U.S. Escalates Trade Dispute With China

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The United States launched another salvo in a trade dispute with China last week when it imposed new duties on imports of steel pipes, escalating tensions between the two powers.

The Chinese government quickly fired back, accusing the U.S. of "protectionism."

The U.S. International Trade Commission (ITC) voted unanimously on December 30 to impose duties between 10.36% and 15.78% on the pipes, which are used mostly by the oil and gas industries. Those new tariffs are designed to negate the subsidies that the U.S. government says China gives its steelmakers.

Trade tensions between the two countries could further escalate in the spring when the ITC will decide whether to impose additional tariffs of up to 96% to penalize Chinese steelmakers for dumping products on the U.S. market at prices below their value.

The moves are the latest in a string of trade disputes that began in September when President Barack Obama imposed additional duties on imports of Chinese tires.

Since then Beijing and Washington have traded shots over exports of tires, chickens, steel, nylon, autos, paper and salt, roiling the already tense relationship between the two economic powers. During a visit to Beijing on November 17, Obama and President Hu Jintao pledged to work on easing trade frictions.

The pipe case is the largest steel trade dispute in U.S. history and will affect about $2.8 billion worth of Chinese imports. U.S. Steel Corp. (NYSE: X), one of eight companies that initiated the complaint, said that it is "pleased" with the decision, noting that imports from China tripled from 2006 to 2008.

"This enormous surge of unfairly traded goods resulted in an overhang of inventory that crippled the domestic industry," the company said in an emailed statement obtained by the Associated Press.

An attorney for the United Steelworkers Union said prices for steel pipe fell by half from their peak in 2008 through September 2009, driven down by low-priced Chinese imports.

But Chinese steel exporters contend prices were hurt when the price of oil soared to about $140 a barrel in the summer of 2008, spurring more drilling and causing oil companies to order more pipes. The bottom fell out when oil prices dropped below $50 less than a year later.

The U.S. steel industry used the global economic crisis to seek "protectionist measures" and the trade commission has wrongly identified Chinese imports as the reason for the decline in demand, the Chinese trade ministry said on its Web site.

"The impact would last for at least five years," Li Liancang, an export manager at Tianjin Pipe Group Corp., told Bloomberg News by phone.

China and the U.S. swap about $409 billion annually in two-way trade and have lodged tit-for-tat complaints as the global recession forces them to protect their labor markets. China announced December 10, it will impose provisional duties on some U.S. and Russian steel imports.

As the world struggles to emerge from the worst economic crisis since the Great Depression, economists are voicing concern that a groundswell of protectionism will hamper the nascent recovery.

But, a surge in trade disputes in the next few years is "inevitable," Michael Pettis, a senior associate at the Carnegie Endowment for International Peace and a professor of finance at Peking University told the Washington Post.

The World Trade Organization estimates that export volumes dropped by 9% in 2009, the biggest drop since World War II, and every country is trying to "protect their share or increase their share," he said.

And despite promises by world leaders to reject protectionism, trade barriers have been on the rise, according to a recent study by the Global Trade Alert obtained by the Post.

The trade group found at least 130 protectionist measures are on the drawing boards of governments around the world, including state funds, higher tariffs, immigration restrictions and export subsidies.

The U.S. is particularly vulnerable if these measures balloon into a world-wide trade war, according to Money Morning Contributing Editor Martin Hutchinson.

"When it comes to trade wars, there are two factors that are important to understand. First, once a trade war starts, everyone tends to join in. And second, once this happens, there's no percentage in being the only free-trading country left in a totally protectionist world," Hutchinson said in a recent article.

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