Is There a Trade War Between China and the U.S.?

Recent policy decisions by the Obama administration imposing duties on certain goods imported from the Peoples Republic of China (PRC) and the actions of the PRC in response to these duties have resulted in a straining of the relationship between the two countries. Allegations of "Dumping" have been made by, and denied by, both sides. Dumping is defined as the act of a manufacturer in one country exporting a product to another country at a price which is either below the price it charges in its home market or is below its costs of production. In addition to dumping are unfair trade practices. These practices may include everything from setting up the duties and tariffs allegedly to defend ones domestically manufactured goods to embargo of goods or commodities.

Complaints of dumping against the PRC have been made for decades by the developed nations, usually these charges have been countered by denials and counter charges of protectionism. These complaints are addressed by the World trade Organization (WTO). In 1995 the WTO was Chartered as a successor organization to the 1947, General Agreement on Tariffs and Trade (GATT) . The United States is a GATT signatory and became a WTO member upon its inception in 1995 and the PRC became a member of the WTO in December of 2001. In so doing both agreed to the terms of the GATT and to be subject to the WTO in matters of resolving international trade disputes.

There are conflicting definitions of the term trade war ranging from setting up barriers to the importation of another countries products through tariffs and duties, to the intentional harming of a countries economy by unfair trade practices. In a world where autarky is for all intents and purposes unachievable there is going to be a certain level of conflict as each country looks out for it's own self interest. Seeking advantage over ones competition and getting the best deal for oneself is the nature of commerce.

As China moves from it's historically isolationist policies into an ever increasing level of interaction with the developed nations and seeks to benefit from commerce with these nations it is only natural that some conflicts will arise. What sets China apart is its size and the nature of it's government. The largest population of any nation and the oligarchical semi-communist political organization essentially makes China one enormous corporation where the management controls the labor costs.

In order to make a judgment on whether a trade war exists we must determine if certain conditions are present, and if so does the level of these conditions rise to such a degree that they constitute a trade war.

Dumping
Both sides have accused the other of dumping its products on the other. It is likely that to one degree or another both countries are guilty of the practice, and it is sometimes difficult to differentiate normal business practices and dumping. How does one determine if the price charged is lower than that for domestic consumption if the country in question is communist? How do we determine the domestic price if the domestic currency does not trade on the international market? How do we determine if a company sells internationally a product it doesn't offer domestically? If a company sells at below market costs to reduce inventory or storage cost is that dumping?

Unfair Trade Practices
Again both countries have accused the other of unfair practices and again cases can be made that both countries are guilty of some level of these practices. Is the fact that the Chinese manipulate their currency in and of itself an unfair trade practice? Is the US, with the worlds agreed upon and heavily entrenched reserve currency, when it devalues that currency by central bank policy, engaging in unfair trade practices? Is the imposition of punitive tariffs unfair trade policy or protectionism?

Harm to the Economy of the Nation
If the aforementioned are occurring is it to such a degree that harm is being done? Is dumping lower priced goods harmful? If you are a domestic manufacturer of these goods it is certainly harmful to your business, but if you are an end user it makes your cost lower. Is the net a positive or a negative to ones economy?

Businesses in the U.S. in 2009 have made more complaints against the PRC than any time since the inception of the WTO and the Obama administration has placed tariffs and duties on a number of Chinese products ranging from Tires to Steel to Paper. The International Trade Commission (ITC) has made affirmative injury determinations in many of these cases. The Chinese have countered with tariffs and threats of action of their own on products ranging from Chicken to Chemicals. They maintain the U.S. has undo influence upon the decisions of the ITC and the WTO. They also maintain that due to the downturn in the American economy the businesses are making frivolous complaints and the administration is acting in a manner designed to mollify their constituency rather than engage in fair trade and fair international policy. The rhetoric has been increasingly bellicose, surprisingly so in light of Mr. Obama's visit to China this week.

Perception is reality in the political arena and if both sides increasingly behave as if on a war footing then a war will occur regardless of the underlying reality. Both countries are extremely sensitive in the current economic environment to statements made implying unethical behavior or policies. Both countries are pressured by the world and domestic economic conditions to maintain policies of self interest and to resist policies by others they see as aggressive or provocative. If there is a perception on either side that economic harm of real magnitude is occurring it is likely that potentially extreme retaliatory actions would be taken.

While I would not at this point say a trade war exists I believe the opening salvos have been fired. In my opinion recent actions by both countries have the potential to escalate into what could be a trade war by any definition. This would be a war that neither country is in a good position to wage and neither would gain from. The world economy is in brittle enough condition that a conflict of economic powerhouses would leave many wounded, and recovery would be prolonged and arduous. It is imperative both countries stand down from this footing and agree to civil conduct. Mr. Obama's visit provides the forum for such an agreement, and I hope both he and the Chinese premier realize it and act upon it.

Disclaimer
Author holds no position in Chinese equities currently.

References
World Trade Organization
China Protests U.S. Steel Duties, Starts Probe on American Cars - Bloomberg
China Enforces Anti- Dumping Duties on Imported Chemicals - Top News Singapore
ITC votes for anti-dumping duties on RI, China coat paper - The Jakarta Post
China Blasts US Anti-Dumping Duties Ahead of Obama Visit - China Daily


blog comments powered by Disqus