Are the U.S. and China Currently in the Middle of a Trade War?

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 currently holds no position in Chinese equities.

Comments

[Freya:]

Chinese equities are Backed by China's drive to be the Number one economy in the World.

The USD is backed by The Ability to print more dollars than any developed country before it.

Before China, Japan was the designated Dumper of choice.

There are more things that China can do to us than ship lower cost finished products into the USA, They can Stop shipping to us and live off their currency Reserves.

They can stop Buying our Treasuries altogether and start selling them into the Open Market.

"But the USD would Tank, they wouldn't risk their Reserves."

They have roughly $800 Billion in Treasury Debt out of $2.3 Trillion in Foreign Reserves, Or about 35%. If the USD were to tank 50%, it would be doing so against the Other Currencies, The Yuan is tied to the USD. And Even if it weren't, The appreciation of the other currencies held would easily offset the USD's decline.

We will Lose when push comes to shove.

Nov 08 08:55 AM

[tripleblack:]

China's reserves are not necessarily what they appear:

blogs.cfr.org/setser/2.../
China does NOT tell us precisely what currencies and assets make up their reserves - and they do not mark the value of those reserves to market, either - but the best guess of many experts is that dollars constitute over 65% of the total, either as a major component in their current account (trade surplus, which has dropped like a rock since the start of the recession), or from investments made in American equities (primarily in 2007 and early 2008, NOT the best time to go long in our stock market). Their Treasuries are only a portion of their dollar assets, which may (which is the problem assessing what goes on within an opaque, totalitarian government) be more like $1.5trillion (though if marked to market, several hundred billion may not be there anymore).

China starting to sell off their Treasuries (which might be considered "the nuclear option" in any trade fracas) would be painful for them (they would be writing off hundreds of billions of dollars, and foregoing billions more in interest earnings) and of course do damage to us as well. It is far more likely that they would exercise better judgement and conduct any trade war in areas where the damage done to themselves is as limited as possible (the current low-level tit-for-tat), rather than seek to circumvent the MAD (mutually assured destruction) economic relationship which has been erected by both our nations over the past few decades.

Nov 08 09:22 AM

[Aiki14:]

Treasury says they hold $797 billion in US Treasuries as of August 2009
www.treas.gov/tic/mfh.txt
Estimates of Chinese holdings of US denominated assets range to $1.4 trillion out of total $2.5 trillion so it's fair to say 65% is within the realm of possibility.
I am inclined to agree with both Freya and Tripleblack for the most part and thank both for their comments.
I agree that putting large numbers of US treasuries on the market is the nuclear option and quite frankly would be tantamount to a declaration of war. Overt frontal attacks are not the style of the PRC and I see this as unlikely.
One point where I am inclined to disagree is Freyas statement that if the dollar gets devalued 50% it would be against those currencies. I think it would be devalued versus hard assets like gold and oil. The dollar is held by so many that a 50% devaluation would cause extreme trauma to the worlds economy and a devaluation of all the major currencies would occur, possibly even the collapse of the worlds monetary system.

Nov 08 10:18 AM

[davidbdc:]

Lets hope so. I want to fight a war when we can still win it.

Nov 08 10:34 AM

[tripleblack:]

LOL, the thought of all-out economic war between China and the West has an odd resemblance to the problem of "too big to fail". Tearing down either China or America would indeed unbalance world trade in a big way.

This is where I draw the perhaps extreme analogy to MAD. And just as the original MAD balance between the US and the USSR had some pretty nasy side-effects, it still acted as the strong prop holidng up the world's political system and forestalling what in the early 50's looked like an impending armageddon.

Nov 08 11:20 AM

[Alphameister:]

I think both sides understand that an all-out trade war between the two countries would be extremely harmful to both. I hope and expect that such a disaster will be avoided.

I do believe, however, that the jobs problem in the U.S. will prove to be so intractable that we can expect an increasing web of regulations designed to make it difficult (if not impossible) for American firms to go offshore with operations in pursuit of greater profits at the cost of American jobs.

Nov 08 11:32 AM

[jerrydd:]

China has been at economic war against the US and the west for 2 decades. It's time we all fight back with a 30% tariff until they allow their currency to rise that much.

Until we do that and get ourselves off imported oil, we can never recover economically.

Nov 08 11:37 AM

[huangthomas:]

"Trade war" between two countries have been over blown. China should under stand that 35% tariff on tire is a pay back of political debt by Obama. George W Bush have done the same thing with steel and paper. But China still has to take a political stand to show Chinese the government is doing something about it. So they charge dumping of chicken to WTO. American, with exception of minority ethnic groups, do not consume check feet or necks. They are delicacies in China if properly prepared. If we dumps, literally, those chicken parts to China, the "dumping" should be an environmental issue, not trade issue.

Nov 08 12:07 PM

[Dave Wrixon:]

Yeah, but if your economy is strong enough then you don't need foreign reserves. Lets face it, the US net foreign reserves are massively negative and have been for a generation. The Chinese would have to loosen controls over the Yuan, but they could survive if all of their foreign reserves were wiped out. Do you seriously believe that the Arabs would refuse Yuan for Oil if that was what was on offer.


