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We may see some fireworks in US-China relations during the Trump administration. With respect to trade, President-elect Trump can use any one of six US statutes, including the Trading with the Enemy Act of 1917 and the International Emergency Economic Powers Act of 1977, to shift trade policy. The latter two statutes give him latitude to change foreign commerce without interference from Congress or the courts. President-elect Trump has advocated imposing tariffs and labeling China a “currency manipulator.” While he has continued to threaten tariffs of 45% on imports from China, there is considerable uncertainty as to what his administration will actually impose. If the US and China engage in a full trade war, the Peterson Institute for International Economics has estimated a notable drag on US GDP growth over three years.” Any of these actions by the Trump administration may provoke a strong reaction from China, including a sizable depreciation of the renminbi. Such depreciation would certainly be disruptive to financial markets. With respect to foreign policy, many policy experts have been calling for a change in strategy toward China. In April 2015, the Council on Foreign Relations published a special report on China, suggesting that Washington needed “a new grand strategy toward China that centers on balancing the rise of Chinese power rather than continuing to assist its ascendancy.”® The militarization of the seven artificial islands in the South China Sea (see image on page 33), according to the Asia Maritime Transparency Initiative at the Center for Strategic and International Studies,” will only expedite such a shift in strategy. If President-elect Trump’s actions to date, such as the telephone conversation with Taiwan President Tsai Ing-wen” and his response to the recent Chinese seizure of a US Navy drone,” are any indication, we may see some fireworks in US- China relations during the Trump administration. 34 | Goldman Sachs | JANUARY 2017 HOUSE_OVERSIGHT_014567