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Citi: US, China will stop short of trade war

While there continues to be significant trade friction between the U.S. and China, it appears both nations are showing restraint to avoid ending up in a full-blown trade war.

In the past 15 years, the U.S. has filed 21 trade complaints with the World Trade Organization against China.

"There's already been significant trade friction between the U.S. and China, and indeed between the U.S. and a lot of countries over the years," Citi Research chief economist Paul Brennan told delegates March 29 at the Global Iron Ore and Steel Forecast conference in Perth, Australia.

"Trade frictions between the two countries aren't a new thing and our view is, at this stage at least, that both China and the U.S. will be very careful about stepping beyond what simply is trade frictions into full-blown trade wars."

The U.S. filed a complaint with the WTO in early January, alleging that the Chinese government was providing loans and other financing to primary aluminum producers, as well as coal, alumina and electricity to one producer.

The argument is that the subsidies are "causing adverse effects to the interests of the United States."

However, moves by both the U.S. and China seem to indicate that neither nation wants a trade war.

This is evidenced in U.S. President Donald Trump's recent decision to back down on his previously aggressive refusal to recognize Taiwan as part of China.

Meanwhile, China is doing its best to manage the renminbi against the U.S. dollar because it fears a weakening currency will antagonize the U.S.

"The U.S. Treasury will be announcing in the next month or so its annual trade report on whether countries are so-called currency manipulators," Brennan said.

"So the last thing they'd want to see there is for the U.S. Treasury to name China as a currency manipulator because then that could be the start of a slippery slope in terms of trade problems.

"The fact that the Chinese seem to be aware of those risks and are managing the currency does suggest to me that again this sort of broader political picture, the concerns that have been raised since the election of the Trump administration, may not be as concerning as what we first thought."