On Nov 08 09:22 AM tripleblack wrote:

> China's reserves are not necessarily what they appear:
>
> blogs.cfr.org/setser/2.../
>
> China does NOT tell us precisely what currencies and assets make
> up their reserves - and they do not mark the value of those reserves
> to market, either - but the best guess of many experts is that dollars
> constitute over 65% of the total, either as a major component in
> their current account (trade surplus, which has dropped like a rock
> since the start of the recession), or from investments made in American
> equities (primarily in 2007 and early 2008, NOT the best time to
> go long in our stock market). Their Treasuries are only a portion
> of their dollar assets, which may (which is the problem assessing
> what goes on within an opaque, totalitarian government) be more like
> $1.5trillion (though if marked to market, several hundred billion
> may not be there anymore).
>
> China starting to sell off their Treasuries (which might be considered
> "the nuclear option" in any trade fracas) would be painful for them
> (they would be writing off hundreds of billions of dollars, and foregoing
> billions more in interest earnings) and of course do damage to us
> as well. It is far more likely that they would exercise better judgement
> and conduct any trade war in areas where the damage done to themselves
> is as limited as possible (the current low-level tit-for-tat), rather
> than seek to circumvent the MAD (mutually assured destruction) economic
> relationship which has been erected by both our nations over the
> past few decades.

Nov 08 12:31 PM

[Dave Wrixon:]

Ah, Nostalgia isn't it wonderful.


On Nov 08 10:34 AM davidbdc wrote:

> Lets hope so. I want to fight a war when we can still win it.

Nov 08 12:36 PM

[Dave Wrixon:]

At those levels of devaluation, China would be forced to allow the Yuan to appreciate to avoid hyperinflation. But by that time China would be well on the way to supplanting the Dollar as the major trading currency. Every Western Country and many more besides would be forced to hold Yuan as part of their currency reserves.


On Nov 08 10:18 AM Aiki14 wrote:

> Treasury says they hold $797 billion in US Treasuries as of August
> 2009
> www.treas.gov/tic/mfh.txt
> Estimates of Chinese holdings of US denominated assets range to $1.4
> trillion out of total $2.5 trillion so it's fair to say 65% is within
> the realm of possibility.
> I am inclined to agree with both Freya and Tripleblack for the most
> part and thank both for their comments.
> I agree that putting large numbers of US treasuries on the market
> is the nuclear option and quite frankly would be tantamount to a
> declaration of war. Overt frontal attacks are not the style of the
> PRC and I see this as unlikely.
> One point where I am inclined to disagree is Freyas statement that
> if the dollar gets devalued 50% it would be against those currencies.
> I think it would be devalued versus hard assets like gold and oil.
> The dollar is held by so many that a 50% devaluation would cause
> extreme trauma to the worlds economy and a devaluation of all the
> major currencies would occur, possibly even the collapse of the worlds
> monetary system.

Nov 08 12:39 PM

[Freya:]

Huang, 35% on tires is one thing, 99% on steel pipes quite another.

Besides, which country is the Asian community more likely to favor in a tug of war between China and the USA. The Asean Bloc assumes life next year? Who are they most likely to side with?

The USD has has proved that as it devalues, it increases the Value of most other currencies. As it declines in value Most other commodities rise not just Gold and oil.

And if we impose a Tariff on all China Made Products, our Inflation rate would skyrocket. There is very little made in the USA.

Meanwhile, China has more than doubled their imports of foreign Oil in the Past 10 years. And they are dedicated to sustaining their growth by paying upfront for future Supllies of Everything, not just oil.

The manufacturing base of the USA is located overseas, Lets put a Tariff on it. Serves us right.

Nov 08 01:16 PM

[huangthomas:]

Freya, do you know 50% of our import from China is the FDI, mainly of American corp setting up manufacturing facilities in China. 30% are from Taiwan, Hong Kong and subsidiarirs of Japanese corp. The decision to "import" products from China" is based on our free trade policy. The American corporations are all behind it. Chinese pushes for export accounting for only 20% of Chinese export to the US. I was in China last summer and felt much of the blame to China regarding trade imbalance may not be justified.

Nov 08 08:46 PM

[Ben Gee:]

If China was dumping, China can not sell goods outside China cheaper than inside China. Anyone went to China can tell you how cheap goods are in China. Then, if China is dumping, it must sell goods below cost, right? If China was selling goods below cost for the last 20 years, China certainly got very rich selling goods below cost, right? I do not understand how China can sell goods below cost and got very rich, do you?
Why did US tire companies against duty on Chinese tires? Because they make more money selling Chinese made tires than if they make those tires themselves.
What will the result be when 100% duty is put on Chinese made steel pipes? It will make projects using this pipes uneconomical, they will be iced.
But President Obama has to do something for the unions. And China has to do something to show, yes, to show that China will not be pushed around. I hope when President Obama meets the Chinese leaders, they will laught about this.

Nov 09 06:54 AM