As the White House is about to escalate trade frictions along with nuclear risks, global economic prospects could turn more clouded and markets more volatile.

Last week, US President Trump talked with President Xi Jinping and said that he is preparing to order an investigation into Chinese trade practices. Now Trump is expected to call for an investigation into China over US intellectual property rights and technology transfers.

US Trade Representative Robert Lighthizer could open an investigation against China under Section 301 of the Trade Act of 1974. The ordering of the investigation will not immediately impose sanctions but it could lead to steep tariffs on Chinese goods.

The White House is escalating economic tensions at a time when strategic risks loom from Korean Peninsula in Asia to Charlottesville in Virginia.

After the Xi-Trump Florida Summit in early April, US and China announced a 100-day Action Plan to improve strained trade ties. That was the official status quo, but not the actual reality.

Only two weeks later, Trump issued a Presidential Memorandum, which directed Commerce Secretary Wilbur Ross to investigate the effects of steel imports on national security. As Trump began to ramp up the heat, Ross stated that he would present the White House a range of options to restrict steel imports on "national security" grounds.

By mid-June, Europe's NATO leaders launched an extraordinary lobbying campaign against an anticipated US crackdown on steel imports, which, they said, would hit US allies more than China. Some EU leaders were ready for retaliation if Washington would move ahead.

When the Trump administration's first US-China Comprehensive Economic Dialogue (CED) ended in Washington in late July, it could only agree on canceled news conference, and no joint statement. A simple scenario was a major trade conflict now overshadowed the US-China ties.

A more nuanced scenario was that, while the Trump administration was willing to penalize the Sino-US economic dialogue over slow progress in deficit reduction, it also wanted to use the CED as a ‘demonstration effect' in the impending NAFTA talks and trade reviews.

Now the White House has returned to a trade war scenario.

Washington's NATO allies are not the only ones who feel the great unease. In North America, US NAFTA partners have been monitoring the debacle very closely. If the Trump administration plans to use steel as a national security threat, Canada and Mexico understand quite well that the real focus will soon be more on NAFTA rather than just China or Germany.

Today China produces almost half of the world's steel, but its US market share in steel is marginal; less than 2 percent. In America, the largest steel importers include Washington's NAFTA partners, Canada (almost 17 percent) and Mexico (nearly 9 percent). So if Trump really is "hell-bent on imposing" major tariffs on steel, it is America's NAFTA partners that will be the first to feel the heat.

However, if Trump plans to move further to imported aluminum, semiconductors, paper, household appliances, that's when China and other major importers will become targets as well. The new debate about intellectual property rights and technology transfers indicates that this is now the likely path.

Meanwhile, Commerce Secretary Ross could submit to Trump his report about steel and its alleged national security implications in the coming weeks or by late fall. If Ross finds that steel imports threaten to impair US national security, Trump would determine within three months whether he concurs with Ross's findings; and what actions should be taken.

As the Trump White House is now broadening the tariff debate from steel to intellectual property and technology, it is also escalating broader and deeper risks — first with China, then with its NAFTA and European NATO allies.

Global economic prospects are about to take a turn to a chill that could get a lot worse by the fall.

Dr Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

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