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Chinese-American trade relations have taken a turn for the worse lately. With U.S. tariffs on different imported Chinese products, diplomatic ties have been strained. In a time when protectionism should be the last on global leaders minds, the U.S. government has taken a strange approach to deal with the global financial crisis. Evil rumors has it that a Chinese-American trade war is looming. What is head and tail in this game? And how did it come to this?

During the G20 summit in April 2009, the leaders of the global world promised each other that protectionism should be avoided as far as possible, if the global economy was to recover and regain a healthy balance. What sparked the controversy (or at least let the cat out of the bag), was the announcement of a 35 %  U.S. tariff that would be imposed on imported Chinese tires. A move that not only hurt diplomacy between the two countries, but also apparently only will affect a fragment of the American car manufactures. Does it make sense? Not really… (For an in depth analysis of this problem from an American perspective, read this brilliant leader from the economist.)

The decision of imposing tariffs on Chinese tires were not a whimsical decision nor one that came out of the blue. For a long time, various U.S. politicians have expressed concern (and anger) over the loss of jobs to China and the constant undervaluation of the Chinese Renminbi, which they claimed was a barrier to free and fair trade.

It is no secret that the Chinese have manipulated the international currency market for years, in order to keep prices on their export products low. Furthermore, with globalization, access to cheap labor in China has been expanded and many manufacturers in the west have been sourcing production to China, established joint ventures and manufacturing facilities. During the global economic up-turn, this worked well. The U.S. and Europe were able to buy cheep products from China and the many opportunities with globalization created many jobs in the west. At the same time, China would support (and stimulate) the ever growing demand from western consumers and thereby  develop export and ensure economic growth.

What a beautiful relationship, until… Boom! Global Financial Crisis and following recession.

Global Financial Crisis= job losses
What to do (besides implementing massive stimulus packages) ?

Already in February this year, the U.S. senate introduced a clause that would require purchase of U.S. made steel and iron with money from the American stimulus package. Back then, the Chinese government responded by calling the “Buy American” step a dangerous one, and Beijing would not solve to protectionist measures like these. Also, in the spring of 2009, a new bill was introduced by senators and congress men from both parties in the U.S, and the bill had over 40 co-sponsors in congress alone. The legislation would open up for the possibility of imposing additional duties on Chinese goods until China would revalue the Renminbi.

However, in spite of the denouncing of protectionists moves, as China struggled to keep the manufacturing industry growing (and avoid massive job losses) in June, the government in Beijing was directing government offices to buy available Chinese goods. Soon after, the U.S. and EU brought a complaint against China to the World Trade Organization (WTO) for restricting exports of raw materials from China, materials used in making steel and aluminum. The U.S. and EU argued that the higher prices from exported Chinese raw materials gave Chinese domestic producers an unfair competitive advantage. As a response, the Chinese government asked the WTO to investigate the American effort to limit Chinese poultry imports. Later on, the U.S. put a ban on imports of Moon cakes that contained meat, poultry and yolk. This was a severe blow to the lukrative Chinese export of Moon cakes, especially in the month up to Mid-Autumn Festival (where moon cakes are traditionally eaten).

In mid- September, President Obama then announced the new tariffs on Chinese tires. The spokeswoman for the Chinese government called the move an act of “trade protectionism” and claimed that the U.S. “abused trade remedy measures.”

Confused much? We are not done yet…

Soon after the announcement of the U.S. tariffs on Chinese tires, the Chinese government then announced that it considered imposing huge taxes on import of American chicken wings and chicken feet, and was looking into accusations of dumping, subsidies and other unfair trade measures. During the past few years, American poultry producers have exported the unwanted wings and feet to the Chinese, thereby competing fiercely on price with Chinese domestic producers. Thus, the Chinese government announced a new protectionist move (the word and concept “protectionism” was of course not used), arguing that many domestic farmers had given in complaints for many years.

By the end of September, a majority of the Chinese solar panel companies suddenly also faced tariffs on their products exported to the U.S. Furthermore, in the beginning of this month, Washington decided to launch an anti-dumping and anti-subsidy investigation into seamless steel pipe imports from China.

China’s next move? On the 12th of October, the Ministry of Commerce announced that  China would impose tariffs as high as 37.5 % on a kind of chemical used in manufacturing of plastics and textiles. Tariffs that will affect the American export of this particular chemical to China (the tariff will also affect European countries and Taiwan). This move came only the day after Reuters announced that “U.S. softens tone to improve China relations”.

And here we are, mid-October, what should we make of all of this?

Nothing… Trade disputes over chicken feet, moon cakes and tires, which constitutes fragments of products imported and exported between U.S. and China, can hardly be described as international high political disputes. However, there are reasons for concern. The situation could head down a slippery slope, moving towards a real international political issue, thus affecting the healing after the global financial crisis. If trade relations deteriorate, there is a high risk that it will have a spill-over affect of the financial trade between the two countries. One thing is the amount of commodities traded between the two countries, another is the massive size of the financial trade between U.S. and China. The two economies’ financial integration is highly complex and disputes over financial trade will affect the global post-crisis economy. (For further information on this matter, read this article from Newsweek)

It is, however, very unlikely that a full blown trade war will emerge. As of now, it is merely a small school yard game of “he said – she said” and “he started (point finger)”.The Chinese reaction after the tire tariffs seemed harsh and with anger, but, as the leader in the Economist cleverly notice; China has a tendency to over dramatize! Furthermore, Obama’s first official visit to China as American president is just around the corner. In mid-November, Air Force One will land in Beijing, where Hu Jintao will greet him with warmth.

It is important to understand, that both Obama and Hu has domestic political pressure to attend to. The high unemployment rate in the U.S. make the lobbyist scream for further measures to secure American jobs. In turn, the Chinese government must also secure jobs in order to sustain the targeted growth rate of 8 % this year. Therefore, both governments know that these small trade disputes are rooted in domestic politics, not international high politics. At the same time, the rest of the world is looking at China and America as major parts of the solution to the recovery of the global economy. Everyone knows that global trade is going to be one of the major factors, in order to ensure a economic up-turn once more.

Nevertheless, the wrong rhetoric from either Washington or Beijing could prove to be fatal. It is important that both Barack Obama and Hu Jintao choose their words with care, in order to keep the balance between the internal pressure of securing jobs and the external pressure of healing the global economy. They are, nonetheless, in the same boat!