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Growing China-U.S. Trade Spat 'Could Turn Ugly Very Quickly'

Keith Bradsher|The New York Times
Monday, 14 Sep 2009 | 10:19 AM ET

HONG KONG — An increasingly acrimonious trade dispute between China and the United States over the past three days is officially about tires, chickens and cars, but is really much broader.

Trade
Trade

Both governments face domestic pressure to take a tougher stand against the other on economic issues. But the trade frictions are increasing political tensions between the two nations even as they try to work together to revive the global economy and combat mutual security threats, like the nuclear ambitions of Iran and North Korea.

On Friday evening in Washington, President Barack Obama announced that the United States would levy tariffs of up to 35 percent on tires from China. China’s commerce ministry issued a formulaic criticism of the American action on Saturday, but after a frenzy of anti-American rhetoric on Chinese Web sites, the ministry unexpectedly announced on Sunday night that it would take the first steps toward imposing tariffs on American exports of automotive products and chicken meat.

Late Monday, the ministry said in a statement that it was demanding talks with the United States on the tire tariffs. Carol J. Guthrie, a spokeswoman for the office of the United States trade representative, said earlier in the day that the United States wanted to avoid disputes with China and continue talks on tires, but would look at any Chinese trade decisions for whether they comply with World Trade Organization rules.

Eswar Prasad, a former China division chief at the International Monetary Fund, said rising trade tensions between the United States and China could become hard to control. They could cloud the Group of 20 meeting of leaders of industrialized and fast-growing emerging nations in Pittsburgh on Sept. 24 and 25, and perhaps affect Mr. Obama’s visit to Beijing in November.

“This spat about tires and chickens could turn ugly very quickly,” Mr. Prasad said.

The Chinese government’s strong countermove on Sunday night followed a weekend of nationalistic vitriol on Chinese Web sites. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of U.S. Treasury bonds.

But rising nationalism in China is making it harder for Chinese officials to gloss over American criticism.

“All kinds of policymaking, not just trade policy, is increasingly reactive to Internet opinion,” said Victor Shih, a Northwestern University specialist in economic policy formulation.

Mr. Obama’s decision to impose a tariffs on Chinese tires is a signal that he plans to deliver on his promise to labor unions that he would more strictly enforce trade laws, especially against China, which has become the world’s factory while the United States has lost millions of manufacturing jobs. The trade deficit with China was a record $268 billion in 2008.

China exported $1.3 billion in tires to the United States in the first seven months of 2009, while the United States shipped about $800 million in automotive products and $376 million in chicken meat to China, according to data from Global Trade Information Services in Columbia, South Carolina.

For many years, American politicians have been able to take credit domestically for standing up to China by enacting largely symbolic measures against Chinese exports in narrowly defined categories. In the last five years, the U.S. Commerce Department has restricted Chinese imports of goods as diverse as bras and oil well equipment.

For the most part, Chinese officials have grumbled but done little, preferring to preserve a lopsided trade relationship in which the United States buys $4.46 worth of Chinese goods for every $1 worth of American goods sold to China.

Now, the delicate equilibrium is being disturbed.

China’s commerce ministry announced Sunday that it would investigate “certain imported automotive products and certain imported chicken meat products originating from the United States” to determine if they were being subsidized or “dumped” below cost in the Chinese market. A finding of subsidies or dumping would allow China to impose tariffs on these imports.

The ministry did not mention the tire dispute in its announcement, portraying the investigations as “based on the laws of our country and on World Trade Organization rules.”

But the timing of the announcement — on a weekend and just after the tire decision in Washington — sent an unmistakable message of retaliation. The official Xinhua news agency Web site prominently linked its reports on the tire dispute and the Chinese investigations.

The commerce ministry statement, posted on its Web site, also hinted obliquely at the harm that a trade war could do while Western nations and Japan struggle to emerge from a severe economic downturn. “China is willing to continue efforts with various countries to make sure that the world economy recovers as quickly as possible,” the statement said.

The Chinese government sometimes organizes blog postings to defend its own policies. But some postings on the tire decision have been implicitly critical of the Chinese government, making it unlikely that they are part of an orchestrated effort.

“Why did our government purchase so much U.S. government debt?” said one posting signed by a “Group of Angry Youths.” It continued, “We should get rid of all such U.S. investments.”

China has accumulated $2 trillion in foreign reserves, mostly in Treasury bonds and other dollar-denominated assets. It has done so by printing yuan on a massive scale and selling them to buy dollars.

This has held down the value of yuan in currency markets and kept Chinese goods quite inexpensive in foreign markets. China’s exports have soared—China surpassed Germany in the first half of this year as the world’s largest exporter—while China’s imports have lagged, except for commodities like iron ore and oil that China lacks.

Worries that China might sell Treasury bonds — or even slow down its purchases of them — have been a concern for the Bush and Obama administrations as they have tried to figure out how to address China’s trade and currency policies.

But China now finances a much smaller portion of American borrowing than a year ago. The savings rate in the United States has climbed during the recession and many private investors around the world have been seeking the safety of Treasuries.

At the same time, the Chinese economy relies heavily on exports to the United States, while the American economy is much less dependent on exports in the other direction. Exports to the United States, at 6 percent of China’s entire economic output, account for 13 times as large a share of the Chinese economy as exports to China represent for the United States economy.

The American Chamber of Commerce in China said in a statement on Monday afternoon, “We respect the rights of governments to take W.T.O.-compliant trade actions, but caution both the U.S. and China against an escalation of restrictive trade measures that could undermine economic recovery in both nations.”

Products involved in trade disputes between the United States and China together make up only a minuscule sliver of the two countries’ trade relationship.

The bigger risk for China, economists and corporate executives have periodically warned, is that trade frictions could cause multinationals to rethink their heavy reliance on Chinese factories in their supply chains. The Chinese targeting of autos and chickens affects two industries that may have the political muscle in the United States to dissuade the Obama administration from aggressively challenging China’s policies.

General Motors sees much of its growth coming from its China subsidiary, the second-largest auto company in China after Volkswagen. The farm lobby in the United States has long pressed for maximum access to a market of 1.3 billion mouths, and agriculture is one of the very few trade categories in which the United States runs a trade surplus with China.

Chickens are a longstanding issue in Sino-American trade relations. The United States only allows the import of chicken meat from countries that meet food safety inspection requirements that are certified by the United States Department of Agriculture as equivalent to American standards. But Congress, worried about low-cost Chinese chickens at a time of international worries about food safety in China, has banned the Agriculture Department for the last several years from spending any money to certify China’s procedures as equivalent.

The Senate budget bill, expected to come up for a vote next week, would remove the ban. So China’s latest move could represent an attempt to influence that vote.

But spotlighting automotive trade may be risky for China. G.M. and Ford both rely mostly on local production to supply the Chinese market, because of steep Chinese tariffs on imported cars and car parts.

But China has rapidly increased its share of the auto parts market in the United States over the past three years, at a time of rising unemployment in the Upper Midwest, where the manufacture of auto parts has long employed more people than the final assembly of cars.

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