about China, Rosen said.

"Neither side fully appreciates the perceptions of the other side," Rosen said, adding the Chinese side engages in clear rational analysis, that leads Chinese officials to conclude that it's "simply not in the interest of the United States to trigger a trade war."

For better or for worse, the Chinese believe "powerful U.S. institutions will lean in and prevent policy from going off the tracks," Rosen said.

"On the U.S. side there are misperceptions about what's going on in China," the analyst said. "It took the current administration the better part of the first year of the presidency to realize that currency manipulation really was not the issue."

China recently relinquished control over the yuan, and the move signals China's confidence in the steady appreciation of its currency against the dollar.

While China moves forward with globalization, it is still "more than likely" a trade war will take place by the end of 2018, Rosen said.

Lardy said trade deficits arise for more complicated reasons, and the Trump administration is simplifying the issue in blaming foreign governments, including China's.

"The only way to deal with a trade deficit is raise savings and investment rates," Lardy said, referring to the reason deficits occur -- Americans consuming spending more than they produce.

Recent U.S. tax reform is harmful, the analyst said.

"Repeal tax reform," he said. "Because the tax reform is going to make the U.S. global trade and current account deficit go up."

Tax reform is also designed to raise interest rates.

"There'll be capital inflow, and the trade deficit will be going up," Lardy said. "I think it's almost inevitable."

"It reflects a fundamental flaw in understanding how the political economy works."