There Will Be No Trade War

If you were going to start a trade war against the United States, it is unlikely that your first salvo would be on chicken parts, or as the Chinese rather charmingly first announced, on dorkings. A dorking is a five toed chicken that flourishes in Surrey, England. The normal chicken has four toes. If you have not heard of dorkings before, you are not the only one.

But this is where the Chinese government focused their retaliation earlier this week, in response to President Obama's decision to impose duties on Chinese tires. To step back, on September 11, President Obama took one of the best and strongest decisions that has been made on trade issues in this town for a long time, imposing duties ranging up to 35% on surging imports of tires from China. In so doing, he overturned eight years of precedent established by his predecessor who had declined to enforce a trade statute called Section 421. Section 421 is a trade statute China agreed to as a condition to becoming a member of the WTO; and it is designed to deal with low cost imports from China that surged into the U. S. after they joined.

It is a trade remedy that makes good sense. As a benefit to China when they joined the WTO, U.S. duties on goods coming in from China were lowered permanently across the board, generally to a zero rate. But China agreed, in turn, that up until 2013 we could impose short term duties to off-set import surges that might result from this change, when the surges harmed our industries and workers during the break-in phase. Since that time, industry after industry in the U. S. has faced these import surges, but it was not until now that the U. S. acted.

The reaction from the Wall Street Journal, George Will, David Rockefeller writing in the New York Times, and many other supporters of the status quo was to declare the beginning of war and the end of trade as we know it. And to bemoan the beginning of protectionism. And finally, to invoke the memory of the Smoot-Hawley tariff and usher in the beginning of the second great depression.

There will be no trade war. For the Chinese to declare a trade war on the United States in retaliation for the U. S. actions would be roughly like Wal-Mart declaring a trade war on the American consumer or Walt Disney declaring a trade war on America's children. The United States is the best friend economically China has. It is basically China's free lunch. We have thrown open our enormous market--still the largest in the world by far--to Chinese imports and run a sustained trade deficit with China of over $100 billion a year since they joined the WTO. Our deficit with China is now over $250 billion per year. We lowered out tariffs to zero and admitted China to the WTO because we believe in free trade, but this was not something the United States had to do. We could have blocked their entry. So the prospect of China wanting to strike back on something beyond dorkings that would really hurt our economy is nil. Though they have threatened action on auto parts as well, this has not yet materialized and even the value of our auto part imports into China is small.

Nor can President Obama's action be called protectionist. China agreed in its Accession Protocol with the rest of the WTO members and the United States that such short term safeguard measures could be applied against them. Just as their enormous trade access to our market is a result of the WTO agreement, so is the short term adjustment action President Obama took. The duties will only remain in effect for three years. This is exactly the kind of case this remedy was designed for. Passenger tire imports from China did indeed surge during the period of review, 2004-2008, increasing by well over 200%, and causing over 9,000 U. S. job losses through this year, and the closing or idling of many U. S. production plants. And to say that the application of this 421 remedy has been overzealous by the United States borders on the absurd. Only six other cases have even been filed under the statute. Of these, the International Trade Commission, a bi-partisan independent agency, has found injury in four others, but in none of those has the President ever imposed a remedy. This is the first in eight years.

And as to the dire warnings of the onset of the next great depression, the economic evidence all goes in exactly the opposite direction. We have lost millions of manufacturing jobs since 2001 in this country. If we do not take action to brace up the manufacturing sector and allow more reasonable adjustments to globalization, it will be this failure that will prolong and deepen the recession we are already in. Yesterday's job numbers, showing a continuing increase in the unemployment rate to 9.8%, the highest level since 1983, demonstrate that.

The fundamental point is that many people in this country, including those represented by the commentators mentioned above and those wailing about the horrors of the tire tariffs are making an enormous amount of money by moving jobs to China, building factories there financed by Chinese government largess in the form of subsidies, and avoiding the environmental, health care, and corporate tax costs they would have to pay here. So they stand up against even the most measured trade actions, meant to help the American worker and manufacturer.

No, there will be no trade war. It's just too hard to imagine the war cry, "Let the Dorking Wars Begin!"