U.S. Trade Spat with China Escalates, But is Unlikely to Cause a Significant Rift

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Shortly after U.S. President Barack Obama announced hefty import duties on Chinese-made tires, China's Ministry of Commerce over the weekend said it would explore possible sanctions against U.S. automobile and chicken imports.

The dispute has caused some concern over an escalation in protectionist measures between the two nations, but few analysts believe the dispute will spiral out of control and threaten a global recovery.

President Obama on Friday signed an order that imposes a 35% tariff on tires imported from China on top of the existing 4% duty. The order came mainly at the behest of the United Steelworkers union, which says 5,000 union jobs have been lost since 2004 because low-cost Chinese tires flooding the market. From 2004 to 2008, the number of tire imports from China has tripled.

The United States International Trade Commission (USITC) – the agency that counsels the president and Congress on trade – recommended even heavier sanctions against the tire imports. The ITC suggested a sliding tariff that would have started at 55% in the first year and then fallen to 45% next year and 35% the year after that. The duty enacted by Obama starts at the ITC's recommended low point of 35% before dropping to 30% and then 25% in the subsequent two years.

Steel companies United States Steel Corp. (NYSE: X) and Nucor Corp. (NYSE: NUE), as well as trade organizations like the National Farmers Union, National Cotton Council, and the American Corn Growers Association lauded Obama's decision, as they continue to argue that low-priced Chinese goods are hurting American business.

However, other companies and trade groups who view China as a valuable export market fear Beijing will retaliate with higher import tariffs on U.S. goods. Those fears came a step closer to being realized Sunday night when China's Ministry of Commerce announced it would launch an anti-dumping investigation into auto parts and chicken products imported from the United States.

"Recently, the commerce ministry has received word from domestic industries indicating that [chicken and auto] products had entered our nation's markets via dumping, subsidies and other unfair trade means," the ministry said on its website, giving no details about the specific products.

The United States shipped about $800 million in automotive products and $376 million in chicken meat to China in the first seven months of the year, while in that time China exported $1.3 billion in tires to the United States according to data from Global Trade Information Services.

Still, this is just a miniscule fraction of the total trade between the two nations. Two-way trade between the United States and China totaled $194.7 billion in the first seven months of 2009, according to the U.S. Census Bureau.

"While there's friction, I suspect that the two nations will keep any disputes under control," David Cohen, an economist at Action Economics in Singapore told Bloomberg News. "They understand that they're increasingly dependent as trading partners."

Exports to the United States account for 6% of China's total economic output, The New York Times reported.

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