Trade Tensions With China Quietly Escalating

When trade volumes tanked in the later part of 2008, quite a few observers expected a rise in protectionism. We haven’t seen a Smoot-Hawley analogue, a wide ranging measure that elicits retaliation. But that does not prevent policy makers from more targeted forms of gamesmanship.

Trade has retreated from front-burner coverage due to the modest recovery in activity. However, what is noteworthy is that most other surplus countries have seen a much greater fall in their surpluses than China. Moreover, some argue that the stabilization and improvement in trade activity is due to government stimulus, and as those programs tail off (and some are even now), trade volumes could give up their recent improvement.

So the situation is more fraught than it might appear. It should therefore not be a surprise that there is a fair bit of jousting on the trade front. One is a proposal is a de facto ban on Chinese tires. I would be surprised if this gets done, but then again, the Bush administration backed steel quotas. From ChinaDaily (hat tip reader Michael):

The proposal by a United States workers union to ban Chinese-made tires has US President Barack Obama bouncing between two very precarious positions.

The high-level tariffs, which would effectively impose a ban, will keep Chinese tire imports off US roads, strip 100,000 local laborers of their jobs and potentially spark a series of special taxes by other nations and regions.

On the one hand, Obama threatens to sour China-US relations…But on the other hand, Obama is wary of enraging the unions who support the case…

The proposed tariffs arose out of a petition brought by the United Steelworkers Union, which represents half of American tire makers. The International Trade Commission in April announced that tire imports from China had disrupted the US industry and proposed a three-year program of import relief, with a 55-percent-tariff on Chinese-made tires in the first year, 45 percent in the second and 35 percent in the third. Last Thursday, the US Trade Representative sent the recommendations to Obama…

Chinese tires have been “targeting the budget and no-brand replacement tire market for US consumers with severe budget constraints,” a sector that the US tire makers gave up long ago and are unwilling to enter again, said China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters in a letter to President Obama…

But the Chinese government will not turn away from issues that will harm the interests of Chinese industries. Officials from the Bureau of Fair Trade for Imports & Exports with the Ministry of Commerce said China has prepared an assortment of plans for countering different possible results from the Obama administration.

“We will surely protect local tire manufacturers from being hurt when needed,” they said.

China will likely take retaliatory measures against the US industries. The Tire Industry Association has petitioned China to launch restrictive measures.

The US had narrower anti dumping case about eighteen months ago, involving coated paper, where the facts seemed pretty clear cut, yet it came to naught.

More from Bloomberg:

The pipe case, the largest so-called countervailing duty complaint filed against Chinese-made products, was brought by the United Steelworkers union; U.S. Steel, the largest U.S.- based steelmaker; U.S. operations of Evraz Group SA, Russia’s second-largest mill; and Pennsylvania-based Wheatland Tube Co.

After the ruling is published in the Federal Register, importers of the product — known as oil country tubular goods — will have to deposit duties of the assigned amount, pending a final ruling later this year by the Commerce Department and a separate decision by the U.S. International Trade Commission.

Chinese officials have spent the past months trying to head off tariffs for the steel pipes and the separate case brought by the United Steelworkers union against Chinese auto tires.

“If there is really such a decision, China’s Commerce Ministry will have a formal response,” Wang Baodong, a spokesman for the embassy in Washington, said in a telephone interview. “On these anti-dumping charges, the Chinese government has been very clear.”

The EU is not happy with how China is behaving and the UK would like to turn up the heat a bit too, as reported in the Telegraph:

The Business Secretary, on a visit to Beijing to boost UK-China trade links, also warned on Tuesday that future “tension and disagreement” between China and the EU was inevitable as the trade deficit between China and Europe continues to grow….

Trade relations between Europe and China are under increasing strain, with a series of opinion polls showing that the European public is growing steadily more intolerant of China’s unfair trade practices.

Last week, the European Union Chamber of Commerce in China released a report containing 600 pages of complaints by European businesses which had fallen victim to China’s myriad hidden way of discriminating against foreign businesses..

Lord Mandelson said that while such trade was vital to reinvigorating Britain’s economy, there needed to be “constant dialogue” to keep up “legitimate pressure” on China’s government to open its markets more fully.

However, he said he did not agree with growing calls from some quarters of the EU for the need to take a tougher stance with Beijing, saying that constructive – as opposed to “conditional” – engagement was in the bests interests of both parties.

“China would say ‘we are a big, complex, fast-growing economy and you have to be patient, give us time’. I understand this, but equally China must understand when we in Europe feel we are being too hard done by.

“These things will even out over time, but in the meanwhile this is going to spark some tension and disagreement, but all of this must be managed because it is in all our interests to see China growing. We would all pay a colossal economic price if China was to fail economically.”

Whether these disputes continue to simmer or escalate into something worse depends on domestic employment in major economies. Were it to worse much, the pressure to Do Something would become intense.

