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EU Tariff Move Spooks Shanghai

|Includes: iShares China Large-Cap ETF (FXI)

Shanghai sold off 5% on Wednesday with most financial papers suggesting that investors were reacting to hints that Chinese authorities might drastically curtail bank lending in the second half of 2009. But we believe the more likely culprit for the stock market rout was the trade news coming from Brussels. A Tuesday vote by EU trade officials to impose punitive tariffs on imported steel pipes from China narrowly passed. What’s more, the trade outlook is likely to get even more hairy next month as trade lawyers now expect even more industries will be in line to pine for protective tariffs for their own fiefdoms.

World Bank President Robert Zoellick characterized protectionism as being on par with a 'low- grade fever' last June, yet this latest move by the EU suggests the malady is intensifying. Temporary duties of 24% have been in place since April, but the new duties, which would range from 17.7% to 39.2% would take effect in October and last for five years. The trade ripples emanating from Europe are likely to impact the American trade debate, emboldening protectionist forces in the U.S. For their part, the Chinese are preparing a case at the WTO against the EU and U.S. over steel tariffs, and on Monday, the Chinese Ministry of Commerce issued a public statement saying it was "gravely concerned" about anti-dumping duties on Chinese imports in the U.S. and the EU.

Here's the WSJ story on this issue: