A Trade War Brews

On September 11, 2009, the U.S. announced a three-year punitive tariff on imports of Chinese tires. Two days later the Chinese Ministry of Commerce (MOC) responded by launching antidumping and anti-subsidy investigations on some American auto and chicken products. On October 30 the U.S. International Trade Commission (ITC) reached affirmative threat determinations on China-made seamless steel pipes, giving the Department of Commerce the go ahead to continue its antidumping and countervailing duty investigations on these imports.

The exchange of fire between the two nations intensified in November. Provoked by antidumping duties by the U.S. on more of China’s products C oil well pipes (the rate is up to 99.14 percent), coated paper and potassium phosphate salts, the MOC chose to return the favor with antidumping and anti-subsidy investigations into certain U.S.-made off-road vehicles and sedans following an appeal filed by the China Association of Automobile Manufacturers (CAAM).

The tug of war between China and the U.S. in their trade relations in 2009 sparked international concern, with fears running deep that it might continue into 2010. To gain further insight into this issue our staff reporter interviewed Dr. Liang Guoyong, an economic affairs officer with the UN Conference on Trade and Development (UNCTAD).

CT: Why does the United State impose trade sanctions one after another on Chinese products while calling for more cooperation?

Mr. Liang: It’s undisputable that the U.S. needs Chinese cooperation in its struggle to pull out of its recession mire. China’s healthy financial system and proactive monetary policies have contributed significantly in stemming the financial crisis and anchoring the world financial markets. Meanwhile, its unprecedented stimulus package has also spurred along strong growth for the domestic economy, which gives traction to the global economy. Today China has become the major engine for international economic growth, and a positive force for America’s financial recovery. As the U.S.’s largest foreign creditor, China’s role cannot be overstated in issues such as the financial stability in the U.S. or helping the dollar maintain its place as the world reserve currency. To combat the economic slowdown, cooperation in bilateral trade and economic relations becomes ever more significant. With this understanding, the two countries have been holding numerous strategic economic dialogues at the highest levels.

But as the close of the crisis looms, their priorities for the American economy shift toward issues like slashing trade deficits and dealing with unemployment. In setting current trade policy it is not always easy to balance the domestic politics and international relations that end up askew C the U.S. government bends to the political demands of small interest groups at home at the cost of hurting its major trade partners. Given its huge trade surplus with the U.S., it’s no surprise China is the first target. The U.S. has obviously steered away from the old way of doing business with China, returning to the tactics of trade restrictions and pushing for a reevaluation of the Yuan.

The hope for a full recovery of the American economy is believed to lie in the better structuring of its exports. In U.S. economic circles, there is a belief that the imbalance in global trade, particularly that between the U.S. and China, is a factor in this economic crisis, and there are calls for a re-balance. The series of American offensives on Chinese products manifests the political resolve of the U.S. to rebuild this equation.

CT: In your study and observation, how large is the China-U.S. trade gap at present? I noticed a

disparity in Chinese and American calculations of the volumes and balance of trades between them. What’s your opinion on this anomaly?

Mr. Liang: Calculation of bilateral trade levels differ in China and the U.S. An example is the transfer trade of made-in-China products. The American figures for its trade deficit with China are inflated to some extent. But we have to agree that there is still a tremendous imbalance. (Figures from the Ministry of Commerce show that during the first ten months of 2009 China’s trade surplus with the U.S. stood at around US $ 107.87 billion, 18.4 percent down from the same period of the previous year. C Ed.)

But we should be aware that the current distribution of international investment and industrial division throughout eastern Asia means that in fact most Chinese exports to the U.S. are actually from foreign-funded enterprises based in China. Moreover, the parts and components of these products, which make up the lion’s share of their gross value, are usually supplied by neighboring countries like Japan and South Korea. China merely assembles them and ships out the finished products. China is often used as an export springboard by other manufacturing countries, which has led to its scapegoat status in the trade imbalance with the U.S.

So my opinion is to view the trade imbalance between the two nations in the context of trade and economic relations between eastern Asia and the U.S. as well as the general imbalance in global trade, and to search for a solution via positive interaction between all parties involved. Meanwhile, an investigation is called for on the relationship between the mode of the American economy and that nation’s deficit in foreign trade; the final cure lies in the restructuring of the American economy.

CT: Many American officials spoke out publicly that the imbalance persists because China is unwilling to increase its purchases from the U.S. Then Chinese officials retorted that was because the U.S. isn’t selling what they want. What’s your view on this point?

Mr. Liang: With disparate strength, China is in the position to sell more labor-intensive products to the U.S., while the U.S. is expected to be primarily a supplier of capital and tech-intensive goods, for which there is a huge demand in China’s sweeping industrialization and urbanization process. But America’s withholding of its high-tech products from China has stymied the colossal market potential. It is time to relax obsolete policies rooted in Cold War philosophy. The change will help ease the trade imbalance between China and the U.S.

