BIZCHINA> Review & Analysis
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BIZCHINA> Review & Analysis
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Debate: Trade wars
(China Daily)
Updated: 2009-10-20 10:06 Disputes not likely to lead to full-blown trade war
The US Department of Commerce's announcement on Oct 7 that it would launch an investigation into imports of seamless steel pipes from China had a sense of dj vu about it after the Barack Obama administration imposed punitive tariffs on China-made tires last month. The announcement raises worries that more protectionist actions would follow, leading to a trade war between the two giants of world trade. China has responded to the tire tariff by filing a complaint with WTO and by launching its own investigations into imports of US poultry and auto parts. China has so far not responded officially to the US' investigation into seamless steel pipes. The impact of actual and potential trade actions on tires and steel pipes is low. The US investigation could potentially lead to imposition of 98.7 percent duty on China-made seamless steel pipes. But as in the case of China's tire exports, the potential damage to seamless steel pipes exports for China is rather low. China's exported $382 million worth of seamless steel pipes to the US last year, which accounted for 0.02 percent of its total exports. The value of Chinese tires export to the US is small and insignificant, too, at less than 1 percent of its exports to the US and less than 0.15 percent of its total exports. On the macro scale, the tariffs will barely make a dent on China's overall export performance. Nevertheless, the US Department of Commerce has said that imports of Chinese seamless steel pipes rose 218 percent in terms of value and 132 percent in terms of volume (tons) from 2006 to last year. The US investigation announcement came shortly after a decision by the European Union (EU) to impose anti-dumping duties on the same category of imports from China. The recent US actions appear motivated by domestic politics. In the case of China's tire imports, President Barack Obama's decision came after the United Steel workers union had filed a safeguard complaint against them. The union is a strong constituency for Obama, and he has been seeking its support for his healthcare reform plan. Investigation into China's seamless steel pipes also appears to have been motivated by similar considerations. The surge in imports of Chinese tires and seamless steel pipes has been blamed for job losses in US factories. There is a risk that more similar complaints and actions on both sides could spiral into a trade war. The success of the United Steel workers will spur other US sectors to follow suit because of the difficult employment situation in America. The current recession is by far the most severe in terms of cumulative job cuts: more than 7.2 million.
If more safeguard complaints against Chinese imports are filed to preserve US factory jobs it will heighten bilateral tensions. Despite the low economic fallout of the US' tariff move, China will have to protect the interests of its producers and workers. This is a year when China's real GDP growth will slow significantly, and its companies have been cutting costs and jobs. The Chinese government is very sensitive to any possible build-up of social discontent and will go to great lengths to keep social harmony intact, and hence could retaliate with similar trade action or through other means such as verbal intervention on its purchase of US Treasuries. Such a chain of events is obviously undesirable and will result in several negative consequences for both sides. China-US bilateral trade is substantial at more than $400 billion (2008 figure). Trade with China accounts for about 12 percent of total US trade, while China's trade with US accounts for 13 percent of its total. Thus if the trade dispute spreads to other sectors, it will have a substantial negative impact on global trade, which is already projected to contract by about 10 percent this year. The difficult employment situation makes more trade disputes possible, but a full-blown trade war seems unlikely. Leaders of the two countries will have to protect and create jobs in their countries. The pressure of a difficult job market will not go away anytime soon, and this will translate into complaints of unfair trade practice by other countries. Therefore, leaders of the two countries will to a certain extent have to dance to the tunes of their domestic constituents. But they seem to recognize the high cost of a full-blown trade war. The cases that the US has acted upon have so far been those with low impact. This indicates that the Obama administration will choose its cases strategically to appease its constituents, but it will be careful, too, not to inflict significant damage to bilateral trade.
On a one-year horizon, it is unlikely that cumulative trade actions by the US will amount to more than 1 percent of China's total exports. The Chinese leaders will be reacting to US actions as strongly as they need to in order to deter the US from taking more such moves. But we believe that they are not going to cast new stones at the US, considering their intertwined economic interests. China is one of the US' key financiers by virtue of having large holdings of US Treasury bills, and it will clearly benefit from the recovery of the US economy. The author is an analyst with Deutsche Bank AG.
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