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September 16, 2009

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Tire war just a skirmish ... hopefully

THE United States-China trade dispute over tires may remain just a skirmish between two of the world's biggest economies, analysts said. At least, that's what many of them are hoping.

"The impact is serious," said Wang Qing, an economist at Morgan Stanley in Hong Kong, "but the macroeconomic impact is not enough to warrant an escalation to levels that would threaten the strategic relationship between the two countries."

The tussle started last Friday when the US decided to impose punitive tariffs on tires made in China, claiming they were dumped on the market at below production cost. China denied the claim and said it will take the dispute to the World Trade Organization.

The trade flap raised eyebrows around the world because many believe a world recovery depends on cooperation between the world's biggest economy and China, the world's third-largest economy.

"We doubt there will be an overreaction risking the long-term trade relationship between the two countries," Wang said. "Any reaction on China's part will likely be an isolated move to register its dissatisfaction and preempt further protectionism."

On Sunday, the Chinese Ministry of Commerce said it will launch an investigation into whether vehicles and poultry products imported from the US violate anti-dumping and anti-subsidy WTO rules.

A day later, China filed a complaint with the WTO over the tire tariff, triggering a 60-day process in which both sides must try to resolve their dispute through negotiations.

Some analysts said the Chinese response was stronger than expected after Commerce Minister Chen Deming said the US decision "not only violates WTO rules but also runs against US pledges at Group of 20 summits."

Chen also said the US action "sets an extremely bad precedent in the current backdrop of a world economy in crisis."

Heavy blow

The US decision, which takes effect on September 26, will deal a heavy blow to the Chinese tire industry, which ships 40 percent of its exports to the US.

According to the China Rubber Industry Association, the new tariff will likely cost China's industry US$1 billion and threaten 100,000 jobs.

The duty hike also hurts the interests of some Americans. Two-thirds of Chinese tire exports are made by US-based tire makers operating in China. Chinese-made tires are mostly lower-priced products. An increase in the trade tariff will add costs for American consumers.

However, potential losses from the dispute are insignificant in the broader picture of China's economy. The export loss is only about 0.4 percent of China's shipments to the US and 0.07 percent of China's total overseas sales in 2008.

It is not worthy of an all-out trade war, said Shen Minggao, an economist at Citigroup in Shanghai.

"The dispute will likely be restricted within the specific area," he said. "The US and China need each other to carry on the economic recovery they both seek."

He said the US needs Chinese investment to finance mounting fiscal deficits or at least keep its cost of financing low, while China needs the US market to sell off the excess capacity built up in the past year.

"China's quick reaction suggests that China takes this case seriously," Shen said. "Neither benefited if either side resorts to retaliation."

The Sino-US relationship has become even more important with the advent of the global economic crisis, analysts said.

Trade war threat

A trade war may constitute a very serious threat to global financial stability and the world economy just when it is starting to recover.

The US and China concluded the Strategic and Economic Dialogue last month, pledging to sustain a stable trade and investment relationship.

"This decision by the administration of President Barack Obama to raise the tariff mainly reflects US domestic politics," said Shen Dingli, executive dean of Institute of International Studies at Fudan University.

"He has to demonstrate that he is protecting American workers, who helped to put him in office.

"But because a trade war benefits nobody, countries should become more tolerant and act after putting themselves in the shoes of the other," Shen added. "It is not wise to carry out tit-for-tat actions."

Patrick Mendis, vice president of academic affairs at the Virginia-based Osgood Center for International Studies said last week in Shanghai that it would be "regretful" if the US decided to impose the tariff.

The US has long been a champion of free trade, and it is a standing dream for the country to bring everybody together through globalization, he said during a lecture on trade relations.

Historically speaking, Americans will always choose to uphold the principles of free trade and good relations with China, Mendis said.


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