CT: Some Chinese scholars predict that trade friction between the two nations in 2010 will mostly arise in the chemical, textile and garment, mechatronics, and iron & steel sectors. Do you agree? Including the industries already wrapped up in antidumping investigations, what will affect China-America trade relations most? Do you have any figures?

Mr. Liang: I think friction is likely where Chinese competitiveness is growing fastest and where Chinese products are taking up American market shares at a rapid pace. The most vulnerable of such sectors are mechatronics and what is conventionally known as heavy chemistry. China’s selection of American exports for countermeasures however is more volatile. The most possible sectors are major job-creating engines in the U.S., such as agriculture, automobile and iron & steel.

It is difficult to estimate the number and value of trade sanction cases and their proportion against the volume of Sino-U.S. trade in 2010. If protectionism gets out of control, the trade war will escalate and inflict grievous damage to bilateral trade. This outcome is not conducive to alleviating the trade imbalance between China and the U.S.; instead it will negatively impact the interests of industrial circles and their employees in both nations. It is foreseeable that both China and the U.S. will work together to avoid this lose-lose outcome and each has to make a compromise. The fallout of the 2010 trade dispute will therefore be kept within a controllable scope, and won’t reach the point of scuttling the general economic relationship between the two countries.

CT: The U.S. always ties the issue of its trade deficit with the dollar-Yuan exchange rate, demanding the appreciation of RMB. There are rumors that the value of Yuan will edge up three to five percent against dollar. What’s your idea on this speculation? I noticed that you suggested in some articles that the Chinese government should make an “appropriate compromise” to ease

China-U.S. trade friction. What do you refer to? Does it include a stronger Yuan?

Mr. Liang: The exchange rate is only one of the factors behind the imbalance in Sino-U.S. trade, and not the fundamental one. During the period between July 2005 and June 2008 the RMB rose markedly against dollar, but the trade imbalance remained unaffected. This is the attestation. The solution to the trade imbalance requires efforts from both countries on all fronts, and resorting to a trade war is the least sensible option. In a time of economic slowdown trade brawls have political implications. In this situation allowing modest appreciation of RMB is one of the cards China can play in the game with the U.S. to smooth economic ties. When formulating and implementing any new policy, China should keep a level head and watch closely the consequences for global economic recovery. It must also conduct an all-around analysis of the consequences of an appreciation, both positive and negative, to China, the U.S. and the world before taking action.

Though China’s foreign exchange system reform has strengthened the role of the market in deciding the value of RMB, there’s still a lapse between the exchange rate and the market supply and demand, which may result in misleading market signals. Therefore, it is likely and also necessary for China to rationally assess the RMB exchange rate based on an analysis of its domestic economic situation and in view of its economic restructuring objectives; increasing citizens’ incomes, stimulating consumption and suppressing inflation are also goals. Though the details of the 2010 foreign exchange policy C how much the RMB appreciation will be, and when the RMB will step away from the peg to dollar and shift to a basket of currencies C remain open so far, the trend seems clear. Clues can be found in the November report of the People’s Bank of China. Making decisions in light of the real situation and raising the value of RMB by small margins might be the keynotes of China’s exchange rate policy in the coming years.

CT: Some Chinese scholars complain that China is underprepared, and even too weak in responding to the U.S. antidumping charges. What do you think of the Chinese government’s response? What would be the result if China follows a hard line and resorts to retaliation?

Mr. Liang: I think China is fully justified but also fairly restrained in its handling of trade disputes with the U.S. It is essential to take reasonable countermeasures against irrational protectionism. But sanctions and over reaction will lead to a vicious tit-for-tat situation, harming both parties. Contention is inevitable in international trade and economic relations, and compromise has always been important. Challenging is a means to achieve compromises in your opponent, but it is compromise on all sides that will favor maximum gains. Businesses hit by trade protectionism should make themselves heard and fight back actively, against antidumping litigation to protect their interests. Given the limited resources and strength of individual enterprises, the government should also provide them with the necessary aid.

CT: Will U.S. trade sanctions against China trigger a chain reaction and encourage the EU to adopt similar measures? As the world economy still struggles to gain its footing, what impact would an exacerbated fray on trade issues have on China and the overall global economy?

Mr. Liang: The China-U.S. relationship is currently the most important bilateral tie in the world. Sound trade and economic relations between the two nations are crucial not only to their own economic health but also to that of the world. If their trade spats spiral up into a trade war, the economic interests of both nations will suffer heavy losses, impeding their vulnerable economies severely. This in turn will be a heavy blow to the rally of the world’s economy.

At present, trade protectionism is still controllable. But it can easily go wild if major players in international trade do not show restraint in the methods of foreign relief they adopt. They might set off a wave of retaliation that would be felt around the world.