Loading...

Trade frictions between China and the US

Current developments and reasons for trade frictions between the US and China

Seminar Paper 2010 16 Pages

Economics - International Economic Relations

Excerpt

Contents

Introduction

History's Impact
The Opium Wars
China and the WTO

Dumping and Anti-Dumping (AD)
Current Trade Frictions
Protectionist Policies
Definitions
China's Reaction
AD and China

Financial Markets Friction
IPR
Currency Manipulation
Credit Derivatives Market
China's Investments

Conclusions
Summary
Future Projections

Works Cited

Appendix

INTRODUCTION

History plays a funny role in repeating itself. With light of the current trade frictions between the United States and China, their trading histories become increasingly relevant. Little did both sides know the substantial impact of President Nixon's 1972 meeting with Chairman Mao—the event laid the basis for growth and development between both countries for the next several decades: into a present where the US dominates while China has the fastest growing financial market of the Twenty-first Century. Up until recently, their trade relations have been, if not smooth, at least civil. However, the increasing number of disputes in trade and policy-making may adversely affect the development of Sino-US relations on the world market. As the international society turns their critiquing eyes towards the friction currently plaguing the US and China, the two world powers are placed in the precarious position of settling these disputes to not only decide the future of their own fragile partnership, but the ultimate direction of the world trading scene.

HISTORY'S IMPACT

The Opium Wars

In the mid 19th Century, many foreigners—notably Britain—were upset with their trade deficits with China as well as China's exclusionary trade policies that included high tariffs and barriers against foreign trade. Britain's way to turn the balance around was by smuggling opium, banned by the Chinese government, into the Chinese market (Allingham). The British thrived on opium's profits "as the huge outflow of silver used to buy opium greatly exceeded the money the traders paid for Chinese tea" ("Opium"). The lack of response after the Chinese government's complaints led to furious authorities at Canton burning the next batch of opium-bearing cargo from the British trading company. The Opium War thus followed in 1839 (Brown).

China's subsequent defeat marked its entrance into the emerging world of global trade and international relations. After the war, Britain and China signed the Treaty of Nanjing, a one-sided contract in which China was obligated to comply with a number of commitments including British extraterritoriality in China, the cessation of Hong Kong, payment of millions for compensation, and the opening of five ports to foreign trade (Hooker; "Opium").

To add insult on injury, Britain then utilized Hong Kong's ports and "...a staggering 6400 tons of opium was being annually shipped into China," into the hands of a growing number of addicts (Montague).

This led to the second Opium War (1856-1860) where China fought against Britain and France "while the Americans and Russians sent envoys" (Hickman). Since the world wanted more from China and China was weak at the time, its doors were kicked open ".to other aggressive colonialist and trading nations. merchants from the United States, Russia, France, Belgium, Sweden, and Norway were trading into China" (Montague). At the end of the war, the Treaty of Tianjin was signed, opening 11 more ports, and allowing foreigners legations and traveling privileges, among other clauses. The West thus successfully pried open and exposed China—the last prize in the East for the power and colony- hungry European nations at the time. Economically drained and politically humiliated, China felt victimized by the world; it realized it was no longer the "Middle Kingdom" of civilization, and was forced to begin understanding the Western world's idea of capitalism to play in their game.

China and the WTO

The Opium Wars and treaties that followed demonstrate the struggle of economic power and greed as the West knocked on the doors of China's economy—a struggle that has been revived as the West once again sets their eyes eastward, a century later. After total isolation from trade relations during 1950-1970, China decided to rejoin the World Trade Organization (WTO), a process that took 15 years until their official ascension in 2001. in order to be accepted, China had two processes to fulfill: "multilateral consultations in a working party composed of all interested WTO members and bilateral negations between the applicant and each major trading partner" (Morrison). WTO regulations stated that China must significantly reduce its tariffs and barriers against foreign trade, treat everybody of different nationalities equally, and obtain satisfactory protection for intellectual property rights. Even after China's WTO accession, the US was not happy and complained that China has unfair pricing, that their currency was not appreciated enough so it was hard to compete against their market, and that Americans should impose an additional 25% tariff on China (Morrison).

As China leads the world economic statistics in growth rates and increasing GDP figures, both nations intimidated by or thirsty for a piece of China are constantly making more demands and pressures. For a country that values its history, it is not surprising that China would be on high defenses as it treks through the déjà vu of feeling—logicality and reason aside—exploited and 'bullied.' Especially since the financial turmoil began, as Brandeis University economist Chad Bown puts it: ".countries have been ganging up to use.WTO.rules in an almost mob-like response to restrict imports from China" ("China swirls"). The United States certainly leads this volley of embargos and trade disagreements, but the very nature behind the disputes could be hinge on cultural misunderstanding.

