Obama's Trade Enforcement Unit and the Looming Trade War with China

U.S. President Barack Obama in Tuesday's State of the Union speech called for the creation of a Trade Enforcement Unit to end unfair practices hindering U.S. trade growth – especially tactics employed by China.

"I will go anywhere in the world to open new markets for American products," the president said in his annual address to the nation. "And I will not stand by when our competitors don't play by the rules."

President Obama hopes this new initiative will help bolster a U.S. manufacturing revival, create jobs, and meet his exports goal. The president vowed in 2010 to double U.S. exports by 2015.

To enforce fair global trade, the Trade Enforcement Unit will:

• Organize a global team of investigators and resources.
• Conduct more import inspections to prevent counterfeit/unsafe goods from coming to America.
• Ensure no foreign company has a financing advantage over American manufacturers.

President Obama also wants to develop a program that provides credit to U.S. companies that struggle against foreign competitors receiving government financial aid.

In order for the new trade unit to make headway in U.S. export growth, China will have to be its primary focus – but that could provoke a dangerous global trade war.

"This trade goal is not a good goal," said Money Morning Global Investing Strategist Martin Hutchinson. "It's protectionist, and invites retaliation."

Trade Enforcement Unit Would Focus On China

For years, the United States has pointed fingers at China's currency manipulation and unfair subsidies as limitations to U.S. trade growth. U.S. manufacturing groups have pushed the government to take a stronger stance against Chinese trade practices.

"It's long overdue," Scott Paul, executive director for the Alliance for American Manufacturing (AAM) told Bloomberg News. "We have seen 10 years of China gaming the system and I think the president has a very good record with China."

The Economic Policy Institute released a study last September showing that the trade deficit with China – expected to hit $300 billion for 2011 – had cost America 2.8 million jobs over the past decade. The computer and electronics industry suffered the most job losses, due to increasing imports of products like semiconductors and audio-video equipment.

"We urgently need a national strategy for restoring America's global leadership in manufacturing," said AAM's Paul after the report's release. "Challenging China's currency manipulation would be an important first step toward developing such a strategy.It would not only cut unemployment, it would result in a much-needed increase in federal revenue."

Earlier attempts to fight China on valuing its currency have failed to get through Congress due to fear of retaliation. A currency bill proposed in October imposed tariffs on goods from countries with undervalued currencies – namely, China. The bill got through the Senate with a 63-35 vote, but has since stalled in the House.

"I'm concerned about the Chinese currency situation," House Speaker John Boehner, R-OH, told reporters at the Capitol after the Senate passed the bill. "But I think it's pretty dangerous to be moving legislation through the United States Congress forcing someone to deal with the value of their currency."

U.S.-China Tense Trade History

President Obama stated his administration has brought at least twice as many trade cases against China than did former President George W. Bush's administration. The U.S. Trade Representative's office has filed five cases against China with the World Trade Organization since President Obama took office in 2009.

Most recent cases the U.S. Commerce Department has been investigating involve Chinese alternative energy companies.

The U.S. Commerce Department in November started an investigation into Chinese solar cells that were priced about 50% – 250% below American-made products. Just last week the Commerce Department launched an investigation into low-cost wind towers shipped to the United States from China and Vietnam.

One of the president's first Chinese-product tariffs was a 35% duty on imported tires in September 2009. The U.S. International Trade Commission declared a China tire import surge had led to the loss of thousands of U.S. tire manufacturing jobs.

China's government fought the tariffs, which were upheld by the World Trade Organization in 2010.

President Obama cited the move in Tuesday's State of the Union address, saying thousands of Americans are now working due to the halting of Chinese tire imports. Analysts have said those tire imports didn't create as many jobs as implied, because they were replaced by tires from other countries including Thailand, Indonesia, and Mexico.

President Obama will meet with Xi Jinping, who is set to lead China's Communist Party at the end of this year, in a few weeks in Washington. The new trade enforcement unit as well as security concerns are expected to be among the main topics discussed.

News and Related Story Links:

• Money Morning:
  Three Reasons the China Currency Bill Will Backfire
• Money Morning:
  Progress Made on U.S.-China Trade, but Currency Roadblock Remains
• Alliance for American Manufacturing:
  Trade Deficit with China Has Cost 2.8 Million U.S. Jobs Over Past Decade, New Study Finds
• Bloomberg News:
  Obama Targets China With Enforcement Group Aimed at Unfair Trade Pracices
• The Wall Street Journal:
  U.S. to Impose Tariff on Chinese Tires