The U.S.-China Debacle: A Looming Trade War?

On September 11, the Obama Administration imposed tariffs of 35% on vehicle tires imported from China. Obama defended the tariffs, justifying them on the basis of enforcement of existing trade treaties between the two nations, arising under international trade law. A safeguard petition was filed to protect U.S. tire producers from surging imports from China. Observers in the trade and business industries consider the act to be purely political. Obama promised trade protections to various interest groups, including the steelworkers union, a key political ally of Obama and representing 15,000 employees at 13 tire plants in the United States. Supporters of the petition argue that Chinese manufacturers are pricing their tires far below market rates, thus harming U.S. manufacturers.

The U.S. International Trade Commission (ITC) recommended that Obama impose tariff duties for three consecutive years, commencing at 55%. A tariff this high would effectively block tire imports from China. According to the ITC however, all of the U.S. tiremakers have operations in China, and none of the companies have publicly supported the steelworkers complaint. Further, Chinese officials and lobbying groups for multinational companies such as Microsoft Corp., Citigroup, Inc., and Caterpillar, Inc., have pressed Obama to resist imposing tariffs, stating that it would result in a "downward protectionist spiral." Additionally, Chinese tires amount to 17% of all tires distributed in the U.S. and are lower-priced, causing concern among businesses and consumers alike.

China responded swiftly to the U.S. decision by filing a complaint with the World Trade Organization. China also commenced an investigation alleging dumping of U.S. auto and chicken products in the Chinese market, a prelude to what will likely be the imposition of tariffs on the sale and distribution of such goods.

Whether this debacle will serve as the prelude to a trade war remains to be seen. One one hand this episode may simply serve as bargaining positions at the G-20 trade meeting in Pittsburgh. On the other hand, it may be a genuine disagreement over China's manipulation of its currency. Still, as two economic powerhouses with deeply intertwined economic interests, the U.S. and China cannot afford to let political shortsightedness obstruct sound economic policy.

In related news, the U.S. House has narrowly passed environmental legislation which would impose tariffs on Chinese environmental goods. The American Clean Energy and Security (ACES) Act would require the U.S. to cut greenhouse gas emissions 17 percent by 2020 and 83 percent by 2050. The legislation would establish a "cap-and-trade" system that would put a value on emissions permits, giving industries an incentive to cut pollution. A specific provision in the legislation would require the U.S. Environmental Protection Agency to calculate "appropriate amounts" of emissions "allowances" for cheaper imports from countries that do not impose greenhouse gas limits. In effect, the result would be a tariff on Chinese goods if the country continues to resist mandatory caps on emissions. Supporters argue that an "equal-playing field" should exist between the U.S. and China with regard to emissions. Opponents argue that such legislation, if passed, will only compel China to impose retaliatory measures while avoiding any cuts to its emissions.

The question of tariffs is particularly sensitive when considering China's relentless purchase and investment of U.S. Treasuries, debt financing, corporations and domestic real estate. With the economic health of both nations interdependent, an exchange of tariffs is viewed as moot.

Sheheryar T. Sardar, Esq. is a Partner at Sardar Law Firm LLC. He can be reached at 631.838.0178 and sardar@sardarlawfirm.com.