Chapter 12. Economic Sanctions and Free Trade 361
12.12 Possibility of a Trade War between the U.S
and China
Similar to the British people in the 19th century who detested the rise of the U.S., some Americans feel uncomfortable about China’s revival. Some American senators and trade union leaders have threat- ened to impose sanctions against China. Some U.S. government offi- cials have also provoked China with words, as if it is their right not to impose economic sanctions on China. These U.S. senators have tried all possible means to create sensational topics to win votes and attract the attention of voters. The most common one is threatening to impose economic sanctions on China. They might think that China would suffer great losses due to economic sanctions without affecting the U.S. economy. When the Obama administration took office, it taunted China through the tire special safeguard case in the second half of 2009 and other trade sanctions to test its limits.
418 From Trade Surplus to the Dispute over the Exchange Rate
In the U.S. presidential election in 2008, to gain the support of unions, President Obama repeatedly illustrated his trade poli- cies. First, the future trade agreements must include labor and environment standard terms that can be effectively carried out.
Second, the government will make more efforts to implement existing trade agreements, ensure the other party to fulfil its promises, expand the U.S. export market, and protect the interests of the American industrial workers. Third, trade policies must submit to the overall U.S. strategy and strive to gain more benefits from economic glob- alization, thus bringing maximum benefits to the Americans. Mr.
Obama further promised to prevent the reduction of jobs due to international trade after election. Thus, meeting the demands of the unions was imperative. The unemployment rate is currently very high in the U.S., placing tremendous pressure on President Obama. He is very clear that the increase in tariff on China’s tires cannot produce jobs for the U.S., but he has no solution to this problem. He has also shown that the White House is working on solving the unemployment problem to gain the support of the union on health care and other issues. No wonder the Nobel Prize winner for economics Professor Prescott stated, “Mr. Obama may bring protectionism indeed after taking office. In that case, it is very bad for all people.”22
The United Steelworkers of America (USWA) was established early on with power greater than that of unions in other industries.
The group organized strikes and constantly demanded for higher wages. Steel workers were paid more than $50 per hour in the late 20th century. The actions of USWA resulted in the weakening of the competitiveness of the U.S. iron and steel industry, causing a large number of steel mills to close and many workers to lose their jobs. After shaking the U.S. steel industry, the group now intends to make a living by imposing sanctions on China. In fact, the tire industry union should determine whether importing tires made in China damages the interests the U.S. industry. However, the USWA has meddled with the issues and claims sanctions should be placed on tires made in China.
22See www.webcitation.org, Nov. 17, 2009, Prescott, China need not worry about trade frictions and protectionism.
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Many American tire enterprises, especially small- and medium- sized tire wholesalers, oppose the imposition of sanctions on China.
The American Tire Industry Association, on behalf of its interests in the production, sales, maintenance, recycling, and other departments of the U.S. tire industry, informed President Obama about the four adverse consequences of the tire special safeguard case on the U.S. in an open letter: (1) Do not protect the jobs of the U.S. manufacturing industry; (2) Increase domestic tire prices and give U.S. consumers fewer choices; (3) The U.S. tire market may plunge into chaos; and (4) U.S. consumers may delay the necessary behavior of tire replace- ment because they cannot afford expensive tires, which could cause potential dangers to U.S. road safety. Workers in the U.S. tire enter- prises were clear that tires made in China filled the gap in low-end tires in the U.S. market. They are the result of market choice and do not directly cause a shock to the U.S. tire industry. However, the Obama administration did not listen to the cries of the tire industry;
it accepted the proposal of the USWA and announced a decision to impose punitive tariffs on Chinese tires for three years on September 11, 2009. The final punitive tariff rate was 35% in the first year, 30%
in the second year, and 25% in the third year.