DUMPING AND ANTI-DUMPING (AD)

Current Trade Frictions

This current "trade battle," best described using game theory terms of "tit-for-tat," began on September 12, 2009 when the US imposed a 35% tariff lasting three-years on imports of Chinese tires. The reason behind the tariff was due to the United Steelworkers Union's complaint on a 300% rise of Chinese imported tires between 2004 and 2008. The Chinese government, however, reacted immediately and struck back by announcing examinations on supposed the dumping of US exporters of chicken products as well as automobile parts. Later on, the US again launched an anti-dumping complaint against China concerning coated-paper (LeVine). Currently, the newest incident is an investigation by the US Commerce Department about introducing duties on different Chinese steel products. The motivation: alleged dumping of the Chinese exporters. The Chinese government in turn tagged this as "abusive protectionism" (Back; Jiayi Ho).

Protectionist Policies

The Obama administration's decisions on implementing tariffs may be an indication of increasing insecurities felt by the US government towards a rapidly growing Chinese economy. The underlying problem is found in US politics, power relations and the current state of a faltering US economy which all contributes to the ongoing trade frictions between the US and China.

President Barack Obama had spoken strongly against protectionism during the G20 summit back in April. Having declaring himself to be a strong supporter of free trade ideals, "Obama praised the world leaders for rejecting trade protectionism, saying that history repeatedly has taught that closing borders to trade with others deepens the crisis" (Kellerhals). In addition, "Yu Jianhua, director-general of the Commerce Ministry’s International Trade Department, told reporters on the sidelines of the Group of 20 economic summit that world leaders should 'firmly reject trade protectionism,' which 'hurts others without benefiting yourself'"("China plays"). During the G20 summit, China further agreed to develop a long term relationship with the US and to settle differences peacefully through communication and negotiations. However, execution of the tire tariff completely contradicted not only Obama's stance during the summit, but also his proposed plan to fight for fair trade when he entered the White House.

This move threatens the nation's role as a leader in trade and questions confidence in Obama's ability to stand up for the best interests of his own party.

Implementation of these protectionist policies goes against the best interest of both countries, especially during times of economic distress. Barriers on trade ultimately decrease production and employment and increases prices. When the increase in tariffs on Chinese tires was first petitioned by The United Steelworkers Union, many believed "Mr. Obama has pandered to a single union, one that does not even represent a majority of American tyre-industry workers" ("The tyre"). The protectionist policy appears to hold a more political incentive behind it for Obama: it is more about gaining votes and securing support rather than actually protecting the domestic industry. The United Steelworkers is supported by different industries which have influence expanding through nine states (Palmer). Perhaps Obama felt the need to appease the United Steelworkers union in order to secure their support for his health- reform bill, even if the tariff went against the best interest of the people. Considering the fact that the majority of American tire makers prefer to import better quality tires from joint ventures in China, the extra 35% will directly affect the American consumers. Another possibility is that the trade frictions between China and the US will escalate, and businesses will migrate to other developing nations, such as Brazil and India, where production costs are relatively low.

The question now is: Who is right? Is it anti-dumping or abusive protectionism? To answer these questions, it is useful to have a look at the definitions and regulations of anti-dumping.

Definitions

The official WTO definition of dumping describes the practice as occurring "when goods are exported at a price less than their normal value, generally meaning they are exported for less than they are sold in the domestic market or third-country markets, or at less than production cost" ("Dumping"). If these pre-requisites are fulfilled, the "Anti-Dumping Agreement" of the WTO allows the affected government to act and protect their domestic firms. One of the actions could be, as seen in the current events mentioned previously, the implementation of an import tariff. The affected country must thereby prove that the exporter is using a dumping strategy. Furthermore, it has to calculate the price difference between the domestic produced good and the imported one. In a final step, the importing country has to demonstrate that the dumping is threatening its own domestic market ("Dumping").

[...]

Details

Pages
16
Year
2010
ISBN (eBook)
9783656182306
ISBN (Book)
9783656226086
File size
732 KB
Language
English
Catalog Number
v193111
Institution / College
The University of Hong Kong
Grade
1,1
Tags
Dumping Anti Dumping WTO Handelskriege Protektionismus Yuan Währungsmanipulation China USA Trade frictions Trade frictions China USA Export Currency Manipulation Handelsstreit USA China

Author

Previous

Title: Trade frictions between China and the US