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  1. psychohistorian

    In the 1950-60’s time frame the US tire makers kept radial tires from coming into this country for about 10 years. They had the political power to make that happen then.

    I don’t think that the US is currently in any position to push China to not wanting to keep buying our debt. We have much more to lose if they stop buying our debt than if another 100K are unemployed.

    The sad part is that there is no hue and cry for a comprehensive look at how to employ the US labor force that is currently unemployed….oh, that’s right, the FREE market will do that automagically in a manner that is forward thinking and socially conscious.

    Where are the moral and ethical adults?

  2. purple

    This ruling is more a question of how powerful finance capital remains in the U.S. relative to industrial capital. And whether finance capital feels it has a real shot a cracking into China’s banking sector. If they do, they will push against any protectionism.

    Ultimately, the CCP wants to maintain strongly centralized political power and that is incompatible with WTO-run trade and an open banking sector. As the developed world slowly realizes this, the current international trading system will fracture.

  3. rickstersherpa

    1. The Chinese buy U.S. dollar debt because they have to to maintain their peg to the U.S. dollar, not because they are altruistic or just like lots of paper with Dead Presidents on them.

    2. The Chinese believe that the CHIAMERICA deal where we buy their stuff and they loan us the money to buy their stuff is being defaulted on as Americans go into the great frugality (and don’t have the money to buy their stuff).

    3. However, they are enjoying a huge trade advantage against the Euro and other foreign currencies as the Yuan/Reminbi follows the dollar down. Hence, they still have an incentive to buy dollars.

    4. There are now lots of domestic buyers of U.S. Treasuries as the saving rate has risen (and will keep rising) and individuals, banks, and corporations realize that in the World of Wall Street Casino capitalism, it is not a good idea to “all in” a stock market where you can have a 60% plunge in value over a very short period (as the Bear Markets of 2000-2002 and 2007-2009? proved). Capital preservation is at least as important (fear) as the desire for yield (greed).

    5. China (like us) wants to have its cake and eat it to. They would like to keep the dollar peg and not buy U.S. dollars. Ironically, if the U.S. was to make the preservation of the high value dollar the sole object of its economic policy, which appears to be one of the things the Chinese say they want (and which the Hayekians who post here also say they want) the consequences for China would not be great. Accomplishing that goal is very simple. It just requires raising U.S. short term interest rates to a level substantially higher than the Central European Bank and the Bank of England and Bank of Japan in order to attract capital flows into the dollar. The rest of the U.S. economy would have to further contract (25% unemployment anyone? and the effeect on the current asset deflation and credit default would make for another interesting year like 2008 or 1932) in response to reduce imports, which of course would adversely affect China and a rising dollar would also turn the dollar peg from an advantage to disadvantage in relation to China’s other trade partners/competitors. An example of why one should be careful what one asks for as one might get it.

  4. TC

    I thought the US would be extremely happy to be able to exchange for some goods and services from other countries by just printing money or creating binary digits on some storage devices.

  5. fajensen

    We have much more to lose if they stop buying our debt than if another 100K are unemployed.

    That depends a fair bit on who “we” are, does it not? The little people have a lot to lose, for the big people it is not so.

    A default on the USD-denominated foreign debt would hurt the holders of said debt A Lot More than it does the US – Imaging all that triple AAA crap blowing up in European pension funds. It will take years to sort out that mess and while everyone is doing that, they are not busy competing with the US. Regional wars might flare up so more military is needed – and SAIC will grow richer; which is good for “the economy” i.e. the insiders/cronies. Draconian new security laws can be swiftly enacted “to protect people in these uncertain times”, bank holidays could allow insiders to sell while everyone else are destroyed, Argentina Style e.t.c.

    Besides, they burn the foreign investors all the time in Latin America with little consequence.

    *If* the whole mess could be blamed on “Ming The Implacable” and his evil mercantilist ways … weell … then people might even lend the US money again!

  6. plschwartz

    China got spoiled by Bush setting no limits. Obama seems to be applying limits to China and they are not going to be happy.
    The $2T is as dangerous as Saddam’s WMD. What can they actually do with it to get back at use?
    I find a much more credible threat that of the Chinese economy imploding. Nothing, not even the FED could prevent this from dumping the world into Depression.
    Do you think Obama ever played the game of chicken on the roads of Hawaii? (two cars both with their left front wheel on the yellow line head toward each other)

  7. Steve Koch

    China has Obama by the huevos. Any time China wants to, they can screw up the US economy. If they stop buying US debt, the US will have to raise interest rates to attract buyers for US debt. Chinese currency will go up in value which will cause the cost of Chinese imports to skyrocket. The rise interest rate will have an bad impact on the US economy and the increased price of imports will immediately impact US citizens. The cumulative effect would ruin the Democrats in the next election. For the most part Obama will bend over and take it from the Chinese (but he will ask them to buy some US debt first).

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