More than two years after the U.S. imposed sanctions on Chinese tires, China reduced its tire exports to the U.S., but the U.S. has imported more. According to data from the mission of China to the WTO, the tires imported by the U.S. from China decreased by 23.6%
in 2010 and further decreased by 6% in the first half of 2011, but its total tire imports increased by 20.2% in 2010 and by 9% in the first half of 2011. Goodyear Tire and Rubber Company, the largest tire manufacturing enterprise in the U.S., stated that the U.S. has no price advantage to produce light tires. Thus, after limiting the imports of tires made in China, the U.S. had to import light tires produced by other countries at a higher price. As expected, after the tire special safeguard case in the U.S., the local tire prices increased by 10%–30%.23
23Consumers suffered greatly from the special safeguard; the price of U.S. tires increased sharply by 30%. September 30, 2009, Shanghai Securities News.
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The special safeguard sanction by the U.S. had limited impact on the tire production in China. Before the special safeguard sanction, China’s annual tire exports accounted for more than 40% of its total production. Economic sanctions affected the exports of Chinese tires, but China’s auto production and consumption had been growing rapidly. The automobile production and sales soared from 5.7 to 18 million from 2005 to 2010 or at an average annual growth rate of 25%.
The domestic automobile production has a huge potential demand for tires, and thus tire companies have turned to the domestic market instead of export markets to ease the pressure.
After the tire special safeguard case, the U.S. government became insatiably avaricious. On October 28, 2009, the U.S. Department of Commerce announced additional levies at a rate of 7.44%–12.06% on Chinese steel grille plates and steel strands. On November 3 of the same year, the U.S. Department of Commerce made the preliminary determination of imposing countervailing duties on metal wire trays at a rate of 2.02%–3.13%. On November 5, the U.S. Department of Commerce found the dumping of oil well pipes imported from China, with an anti-dumping rate of as high as 99.14%. On Novem- ber 6, the U.S. International Trade Commission made an initial determination of imposing double reverse tariffs on glossy paper imported from China and Indonesia as well as potassium pyrophos- phate, monopotassium phosphate, and dipotassium hydrogen phos- phate imported from China.
At the end of 2011, the U.S. International Trade Commission determined that crystalline silicon terrestrial photovoltaic cells and modules imported from China caused damage to relevant U.S. indus- tries. Thus, the U.S. Department of Commerce planned to conduct an anti-dumping and countervailing investigation on such products.
Photovoltaic cells are used for solar power generation. The solar pan- els produced by China account for more than half of the total global output. Some Americans believe that the sanctions on China’s pho- tovoltaic cells can narrow the Sino-U.S. trade deficit, but they may not be aware that the main components of photovoltaic cells made in China are from polysilicon made in the U.S. Thus, sanctions on China’s photovoltaic cell production industry actually impose sanc- tions on the U.S. polysilicon industry as well.
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After a series of economic sanctions, on December 8, 2011, the U.S. Department of Commerce made an initial determination of imposing an anti-dumping duty of 5.08%–26.23% on high-pressure cylinders imported from China. Unexpectedly, China was very deci- sive and responded quickly this time. On December 14, 2011, the Ministry of Commerce of China found that GM and Chrysler cars and SUVs with over 2.5-liter displacement produced in the U.S.
had dumping and subsidies. Thus, it imposed anti-dumping duties of 8.9% and 8.8% and countervailing duties of 12.9% and 6.2% on GM and Chrysler cars, respectively. Undoubtedly, as long as China imposes more tariffs on U.S. cars, German and Japanese car compa- nies will gain a large share of the market in China.
In the past 10 years, China has had more than 690 anti-dumping, countervailing, and special safeguard cases involving a total of $40 billion. Among these cases, 73 were initiated by the U.S., involving
$10.3 billion. In the first quarter of 2012, the U.S. made a number of successive anti-dumping and countervailing rulings on metal silicon, silicon terrestrial photovoltaic battery, steel wheel, chemical bright- ener, galvanized steel wire, and solar photovoltaic products exported from China. On April 12, 2012, it even imposed anti-dumping duty on garlic exported from China.24 Seemingly, U.S. sanction measures have been upgrading, but the tire special safeguard case involved only $1.7 billion. As of November 2009, Chinese products on which the U.S. imposed anti-dumping duties or punitive tariffs account for only 3.6% of the total U.S. imports from China. China’s retaliatory measures also account for only 4% of U.S. exports to China. Unlike in the Sino-U.S. bilateral trade volume of $446.64 billion in 2011, the symbolic significance is far greater than the actual impact. The con- frontation between two sides is merely to test each other’s reaction at most.
