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Wednesday, September 09, 2009 2:27 PM


US Fires Opening Salvo In Trade Wars With China


The last thing the US needs now is a trade war, with anyone. We have already upset Canada, and now have our eyes set on China.

Yesterday, with a decision on tires and steel pending, China warned the US 'Trade wars' are counterproductive.

Top Chinese diplomats in Washington on Tuesday warned against "trade wars," as President Obama faces a looming decision on whether to erect barriers against the import of Chinese tires.

"Trade wars between China and the United States is the last thing that our two countries need right now," said Xie Feng, deputy chief of mission for the Chinese Embassy in Washington.

The Obama administration currently is facing a decision on whether to impose tariffs against Chinese tires, following the recommendation of the U.S. International Trade Commission. The president has until Sept. 17 to decide.

The United Steelworkers of America, the union that represents many of the 8,000 American workers who it says have lost or will lose their jobs because of competition from Chinese tire production, called Tuesday for the White House to go further than the ITC recommendation and impose a tariff of higher than 55 percent.
The Seen and the Unseen

If the US is dumb enough (and we might be) to impose a 55% tariff on Chinese tires, the first thing US manufacturers might do is jack up prices. Unlike what the union clowns think, the result would be fewer cars and tires sold. Moreover, China's reaction might be to buy fewer US planes. Finally, there would be fewer jobs at the docks loading and unloading stuff.

Union clowns never look at the seen and unseen for their ridiculous proposals. In aggregate it is clear (at least it should be clear) that trade wars cost jobs.

Outrage In Canada

Earlier this year, restrictions in the stimulus packages caused outrage in Canada over "Buy American" provisions. Please consider Trade Wars Brewing In Economic Malaise.
Is this what the first trade war of the global economic crisis looks like?

Ordered by Congress to "buy American" when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.

Outrage spread in Canada, with the Toronto Star last week bemoaning "a plague of protectionist measures in the U.S." and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts -- the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.

This is not your father's trade war, a tit-for-tat over champagne or cheese. With countries worldwide desperately trying to keep and create jobs in the midst of a global recession, the spat between the United States and its normally friendly northern neighbor underscores what is emerging as the biggest threat to open commerce during the economic crisis.

The new buy American provisions, the company said, are being so broadly interpreted that Duferco Farrell is on the verge of shutting down. Part of an increasingly global supply chain that seeks efficiencies by spreading production among multiple nations, it manufactures coils at its Pennsylvania plant using imported steel slabs that are generally not sold commercially in the United States. The partially foreign production process means the company's coils do not fit the current definition of made in the USA -- a designation that the stimulus law requires for thousands of public works projects across the nation.

In recent weeks, its largest client -- a steel pipemaker located one mile down the road -- notified Duferco Farrell that it would be canceling orders. Instead, the client is buying from companies with 100 percent U.S. production to meet the new stimulus regulations. Duferco has had to furlough 80 percent of its workforce.

"You need to tell me how inhibiting business between two companies located one mile apart is going to save American jobs," said Bob Miller, Duferco Farrell's executive vice president. "I've got 600 United Steel Workers out there who are going to lose their jobs because of this. And you tell me this is good for America?"

The United States is not alone in throwing up domestic policies assailed by critics as protectionist. Britain and the Netherlands, for instance, are forcing banks receiving taxpayer bailouts to jump-start lending at home at the expense of overseas clients. French President Nicolas Sarkozy initially insisted that his nation's automakers move manufacturing jobs home in exchange for a government bailout, but backed down after outrage surged among his peers in the European Union, of which France is a central member.
No, Mr. Miller this is not good for US jobs, nor jobs in aggregate anywhere. But the union clowns are strongly in favor of it anyway.

By the way, geographic illiterates in the US need to make a note that Canada and Mexico are American. Brazil is too, but more specifically South American. North America and South America are continents and anyone from either continent is American.

Trade Wars Over Steel Pipe

Inquiring minds interested in trade wars are reading U.S. Said to Impose Duties on Chinese Pipe Used in Oil Wells
The U.S. Commerce Department decided to impose duties of as much as 31 percent on steel pipe from China, agreeing with American producers such as U.S. Steel Corp. that the imports were supported by unfair subsidies, people familiar with the decision said.

The preliminary decision was to be released in a statement by the Commerce Department today, according to the people, who asked not to be identified before the announcement. The average duties on $2.8 billion in annual imports of the pipe, used in oil and gas wells, will be 21.3 percent, the people said.

The case, the largest so-called countervailing duty complaint filed against Chinese-made products, was brought by the United Steelworkers union; U.S. Steel, the largest U.S.- based steelmaker; U.S. operations of Evraz Group SA, Russia’s second-largest steelmaker; and Pennsylvania-based Wheatland Tube Co.
Tariffs Cost Jobs

The above article came out just minutes ago. I had not yet seen it when I wrote in Greenspan "Market Crisis Will Happen Again": One of the biggest risks now to the global economy is a huge round of protectionism. Unfortunately, it's probably only a matter of time before Congress overreacts. That's human nature, Congressional style.

Pray tell, how is charging 21.3% more for steel pipe going to encourage investment? The answer is: it will not. Not a single job will be saved by this ridiculous measure. Instead, China is likely to react by buying more planes from Europe, or wheat from Australia, instead of either from the US. Alternatively, trade just shrinks across the board in other ways.

It will be interesting to see if the US follows up on tire threats or Congress follows through with earlier threats of labeling China a "currency manipulator". The irony is, via practices at the Fed and treasury, the US is the world's biggest manipulator of currencies as well as the world's biggest hypocrite about free trade, especially in regards to agricultural goods.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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