Steel Pipe Probe Could Escalate U.S.-China Trade Feud

The U.S. Commerce Department has launched an investigation into seamless steel pipe imports from China in a move that could fuel a feud over trade relations.

The Commerce Department said Wednesday that it accepted a petition filed last month asking for the probe by United States Steel Corp (NYSE: X), V&M Star LP, TMK IPSCO and a trade union, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union.

The investigation is designed to determine whether the steel pipes are being sold below cost or are being subsidized by the Chinese government.

The government agency will make a decision on preliminary anti-dumping duties in December and could impose new duties of almost 100% on imports of steel pipes from China as soon as February.

Before that happens, the U.S. International Trade Commission must find that U.S. steel producers are being harmed by the imports.

In a statement the Commerce Department cited figures showing that imports of carbon and alloy steel standard, line and pressure pipe more than tripled from 2006 to 2008 with a value of $382 million last year.

The new investigation comes on the heels of an announcement last month by U.S. President Barack Obama that imposed additional duties of 35% on Chinese-made tires, marking the first trade dispute of his presidency.

China angrily denied the charges at the time, lodging a complaint of "rampant protectionism" with the World Trade Organization and launched a probe into unfair trade practices by U.S. producers of car products and chicken meat in retaliation.

"This is a grave act of trade protectionism," Mr Chen Deming, China's minister of commerce Chen said then in a statement. "Not only does it violate WTO rules, it contravenes commitments the U.S. government made at the [April] G20 financial summit."

Obama's response denied his administration's moves violated any WTO rules and that the duties would stand.

The tire spat was seen as Obama's first big test on world trade since taking office in January, according to the Financial Times, and the decision suggested he sided with America's labor unions, which have complained that a "surge" in imports of Chinese-made tires had caused 7,000 job losses among U.S. factory workers.

The steel probe is just the latest among a rising tide of trade tensions between the two powers over the past few years.

The United States also imposed preliminary tariffs in August on $2.6 billion worth of Chinese-made steel pipe used to transport oil. In April, China challenged a U.S. law banning imports of processed Chinese poultry.

While these disputes may appear to be minor skirmishes affecting limited markets, they have the potential to erupt into a full-blown trade war that could seriously damage the world's economy as it struggles to recover from the worst economic meltdown in 70 years.

"These protectionist measures, some of which amount to domestic political posturing rather than substantive restraints on trade, could easily ratchet up into a full-blown trade war and inflict serious economic damage on both countries," Eswar Prasad, professor of trade economics at Cornell University, told the FT, warning that the disagreement could escalate.

Some analysts point the finger squarely at China for failing to adopt orthodox standards of free trade.

"China has openly adopted a neo-mercantilist, export-led economic growth strategy (and) keeps its renminbi undervalued against the dollar in order indirectly to subsidise its exports. This kind of trade is not win-win. Rather it is a classic zero-sum game," Clyde Prestowitz, the president of the Economic Strategy Institute, wrote recently in the FT.

But no matter who's to blame, all sides stand to lose if the current trade feud escalates into an all-out trade war.

"With the worldwide economy already in a weakened state, a bare-fisted trade war between the world's two most important trading partners - the United States and China - would be devastating," wrote Money Morning Contributing Editor Martin Hutchinson, a former investment banker with more than 25 years' experience in the global financial markets.

Hutchinson said that global trade is still 20% below normal and noted it fell by 35% after last September's financial crash, compared to a 65% drop during the Great Depression.

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