Some people believe these actions are necessary to prevent trade protectionism and not to provoke a trade war at a time of financial crisis. They suggest ignoring these provocations. Those holding such a view do not really know the U.S. The Obama administration changed the decision of the former president and approved the
24See The People’s Daily, April 17, 2012.
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sanctions on tires made in China because it wanted to balance domes- tic forces. The domestic forces want to see if they can obtain some benefits from the trade war. However, for the right-wing forces with the USWA as their representative to succeed, they must further intensify their actions and produce fresh effects.
Shrinkage and compromise are necessary in the trade negotia- tion, but informing the other side of your bottom line is a much better course of action. Therefore, to prevent a massive trade war from occurring, China should let the Americans know about its bot- tom line. If the U.S. goes beyond it, China will give back tit for tat immediately. Neither side is afraid of the other.
The U.S. and China have engaged in a battle of words. “The wind before the storm fills the mountainside tower.” Will a full-scale trade war break out between China and the U.S.?
No one knows.
No one can guarantee if madmen like Hitler or Hideki Tojo will exist in the future. After the Second World War, many Germans and Japanese could not understand how Hitler dared to attack the Soviet Union immediately after beating Britain and France. The Japanese fascists were engaged in a war with China and could not escape, but they dared to attack Pearl Harbor to provoke the Pacific war. How foolish they were. Perhaps arrogant and conceited madmen who will do stupid things will appear at any moment. Politicians, scientists, and economists with superior intelligence may surround these madmen, but policymakers rarely listen to remarkable insights into any situation.
The U.S. imposed economic sanctions on China three times in history, and all these sanctions failed. However, these failures did not discourage policymakers and movers who believe that their country is the only superpower and that they could easily threaten to impose sanctions on China. According to one U.S. official, “If a trade war breaks out between the U.S. and China, China must be the loser.”25 He is right. China will certainly suffer great loss if it loses the U.S.
market. However, he did not mention that the U.S. would also lose
25See the speech of America’s Deputy Secretary of Commerce Eisenstad to the U.S.
congress on May 16, 1996.
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in the trade war and would lose more than China due to unknown other reasons.
In the Sino-U.S. trade, China has the flexibility of making small adjustments, but making principled concessions is impossible.
A trade war between China and the U.S. will bring great losses to China’s economic development but will not reverse its trend. The bilateral trade is not the primary reason for the falling U.S. compet- itiveness, and the trade war will accelerate the decline of the U.S. At this juncture, the key to stop a trade war is to inform the American right-wing forces about the damage to themselves and prevent them from doing anything rash. In the past few years, the Sino-U.S. trade relations have been near the point of a trade war several times, but China and the U.S. just shake hands and make up. Both sides know that economic sanctions are a double-edged sword that can hurt both parties, weaken their competitiveness, and give their market shares to the competitors. Facts prove that both sides can take reasonable countermeasures rationally after knowing the other side’s bottom line. As long as the U.S. government and congress can obtain accu- rate information, they will naturally make the right decisions. In the future, with the further development of trade with countries in the world, China may sufferer from trade conflicts more frequently, but this is an unnecessary concern because the world will not end if it encounters trade conflicts.
The U.S. Department of Commerce found that China dumped steel wheels on March 19, 2012 and planned to impose anti-dumping duties of 44.96%–193.54% and countervailing duties of 25.66%–
38.32% on relevant products. On April 15, the U.S. International Trade Commission ruled that mainland companies did not need to be responsible for these duties. In 2012, China had six cases of trade friction with the U.S., with one succeeding and one failing. In the future, business between two countries will continue and so will the cases, as troubles are unavoidable in business.