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China Reacts Quickly and Badly to Tire Tariffs

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It would be better if we were not proven correct on this one, but when the US imposed stiff tariffs on imported tires from China late on Friday, we noted, “This could get interesting in a bad way.” The Chinese responded quickly over the weekend to announce they were investigating US auto parts and chicken, which together account for roughly as much as the disputed tires ($1.2 billion versus $1.3 billion for tires).

It is if nothing else getting interesting fast, and it certainly does not look good. The Financial Times branded the harsh reaction from China as elevating the US action to “a full-blown trade row.”

When trade volumes plunged late last year, most commentators expected a rise in protectionism. There hasn’t been much in the way of overt action, yet, perhaps in the hope that government intervention would work and the crisis would pass quickly.

But protectionism is driven by the desire to protect jobs. Unemployment has not peaked in the US, and some analysts suggest that China’s job losses are far worse than the 20 million often bandied about, more on the order of 30 to 50 million. So political pressure is set to intensify.

The New York Times treats the Chinese reaction as a surprise. But the tire tariffs relied upon a special provision in the WTO agreement for China’s entry that set a lower bar for trade violations than the normal anti-dumping sort. This is the first time that rule has been used as the basis for an action against China, and China may feel it important to fight that precedent.

From the New York Times:

China unexpectedly increased pressure Sunday on the United States in a widening trade dispute, taking the first steps toward imposing tariffs on American exports of automotive products and chicken meat in retaliation for President Obama’s decision late Friday to levy tariffs on tires from China….

Eswar Prasad, a former China division chief at the International Monetary Fund, said that rising trade tensions between the United States and China could become hard to control…

“This spat about tires and chickens could turn ugly very quickly,” Mr. Prasad said.

China exported $1.3 billion in tires to the United States in the first seven months of this year, while the United States shipped about $800 million in automotive products and $376 million in chicken meat to China, according to data from Global Trade Information Services in Columbia, S.C.

For many years, American politicians have been able to take credit domestically for standing up to China by taking largely symbolic measures against Chinese exports in narrowly defined categories…For the most part, Chinese officials have grumbled but done little…Now, the delicate equilibrium is being disturbed….

But the timing of the announcement — on a weekend and just after the tire decision in Washington — sent an unmistakable message of retaliation. The official Xinhua news agency Web site prominently linked its reports on the tire dispute and the Chinese investigations…

The bigger risk for China, economists and corporate executives have periodically warned, is that trade frictions could cause multinationals to rethink their heavy reliance on Chinese factories in their supply chains. The Chinese targeting of autos and chickens affects two industries that may have the political muscle in the United States to dissuade the Obama administration from aggressively challenging China’s policies.

DoctoRx gives a Pangloss watch update from Bloomberg: Obama’s China Tariffs May Be Prelude to Opening Trade

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17 comments

  1. Swedish Lex

    Yves,

    “China unexpectedly increased pressure Sunday on the United States in a widening trade dispute”

    There is always a phase of escalation in trade disputes, right? So pretending to be surprised by the Chinese reaction just makes the U.S. look ignorant or arrogant, or both. Of course the Chinese need to respond, including by political gestures.

    The U.S. started this. Hopefully there is an exit strategy that is smarter than the way this whole thing was started in DC.

    The G 20 meeting at best had limited chance in resulting in a final communiqué that at least would have the benefit of NOT showing big disunity (forget the absence of real progress). The U.S. seems intent of making G20 a venue to demonstrate mutual disagreement.

    At least it is not France that gets the blame for protectionism this time. Some people in Paris and in Brussels are smiling…….

  2. k

    From the above mentioned NYT article,

    “China exported $1.3 billion in tires to the United States in the first seven months of 2009, while the United States shipped about $800 million in automotive products and $376 million in chicken meat to China, according to data from Global Trade Information Services in Columbia, S.C.”

    So China is CAREFUL in striking a proportionate retaliation figure. Local newspaper leak indicates initial targets are soybeans and pork.

    American export of soybeans to China amounted to $8.4 billion last year. Maybe they ARE next if this thing gets out of hand. Yes, American farmers, I am talking to you!

