Trade tensions flare up between China & US

The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the US on Chinese websites in response to the tire tariff. “The US is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of US Treasury bonds.

The impact of the dispute extends well beyond tyres, chickens and cars. Both governments are facing domestic pressure to take a tougher stand against the other on economic issues. But the trade battle increases political tensions between the two nations even as they try to work together to revive the global economy and combat mutual security threats, like the nuclear ambitions of Iran and North Korea.

Obama’s decision to impose a tariff of up to 35 per cent on Chinese tyres is a signal that he plans to deliver on his promise to labour unions that he would more strictly enforce trade laws, especially against China, which has become the world’s factory while the US has lost millions of manufacturing jobs. The trade deficit with China was a record $268 billion in 2008.

China had initially issued a fairly formulaic criticism of the tyre dispute on Saturday. But rising nationalism in China is making it harder for Chinese officials to gloss over American criticism.

“All kinds of policymaking, not just trade policy, is increasingly reactive to internet opinion,” said Victor Shih, a Northwestern University specialist in economic policy formulation.

Eswar Prasad, a former China division chief at the International Monetary Fund, said that rising trade tensions between the US and China could become hard to control. They could cloud the G20 meeting of leaders of industrialised and fast-growing emerging nations in Pittsburgh on Sept 24 and 25, and perhaps affect Obama’s visit to Beijing in November.
China exported $1.3 billion in tyres to the US in the first seven months of this year, while the US 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.
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. In the last five years, the US commerce department has restricted Chinese imports of everything from bras to oil-well equipment.

For the most part, Chinese officials have grumbled but done little, preferring to preserve a trade relationship in which the US buys $4.46 worth of Chinese goods for every $1 worth of American goods sold to China.

Now, the delicate equilibrium is being disturbed. The official Xinhua news agency website prominently linked its reports on the tyre dispute and the Chinese investigations.

Side-effects

The commerce ministry statement, posted on its website, also hinted obliquely at the harm that a trade war could do while Western nations and Japan struggle to emerge from a severe economic downturn. “China is willing to continue efforts with various countries to make sure that the world economy recovers as quickly as possible,” the statement said.

The Chinese government sometimes organises blog postings to defend its own policies. But some postings on the tyre decision have been implicitly critical of the Chinese government, making it unlikely that they are part of an orchestrated effort.
China has accumulated $2 trillion in foreign reserves, mostly in Treasury bonds and other dollar-denominated assets, and held down the value of its currency, which has kept Chinese goods quite inexpensive in foreign markets. China’s exports have soared — China surpassed Germany in the first half of this year as the world’s largest exporter — while China’s imports have lagged, except for commodities like iron ore and oil that China lacks.

Worries that China might sell Treasury bonds have been a concern for the Bush and Obama administrations as they have tried to figure out how to address China’s trade and currency policies.

At the same time, the Chinese economy relies heavily on exports to the US, while the American economy is much less dependent on exports in the other direction. Exports to the US, at six per cent of China’s entire economic output, account for 13 times as large a share of the Chinese economy as exports to China represent for the US economy.
Products involved in trade disputes between the US and China together make up only a minuscule sliver of the two countries’ trade relationship.

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 US to dissuade the Obama administration from aggressively challenging China’s policies.

General Motors sees much of its growth coming from its China subsidiary, the second-largest auto company in China after Volkswagen. And the farm lobby in the US has long pressed for maximum access to a market of 1.3 billion mouths.

But spotlighting automotive trade may be risky for China. GM and Ford both rely mostly on local production to supply the Chinese market, while China is rapidly increasing auto parts shipments to the US.