The Next Big Thing

On Sep 11th 2009, US administration has decided to impose excessive import duties of 35% on Chinese passenger and light truck tires, as a result of a surge of Chinese tire exports that have dented the US tire industry. Just two days after, the Chinese ministry of commerce responded that the Chinese officials were investigating US automotive and poultry product imports following complaints from local industries that some of these products are being dumped in the Chinese market or are benefiting from subsidies, seriously affecting domestic industries. Who will end-up hurt more severely from this mounting trade dispute?
The US introduction of 35% import tariffs will decline to 30% in the second year and 25% in the third. The first tariffs should take effect in 15 days and they would come on top of the current 4 percent level. Politicians have constantly accused China of making protectionist moves, such as the government’s rejection earlier this year of a bid by Coke to buy a Chinese juice maker. Washington is also unhappy about the high volume of Chinese exports to America, accusing Beijing of deliberately keeping the Yuan currency undervalued to make its exports artificially cheap. Between 2004 and 2008, China’s tire production capacity surged by 152% at 235.2 million tires, such that its production capacity in 2008 became more than three times greater than its domestic needs. China’s share of the U.S. tire market surged 255% in that time, to 16.7% from 4.7%. Meanwhile, four US tire plants closed in 2006 and 2007, and three more are planned for closure this year. There were 5,168 fewer workers in the US tire industry in 2008 than there were in 2004.
The US trade deficit with China totaled $103 billion in the first half of 2009, down 13% from the same period last year. However, for the month of July the trade gap with China read $20.4 billion, an increase of 36% from February. While the overall current account deficit (CAD) has improved from $64.9 billion a year earlier or from the record $214.8 billion in September 2006, it is still above the long-term average of $63.2 billion. To cover its CAD, US need to attract about $1 billion a day in new foreign capital. In addition to that, US need China to help float a US budget deficit expected to reach $1.56 trillion this year. As of May 2009, the US owed China $772 billion, representing more than 24% of the US foreign-owned debt. The budget deficit gap will grow to $1.6 trillion in fiscal 2010 before narrowing to $1.4 trillion the following year, according to the Congressional Budget Office.
The currently built-up stock of ongoing World Trade Organization (WTO) disputes between the United States and China is one legacy of the Bush administration. In March 2006, Canada and the European Community (EC) joined the United States in the first dispute by challenging China’s discriminatory treatment of imported automobile parts. In February 2007, the United States and Mexico challenged China’s system of subsidizing domestic industries. In April 2007, the United States initiated two complementary disputes over China’s treatment of imported movies, music, and books—both Beijing’s failure to enforce American intellectual.
On one side US need China for financing its ballooning CAD and budget deficit. On the other side, China needs US to sell an average of $300 billion worth of merchandise on the American market. If the recent events develop into a full-blown trade war, we could see an inevitable collapse of WTO altogether. Fasten your belt seats!