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