Blustering Trade Winds

By Yu Lintao

The U.S. Commerce Department set tariffs as high as 73 percent on Chinese manufacturers of windturbine towers on July 27, adding to trade disputes between the two countries in the renewable energy sector.

The decision came just days after the two countries failed to reach consensus in Geneva during consultations on U.S. anti-dumping and anti-subsidy cases against imports from China. The consultations involved 22 product categories, including steel, coated paper, solar cells and wind-turbine towers, with a total trade value of about $7.3 billion.

Since the beginning of this year, Sino-U.S. trade friction has intensified. July appeared to be a particularly disquieting month for bilateral trade relations.

“Bilateral trade tensions can be attributed to several factors, concerning both Washingtons shifting development strategy and the cutthroat competition among Chinese exporters,” said Chen Fengying, Director of the Institute of World Economic Studies at the China Institutes of Contemporary International Relations.

Tao Wenzhao, a research fellow on U.S. studies with the Chinese Academy of Social Sciences, added to Chens remarks by noting that the upcoming U.S. presidential election could be another motivating factor behind the tariffs.

Despite recent trade tensions, analysts say mutual interests between the two countries will ultimately overcome the disputes.

“The high interdependence of Sino-U.S. trade and economic relations has reached a point where neither can do without the other. Any damage to bilateral relations will be minimal,” Tao said.

During the latest consultation on the issue, both parties promised to respect the rules set up by the World Trade Organization (WTO) and correct any possible misconduct.

Shifting strategies

“Generally speaking, the key point of the aggravated Sino-U.S. trade friction is related to United States shifting of its development strategy back to manufacturing in recent years after the 2008 financial crisis,” said Tao.

In the last four decades, the United States has devoted itself to building a financial empire to take advantage of the U.S. dollars dominant status as the worlds reserve currency. Meanwhile, it has shifted most of its manufacturing industry to emerging countries like China.

“In the process of economic globalization, labor-intensive industries have lost competitiveness in the United States. Many U.S. jobs in those industries have been outsourced to emerging countries. This conforms to the rules of industrial development but it has also caused job losses in the United States,” Tao said.

“It is not that China, as an emerging economy, has stolen jobs from the United States, but rather the United States has deserted them according to its own needs,” Tao added.

“Because labor costs are so high in the United States, prices of manufactured goods made in the United States are also very high,” said Chen. “Its sometimes joked that Americans wouldnt be able to afford the shoes they made themselves. The United States should acknowledge that emerging countries such as China are better at producing decent products at low prices.”

The deindustrialization of the United States has led to the “hollowing out” of U.S. industry, which also brought on high unemployment. In addition, the 2008 financial crisis hit the U.S. economy hard, which was followed by a lackluster recovery.

“The financial crisis has demonstrated the structural problems of the U.S. economy. In a sense, it is a sick economy,” Chen said.

Concerned about the faltering economic recovery, U.S. President Barack Obama pledged to revive the countrys manufacturing capability. Critics say the United Statesshifting its attention back to the healthy development of its domestic economy would inevitably bring about competition with other countries. Once the competition intensifies, protectionist sentiments could make foreign product makers suffer increasing friction.

“By supporting manufacturing, Obama is trying to create jobs and promote exports, which may bring about competition with export-oriented emerging economies such as China. Obamas reindustrialization policy thus spurs its latest trade protectionism,” Chen said to Beijing Review.

However, Tao said whereas emerging economies have established a complete manufacturing production chain under globalization and have advantages in labor costs, the United States will have a hard time restoring its manufacturing base and getting jobs back from those emerging countries.

With the U.S. presidential election drawing nearer, both Democratic candidate Obama and Republican candidate Mitt Romney are attempting to win votes by blaming China for U.S. domestic problems.

“Both parties target China during their election campaigns. In their speeches, Romney and Obama have been trying to outflank each other by appearing more aggressive toward Chinese economic policies,” said Tao. “There is, in fact, a big trade imbalance between China and the United States, but the causes are complicated. Made-in-China products have strong international competitiveness, which could partly explain the discrepancy.”

Manufacturing woes

Besides the comparative manufacturing advantage of China, fierce competition among Chinese exporters also drove down the prices of Chinese export products.

“Among the 22 targeted product categories, some are in the renewable energy industry such as solar cells and wind-turbine towers. The renewable energy industry should be a hi-tech industry. Many Chinese enterprises, however, have made it a low-end one,”Chen said.

Some of the new energy enterprises in China do not possess the core technologies of their products and are engaged in assembling the products with materials supplied by clients, taking advantage of low Chinese labor costs. In addition, those enterprises try to expand their exports at any price.

“Cutthroat competition among those enterprises is commonplace—and its gotten really bad,” said Chen. “They sell hi-tech products at low prices. It doesnt produce much in profits but gives the world an impression of dumping.”

Chen added that manufacturing industries like solar cells result in high pollution and high energy consumption. While developed countries enjoy new energy products made in China, the pollution is left behind in China.

However, the rapid increase of Sino-U.S. trade is irreversible. In the first half of 2012, the growth of Sino-U.S. trade was far more rapid than that of China with other economies, Tao said.

“It is understandable that bilateral trade friction is intensifying, because our trade volume keeps increasing. But all the problems should be settled under the rules of the WTO, so that trade disputes do not turn into a trade war that benefits neither side,” Chen said.

According to Chen, Beijing and Washington are considering a new trade dispute settlement mechanism. It requires all trade disagreements to be settled between local governments or enterprises themselves, which will help prevent growing trade friction from adversely affecting the two countriescooperation.