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September 1, 2010

A China Trade Policy Most Mixed

How do you explain a policy as confusing as this? On the one hand, President Barack Obama refuses to declare that China is a currency manipulator, even though, by all Treasury Department standards, that's exactly what China has been doing for many years now, and even though the former Sen. Obama was a Chinese currency hawk. The president and Treasury Secretary Timothy Geithner both say, somewhat timidly, that it's better to talk to China about its undervalued currency than it is to actually try to take the first concrete step to combat those policies.

But on the other hand, the administration vigorously pursues trade cases against China and has even invoked the China-specific Section 421 of current U.S. trade law to punish the Asian giant for its trade policies in tires. President George W. Bush, in contrast, refused to use Section 421 despite at least four opportunities to do so.

Of course, the recession has had a lot to do with the increase in trade cases, and the law obliges the administration's regulatory machinery to respond when complaints are made. But as China currency watchers have seen many times in the past, what passes trade law muster can be a function of political ideology as much as, or more than, a simple management function within the Commerce Department.

Certainly, the number of China cases has grown. In 2009, the Department of Commerce initiated 22 anti-dumping/countervailing duty investigations of Chinese products in response to U.S. industry petitions. That was an increase from the 15 investigations directed at China in 2008, President Bush's last year in office. All four such cases initiated so far in 2010 have been directed at China.

The department says it initiates an investigation only when a U.S. industry petitions for redress, and, not surprisingly, such petitions increase during economic downturns. “Disputes have increased, but it's more a function of the Great Recession rather than administration policy,” suggests Gary Hufbauer, a senior fellow at the Washington, D.C.-based Peterson Institute for International Economics.

A clearer indication of the administration's intentions may be the president's decision in September 2009 to levy a 35% tariff—to be reduced 5% per year for three years—on imported Chinese tires in response to a United Steelworkers Union complaint. The union, which endorsed candidate Obama, claimed, and the International Trade Commission agreed, that Chinese tires violated Section 421.

Section 421 was inserted in 2001 as a buttress against problems anticipated on China's entry into the World Trade Organization. It imposes a lower burden of anti-dumping proof for China than other nations. The president decides what protections to order after an ITC recommendation.

“I have no doubt that the tariffs in Chinese import tires are helping domestic tire manufacturers,” says Joung Park, equity analyst for Chicago, Illinois-based investment research company Morningstar, Inc. Park cites a 25% second-quarter increase in North American light vehicle tire shipments from Cooper Tires—the second-largest U.S.-based tire company—compared with a 7% industry average increase. A case filed by U.S. steel wire manufacturers, which ended with tariffs as high as 234% being placed on Chinese imports, was so effective that importers have resorted to trans-shipping steel wire products from China to third-party countries such as Mexico, Canada and Vietnam and then into the United States, bypassing the tariff, the Coalition for Enforcement of Antidumping and Countervailing Duty Orders says.

China has retaliated. In response to the tire tariff, it initiated an anti-dumping case of its own against U.S. cars and automotive parts, and also enacted a tariff that effectively ended U.S. chicken exports to China. That clampdown could be particularly troublesome given that the Obama administration has been reluctant to open trade doors to other markets, says Frank Lavin, who served as under secretary of commerce for international trade under President Bush from 2005 to 2007.

Of the 64 international trade pacts that have gone into effect since 2005, the U.S. has been a part of five, and has 14 free trade deals with other nations (including Canada and Mexico under NAFTA).

“Almost all presidents have used combinations of carrots and sticks—trade liberalization and trade sanctions,” says Lavin, now chairman of public affairs practice, Asia Pacific, at global public relations firm Edelman. “The distinctive aspect of President Obama's approach is not so much that he has increased the sticks, though he has. It is that he has almost completely eliminated the carrots. Any work on trade liberalization with those who play by the rules would penalize countries that do not play by the rules.”

Chinese currency manipulation, meanwhile, is a much larger issue that impacts all domestic manufacturers. The undervalued yuan gives Chinese producers a price advantage of up to 40% before the first item crosses U.S. borders. Yet the administration won't act on it, and neither will other global agencies charged with doing so (see “Currency Non-Grata,” Forward, July-August 2010).

The trade disputes thus serve as a way for Obama to appear tough on China without addressing the root problem.

“I think the Obama administration hopes that tough enforcement will, to some extent, take pressure off the currency question,” says Hufbauer. “I have my doubts.”