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First shots fired in US-China trade war
There has been rising concern in
recent weeks that China’s burgeoning trade with the United States
could lead to worsening bilateral economic relations and
repercussions for global trade.
In the first two months
of this year, China’s bilateral trade surplus with the US hit an
all-time high of US$39.7 billion, with the March surplus projected
to double to around US$20 billion.
The upsurge in Chinese exports has been of great concern to the
US. The overall trade surplus last year hit the unprecedented
level of US$232.5 billion, one third of America’s total trade
deficit.
The US government has reacted to the latest news by imposing
countervailing duties of 10.9% and 20.4% on imported coated paper
from China, in what many have interpret as the first shots in the
start of a trade war.
Until now, it has refrained from using countervailing duties
against China, having mainly resorted to anti-dumping actions. Its
latest action appears to treat China like a free market economy
rather than one where many industries could be subsidised by the
state.
For some considerable time, the US government has been pressuring
China to revalue the yuan, arguing that an artificially low
currency is an impediment to trade and that it provides Chinese
manufacturers with an unfair advantage.
A lowly valued currency has been used in the past, notably by
Japan, to promote export-led growth but that policy came to an end
in the mid to late-1980s under severe US pressure saw the yen
revalued to its current levels.
The mood in the US Congress is also in favour of various
protectionist measures that it hoped would bring the China trade
into balance.
In his statement on the tariffs on coated or glossy paper imports,
US commerce secretary Carlos Gutierrez said: “We want fair trade
and we will use every tool at our disposal to guarantee that our
companies have a level playing field.”
He said the US now had the ability to “quantify” subsidies by
non-market economies.
China has been unhappy with the US decision and has warned of
possible retaliation, and one government official claimed the
trade surplus for January and February was unlikely to be
indicative of the trend in the first quarter of this year or the
year as a whole.
Most analysts felt a high trade surplus could be anticipated once
again for March, possibly in the vicinity of US$20 million,
providing further impetus for US calls for action against the
Chinese.
Ironically, leading US management consultants McKinsey had warned
early last year that American and European producers of coated
papers, who were eyeing the burgeoning Chinese market, were likely
to be in a for rude shock.
“Fine paper capacity is exploding throughout Asia, particularly in
China,” wrote Peter Burg and Per-Ove Nordström, in an article in
March last year titled “The China factor in fine paper”.
Predicting an overcapacity in world demand for fine paper, they
noted that China’s production capacity for this product was
expected to double to around four million tonnes a year by 2008
and that this could transform the country from an importer into a
net exporter.
The article predicted the Chinese plants will be competitive with
imports from the US and Europe and come in around the middle of
the Asian cost curve.
The McKinsey article raises questions about the legitimacy of the
American trade actions which only affects a miniscule portion of
bilateral trade anyway.
If the Americans decide to extend the countervailing duties or
tariffs to other Chinese products such as textiles, plastics and
steel, there will be the ever-present danger of a strong reaction
from China.
There is a certain level of irony in the entire situation.
China’s economy has continued to grow at double digit rates
despite various measures by the authorities to slow it down.
This growth is largely responsible for lifting poverty for
millions of Chinese.
In the United States, on the other hand, while it is feeling the
brunt of China’s increasing role as the world’s major power in
terms of manufacturing activity and exports, its economy too has
been very buoyant.
Helped partly by the Chinese imports, inflation has remained
relatively low and employment remains very strong despite some 1.5
million manufacturing jobs having been shed between 1989 and 2003.
In fact, financial inflows into the US last year amounted to
US$719 billion, largely made up of purchase of US Treasury bonds
by Asian buyers, while foreign direct investment into the US
totalled US$183.6 billion.
While the US would like to blunt the Chinese export onslaught into
its markets in favour of more even trade, there is no guarantee
that a stronger yuan is going to bring about this result in the
short to medium term.
There is every likelihood, in fact, that tough actions on the part
of the US could be counter-productive especially at a time when
the US economy shows some signs of being impacted by inflationary
pressures and a possible slowdown.
 
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