  3. jmf

    Moin from Germany,

    this is a translation from the German version of the FT

    The ECB is pointing to a study that after the G-20 Summit in November 2008 17 of the 20 states have been implementing protectionist measures…. This is in stark contrast to what they have promised ( my translation )

    Just what the doctor ordered…… :-(

  4. purple

    It’s impossible there won’t be protectionism in a protracted recession. This is a world of nation states, and political power is based on domestic demands.

    1. Gentlemutt

      Purple is exactly right. Local considerations mean the “free markets” are anarchic at the global level, as John Gray so succinctly described in his 1997 book, False Dawn. Capital is mobile now; people and their politics are not.

      K comments,”Yes, American farmers, I am talking to you!” To which American workers and businessmen in all sorts of shriveled and off-shored industries might reply, “Well, what is your point?”

      American farmers’ self-interest means they should support a $250+ billion yearly US trade deficit with China forever, for the sake of selling $8-9 billion of beans? That is a tough trade-off to sustain, even in a democracy with the kind of bicameral setup we have here.

  5. ronald

    The only surprise about the emerging so called trade war is that it has unfolded at a snail pace. The idea that western employment will be based on house flipping and retail sales makes sense only to modern economist’s.

  6. Beezer

    “The bigger risk for China, economists and corporate executives have periodically warned, is that trade frictions could cause multinationals to rethink their heavy reliance on Chinese factories in their supply chains.”

    The underlying problem is that China has been running a mercantilist, export driven economy. It is no more sustainable than our current account deficits.

    In a trade war, if one actually happens, it’s the export reliant economy that will suffer the most.

  7. S Brennan

    “American export of soybeans to China amounted to $8.4 billion last year. Maybe they ARE next if this thing gets out of hand. Yes, American farmers, I am talking to you!”

    Ass-u-me a complete blockade of Soybean [a water intensive crop...Chinese water being in short supply]. How many jobs will the US lose. A reasonable guess might be 800 jobs, which switch to corn production. However a complete blockade is also a ridiculous assumption.

    “China’s drought in the northwest agricultural region has hurt their crop, but the government is selling beans out of storage to keep prices below $10 per bushel. China continues buying U. S. soybeans where domestic bean auctions fail to sell above market prices.”

    India’s soybean belt has been dry but recent rains have alleviated yield reduction potential. Soybeans are setting pods at a normal pace on Indian bean fields.”

    Just one more bit since everybody raises the dreaded specter of SMOTT HARTLY ACT. The act was passed after huge trade reduction had occurred…NOT BEFORE…the act while not helpful could only account for a MAXIMUM 6% reduction in world trade…a drop in the bucket compared to prior declines in the preceding three years.

    The economics profession continues to teach crap.

  8. william

    Living in China, I have learnt that many Chinese business managers get their way through bullying and bluff. I would suggest that the Chinese Government work by the same principle.
    While China has been a cheap place to produce goods, the realitiy is that it is loosing its competitiveness on a daily basis.
    Labour Laws have been changing to increase the incomes and wealth of the ordinary workers. In January 2008, the 40 hour week was introduced with any work over that being paid at time & a half. On top of that, are matters of corruption, IP protection etc., and I guess worst of all, the education process in China teaches them to copy and cheat so that they can obtain their “Certificates” (and I use that word lightly). Chinese workers need to be micro managed and their actual ability to create and reason is basically zero.
    As a result, overseas companies that had manufacturing plants in China are starting to leave and a number that were contemplating coming to China have gone elsewhere.

    China has more to lose in any Trade War than the USA. The USA should not be bullied by them, nor should any other country for that matter, big or small. The Chinese Government knows it must create wealth through jobs for its 1.3 billion people otherwise there will be revolution and they will be thrown out or worse. They will do everything in their power to stop this happening and the US Government should remind them of this from time to time when the Chinese Government are not getting their way.

    But at the end of the day, the USA should look to develop new markets in other countries and trade on an equitable and fare basis with them. Start to make new friends and renew old friendships with countries that have been overlooked in the rush to China.

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