Deutsche Bank Research asks how likely it is that last week’s spat between China and the US on the issue of tyre tariffs will lead to a larger trade confrontation and more protectionism. DBR says that intertwined economic interest should prevent a major escalation, although opportunistic moves by other industries cannot be ruled out.
DBR economist Syetarn Hansakul, says China is retaliating against President Obama’s decision to impose punitive tariffs on its tyre exports. China has filed a complaint with the WTO (World Trade Organisation), protesting against the US decision to impose emergency tariffs on Chinese-made tyres (35% in the first year, 30% in the second and 25% in the third). It also said it would be launching investigations into imports of US chickens and auto parts to see whether they involve unfair trade practices as well as considering the possibility of imposing anti-dumping measures and countervailing duties.
The US decision appears motivated by domestic politics. President Obama’s decision appears to be motivated by the desire to appease the United Steelworkers union, which brought forward the safeguard complaint against Chinese-made tyres. The union is a strong constituency for Obama, and he is believed to be seeking its support for his healthcare reform plan.
Immediate impacts of these trade actions on China-US trade are low. The value of Chinese tyre exports to the US is insignificant at less than 1% of China’s exports to the US and less than 0.15% of China’s total exports. On the macro scale, the tariffs will barely make a dent, if any, on China’s overall export performance.
Hansakul says China has no choice but to act tough. Despite low economic fall-out from the tariffs, China must be seen to be protecting the interests of its domestic tyre producers and workers. This is a year when real GDP growth is slowing significantly, and companies are cutting costs and jobs. The Chinese government is very sensitive to any possible build-up of social discontent and will go to great lengths to keep social harmony intact.
The Ball is in WTO’s court. The US side has expressed confidence that the action is within its legal rights and consistent with WTO rules. When China was admitted to the WTO in 2001, it agreed to safeguard clauses which state that US companies only have to show that imports of certain products are surging. They do not need to show that the imported products benefit from subsidies or are being dumped at unfair prices. Whether or not the WTO will be sympathetic to China’s cause remains to be seen.
Syetarn Hansakul says the key risk is that other sectors may follow the example of the United Steelworkers union, and actions on both sides could spiral into a trade war. It is possible that the success of the United Steelworkers will spur other US sectors to follow suit. More filings of safeguard complaints against Chinese imports will heighten bilateral tensions. China would be more inclined to retaliate against US companies doing business in China in an informal manner. This chain of events will obviously be undesirable and have negative consequences for both sides. Bilateral trade is substantial, at more than US$400bn in 2008. Trade with China accounts for around 12% of total US trade, while China’s trade with the US accounts for 13% of its total. Thus if the trade war spreads to other sectors, negative impacts will be substantial with severe repercussions for global trade, which is already projected to contract by around 10% this year.
China’s other possible recourse, while unlikely, China could also pressure the US via verbal or effective action with regard to its purchases of US Treasuries, which play a key role in determining the level of domestic US interest rates. Unnecessary volatility in US Treasuries and money market rates will not be helpful to global recovery.
Hansakul says Obama’s recent comment suggests common sense will prevail. While both leaders will to a certain extent have to dance to the tunes of their domestic constituents, they appear to recognise the very expensive cost of a full-blown trade war. Obama’s stern comment that we’re not going to see a trade war seems to indicate that he will not entertain protectionist demands by other sectors. She says the best hope is that this punitive tariff on Chinese tyres is a one-off political concession in light of the healthcare reform power play. As for China, its leaders will likely respond to US actions in as tough a manner as necessary to deter further moves by the US side. But we believe they are not going to cast new stones at the US, considering their intertwined economic interests.
