In a move with possible consequences for Australia and Australian exports to China, the Bush Administration has hardened its attack against Chinese imports.
It’s a move that could threaten the freedom of global trade and the global economy.
It’s not the first time the Bush Administration has done this: they introduced quotas on steel imports about eight years ago and also on imports of Australian lamb: both were done to protect inefficient US producers and in the case of steel, they caused immense damage to America’s reputation.
Nor is it the first time action has been taken against Chinese imports but this time the Government is using a more powerful punishment: counterveiling duties instead of anti-dumpuing duties.
But this is the first time they have used counterveiling duties against China, America’sfastest growing source of imports (for companies like Wal-Mart) and its second biggest creditor, with much of its foreign reserves of $US1.1 trillion held in US Government bonds and other treasury securities.
The potential for China to retaliate by dumping some of these holdings and switching more quickly to other currencies (which it has said it will do gradually over the next couple of years) is now a real possibility.
This is a dispute every Australian investor should monitor closely because if China and the US get into a trade war (Australia has to back China) then the resources boom could be curtailed through a drop in demand from Chinese importers.
The US Commerce Department reversed more than two decades of practice and decided late last week to levy countervailing duties to compensate for alleged Chinese subsidies to exporters.
Trade commentators say the policy change opens the way for steel, textile and other US manufacturers to apply for the same protection: US steel and textile producers in particular have been lobbying for action against Chinese imports of these products.
A move against steel imports would hit world steel prices hard, hurt Chinese consumption of Australian iron ore, coal (in small amounts but projected to increase) and energy imports of LNG.
That would in turn hurt a host of companies such as BHP Billiton, Rio, Fortescue Metals, Woodside, Macarthur Coal and Centennial Coal. The list is long.
The share prices of these and other companies should be monitored closely because that’s where the reaction will be seen first.
China didn’t take a backward step: its commerce ministry said the US tariffs on imports of coated paper were unacceptable and it reserved the right to take “necessary” action, holding out the prospect it will escalate the dispute if necessary.
A Chinese Government spokesman was quoted in news reports as warning the tariffs “have severely damaged the interests of Chinese industry. It’s unacceptable and China strongly demands the US to reconsider the decision.”
The US dollar fell on concern the levies will provoke trade tensions with China,
The Commerce Department claimed Chinese paper producers benefit from government grants, tax incentives, debt forgiveness and other unfair subsidies.
China’s exports of coated paper more than doubled in 2006 to $US224 million from their level in 2005, according to U.S. government data.
Countervailing duties are tariffs imposed to offset the benefits of government subsidies. They are different from anti-dumping duties, which apply to goods sold overseas at or below the price they are sold in their home country. Anti-dumping duties are the only ones that have been applied on products from so-called non-market economies such as China, because it’s difficult to identify subsidies in those nations.
The Chinese government lost an American court case on last Thursday aimed at preventing this decision. The combination of the court ruling and this decision will encourage other industries threatened by imports from China (and let’s not forget India in some areas) to file similar complaints.
(The American attitude is pretty rich seeing how their agricultural subsidies are distorting world trade in beef, grains, sugar, etc.)
The U.S. has imposed anti-dumping tariffs on Chinese televisions, furniture and textiles in the past four years and yet more and more are being imported and sold into the U.S. market.
U.S. retailers and companies such as General Motors which import goods from China, oppose countervailing duties, are arguing tariffs would be applied twice on many products — once for dumping and once for subsidies.
Traders said the dollar fell because of the switch from anti dumping duties to the higher profile countervailing duties. They regard the move as significant for US trade policy and for the possible inflationary impact if it becomes widespread.
That’s why one group (besides importers and US magazine and other paper consumers) which won’t be all that impressed is the Fed. The move, if it become permanent and is extended, will feed inflationary cost increases into US wholesale prices.
