Could Trump’s chest-thumping over China trigger a trade war?

Allegations of Chinese currency manipulation are out of date and largely incorrect, according to Pei. In fact, Beijing has been burning through its currency reserves in an attempt to prop up the value of the yuan. But for Donald Trump that doesnt matter. Intellectual rigour is not one of his concerns.

Louis Kuijs, head of Asia economics at Oxford Economics and a former senior China economist at the World Bank, said it was more legitimate now than at anytime in the last 10 years to talk about the risk of something pretty close to a trade war, he said.

Anyone with a stake in Chinese exports, especially to the US, should be worried, said Kuijs, adding that US and European companies that assemble products in China would also see their bottom lines affected.

If a trade war starts, it is likely to start with targeted hits, said Pei. If Trump wants to placate his base in the midwest he could target Chinese steel, for example. China is engaging in at least questionable practices in the steel industry, says Pei. The industry has so much overcapacity and they are exporting a lot of cheap steel and that is disrupting.

If the moves are small enough, China might chose to ignore them and concentrate on the bigger picture. But past at a certain point, Beijing will retaliate and would likely target large American firms, Boeing or Apple for example, that increasingly rely on China.

Both sides have a lot to lose in a trade war. China is currently the USs largest goods trading partner. Trade between the two was worth $598bn in total during 2015, with US exports to China totalling $116bn and imports totalling $482bn. China has more to lose but the types of goods it sells to the US are harder to source elsewhere.

The three largest categories of goods China buys from the US are soybeans, cars and aircraft, all of which China could source from elsewhere.

The three largest categories that the US imports from China are mobile phones, tablets/laptops and network equipment. In each case, China is the dominant global supplier, producing about 70% of global output. A high tariff would end up as effectively a tax on US purchases of consumer electronics, Capital Economics chief Asia economist wrote in a recent note to investors.

Tariffs on those goods would also disrupt trade right across the Asia Pacific region, said Pei. Some 35% of Chinas exports in 2015 was processing trade, where China imports components from other countries and assembles them for exports. A trade war with China on those goods would cause collateral damage on imports from Japan, South Korea, Taiwan and others.

While both sides would suffer, Chinas economy is more reliant on US exports and a serious spat would rock the economy at a time of sluggish growth. Household debt has soared as property prices have increased, and millions of workers are set to lose their jobs as the government seeks to rebalance the economy away from state-led investments.

Not all factory owners in China are worried about an upcoming trade war. Trumps grandstanding performances during the campaign were for publicity, but hes a successful businessman and therefore should be very rational in his thinking, said Sun Sijun, chief executive of Uptop Group in southern China, which exports between $150m-$200m worth of Samsonite suitcases and Walmart shoes to the US every year. Rationally, the basic interests are not to make enemies, and to ultimately not harm yourself, he said.

Trumps talk of increasing tariffs is in the hope of increasing employment in America, Sun said. But theres a very small probability you can bring these labour-intensive industries back to the US. Labour-intensive industries flowed to third world, and they wont return to America.

But other producers in China see only dark clouds on the horizon. Chen Yadong also sells to Walmart. His company, Indena, makes computer mice and bluetooth speakers, sending more than 1m mice to the US each year.

Im extremely worried, Chen said from the electronics manufacturing hub of Shenzhen in southern China. The US is the largest market for export-oriented companies here. If Trump increases tariffs, then this business will become increasingly difficult.

Chinas leaders dont know what to think of Trump quite yet, said Pei. But they do understand the consequences of a trade war. The Chinese have a proverb: you lift a rock only to drop it on your own foot.

Additional reporting by Christy Yao