China and The US: A Good Old-Fashion Trade War

China voiced unusually strong objections to tariffs put on its tire exports to the US. The American government believes that the Chinese are targeting the industry which is costing US jobs. Labor unions will like the decision, as will a number of members of Congress who think China does not work on a level playing field when it comes to trade.

China has already begun the process of retaliation. It has the upper hand in a trade war with the US and it is about to use that hand to proves its supremacy.

The mainland government has said it will scrutinize U.S. imports of chicken and auto products and may put limits on them. The Chinese Ministry of Commerce said “China has consistently opposed trade protectionism, and the country’s actions since the financial crisis have reflected this stance.”

The fear of China using its financial and manufacturing muscle to compete effectively in the US and elsewhere abroad has grown as the global recession has taken a tool on jobs. There is also increasing resentment over China using capital from its $2 trillion in foreign currency reserves to buy up cheap assets, particularly commodities and real estate, which have been pushed down by the economic crisis.

China has a large advantage over the US on the trade issue. Large American companies like Wal-Mart (WMT) source so many good from China that the supply chain could not be replaced by getting manufactured goods elsewhere. China does not rely as much on American imports as the balance of trade shows every month.

The temptation to take actions against China for instances where it ships goods to America at what appear to be below market prices will increase as unemployment moves to 10% and beyond. But, it is a sucker’s game for the US. China has the factories and America has the consumers.  All locking out China’s products does is drive up consumer prices and drive down consumer spending which is still the engine of US GDP.

Douglas A. McIntyre