Rising Trade Tensions

As was the campaign and the initial appointments, the election of an unorthodox candidate promises to change the way things are done in Washington. However, just as there were some continuities between Obama and Bush, there will be some continuities between Trump and Obama.

Some policies that are often associated with Reagan began under Carter. For example, the defense build-up that many attribute to Reagan began by Carter after the Soviet Union invaded Afghanistan. Similarly, the deregulation attributed to Reagan also began when Carter deregulated the airlines.

We are reminded that G.W Bush and Obama threatened to cite China as a currency manipulator during their initial campaigns, neither did. Under instructions from Congress, the US Treasury has developed a more quantifiable definition of currency manipulator, and still concluded that China does not meet the definition.

Citing China as a manipulator seems difficult in the current environment. It is true that there are plenty of indications that the PBOC is engaged in the foreign exchange market regularly. However, rather than trying to weaken its currency, it has been buying it. If Chinese officials were to stand back fully, we suspect the yuan would weaken sharply. Its current account surplus is more than offset with capital outflows, even if some significant part of the outflows reflect Chinese companies paying down foreign debt (mostly dollars). China's trade surplus with the US has eased this year, and some of those goods that China exports to the US are owned by US companies, who may use local labor for assembly and other work.

Leaving aside the currency issue, one area that there is likely to be some continuity between Trump and Obama is the hardline on trade relations with China. It does not appear to be recognized that the Obama Administration succeeded in keeping Europe and Japan on board with refusing to recognize China as a market economy. This is important.

Earlier it had looked as if the EU, and possibly Japan would break ranks and accept that China is a market economy. This sounds like a small detail, but what is at stake is combating dumping. China argues that 15 years after joining the WTO (11 December 2001, when many had argued after 9/11 globalization was over) the rules that allow anti-dumping duties to be calculated using a special formula and prices in third countries expires. If China were a market economy, WTO members would compare domestic prices export prices.

At the end of last week, the US imposed anti-dumping duties on Chinese-made washing machines (2015 imports ~$1.1 bln). It also announced it would launch a new anti-dumping investigation into Chinese plywood imports (2015 imports ~$1 bln). China has sought consultations with the EU and US and indicated that if it did not get satisfaction, and has filed a formal WTO complaint.

The EU's own rules regarding dumping are being revised with an eye toward China. An agreement was struck earlier this week that will allow the EU to impose higher tariffs on imports of some raw materials. At issue is the EU's "lesser-duty rule." This allows the imposition of a tariff on imports that offsets the injury suffered by domestic producers, but not as large as "dumping margin," which is the difference between the price of imports and what is calculated to be a fair price. In practice, this means that EU applies considerably lower duties than the US. For example, the EU imposed a 21% tariff on the same (cold-rolled) steel products this year that were hit by a 266% duty by the US last year.

The UK had been perceived to be among the most vocal proponents of recognizing China as a market economy, but its influence in the EU has waned since it voted to leave. Slow domestic growth makes Italian steel producers particularly vocal in resisting giving up the WTO's anti-dumping protections. Reportedly, Spain is also reluctant. Germany, which is more competitive, making it less vulnerable to cheap Chinese steel imports, but it appears to have decided to use its political chits on something else. Last week, the EC launched three new investigations into dumping charges levied against China in steel and iron. The EC has already imposed 18 anti-dumping and anti-subsidy measures against China.

Before the new US Administration assumes office, trade tensions with China have increased. It is not simply an American-Sino issue. The EC is also becoming less tolerant. Among emerging market economies Brazil and India have reportedly become more aggressive in bringing anti-dumping charges against China. The confrontation is unlike to abate regardless of the outcome of next year's elections in Europe or the operational policy of the Trump Administration. Even more, the integration of China more fully into the world economy is one of the most critical political and economic challenges. Some suggest that the disruption created by China's membership in the WTO may be a contributing factor to the economic malaise that has been one (of many) contributing factors behind the rise of populist-nationalist forces.