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Trump may struggle to live up to campaign promises on China

As part of his plan to “Make America Great Again,” President-elect Donald Trump has pledged to slap China with 45% import tariffs and declare the country a currency manipulator on Day 1 of his presidency.

Easier said than done is the common sentiment among experts well versed in trade issues.

As things stand, the U.S. does not have the legislative rationale to call out China for its foreign exchange operations which is why in October, the Treasury did not name the country as a currency manipulator.

In order to do so, China would have had to meet all three of the following criteria: A trade surplus in excess of $20 billion with the U.S., a current account surplus of 3% of its GDP and consistent interventions in currency markets that is deemed one-sided.

Nor can the U.S. arbitrarily impose import restrictions and tariffs without breaking World Trade Organization regulations. There is also the question whether Trump can secure support from the Republicans in Congress who tend to favor free trade, according to Louis Kuijs, an economist at Oxford Economics.

Still, at least one prominent economist believes Trump’s threats against China should not be summarily dismissed as grandstanding.

“Trump is a real estate developer and he’s basically put himself in position to begin negotiations,” said Steven Ricchiuto, chief economist for Mizuho Securities USA.

Ricchiuto believes the U.S. is likely to focus on specific areas of bilateral trade rather than pursue a take-no-prisoners strategy.

“It will involve doing some target attacks such as anti-dumping [duties] for steel products” similar to what the U.S. did with Japan in the 1980s, he said.

Japan’s emergence as an economic powerhouse after World War II led to significant trade friction with the U.S. that prompted Washington to enforce import quotas for Japanese products such as automobiles while demanding the country to lower barriers to American exports.

But an outright standoff between the U.S. and China is highly unlikely, according to Ricchiuto.

“Donald Trump is not stupid. He didn’t get to where he is by being stupid,” said the economist who professed to be a Bernie Sanders supporter.

However, it is apparent that any confrontation with China carries significant risks, not only for the U.S. and China but for international trade in general.

“The end game of any trade war is highly uncertain,” said Sue Trinh, head of Asia FX strategy at RBC Capital Markets, in a report. Any move to punish China could trigger a quid pro quo chain reaction as other countries get involved, she said.

To be sure, launching a trade war—albeit even on a limited scale—with the second-largest economy in the world will be a costly endeavor for the U.S. with far-reaching implications that the markets have yet to understand.

For China, its currency, already under pressure on the back of a slowing Chinese economy, will be one of the most symbolic victims.

The yuan USDCNY, +0.1439% which has declined over 5% this year, is expected to trade around 6.84 versus the dollar by the end of 2016 and then further drop to 6.9 by the middle of 2017, according to Kuijs.

A softer yuan becomes a global headache as it will weigh on commodities which are priced in dollars. It could also lead to other countries importing lower prices given China’s dominance as an exporter, an especially insidious problem for Japan and the European Union which are struggling to reflate their economies. Furthermore, a weak yuan could trigger a new round of competitive devaluations by other countries in an effort to keep up with Chinese exports.

“The immediate negative impact on the U.S. economy from trade wars would outweigh any potential gains on domestic jobs in the long run,” said Helen Qiao, China and Asia economist at Bank of America Merrill Lynch, in the immediate aftermath of Trump’s election.

China is the U.S.’s largest trading partner, with the U.S. suffering a trade deficit of $336 billion in 2015, according to the Office of the U.S. Trade Representative. Top exports to China are aircraft, electrical machinery, soybeans, and vehicles.

China has already put the U.S. on notice that it will fight back on any attempts by Trump to bully it into submission on trade.

“China will take a tit-for-tat approach then,” said the state-sponsored Global Times in an editorial over the weekend. “A batch of Boeing BA, -0.76%  orders will be replaced by Airbus AIR, +1.30%  U.S. auto and iPhone AAPL, -0.04%   sales in China will suffer a setback, and U.S. soybean and maize imports will be halted.”

Mark Williams, chief Asia economist at Capital Economics, predicted that any pushback by Beijing would significantly hurt U.S. multinationals.

“China’s response would go well beyond tariff increases. U.S. companies would find their products and operations in China subject to tighter regulation that hampered their capacity to do business there,” said Williams in a note.

Ricchiuto at Mizuho, however, downplayed the possibility of retaliation.

“What are they going to do? Stop selling to us?” he asked. “The reality is that China needs the U.S. and U.S. needs China.”

The economist, in fact, believes China should capitalize on any potential faceoff with the U.S. to earn the respect that it so craves.

“China has gotten away with being a child because it’s been an underdog. This is a great opportunity for China to stand up and say we are better than this,” he said. “If it wants to be treated like a big boy, it has to behave like one and treat others with respect.”

As for Trump, Ricchiuto thinks he will stop acting like a “child” once he becomes president.

“Don’t rush to conclusions on how he is going to govern,” he said.