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Trade Tensions With China on the Rise

The trade relationship between the two countries hit a new low Monday as they exchanged World Trade Organization cases.

WASHINGTON — China is becoming more of a political football than ever.

The trade relationship between the U.S. and China hit a new low Monday as the two countries exchanged World Trade Organization cases, while President Barack Obama and Republican presidential candidate Mitt Romney sparred over who has the best approach to reining in the Asian giant.

The heightened political rhetoric and new WTO cases escalated the tensions between the two countries and reinforced the potential of a trade war if the tough stance on China becomes more entrenched or punitive, trade experts said.

The WTO complaint filed by the U.S. alleges that China illegally subsidizes the export of auto and auto parts. China countered with a WTO case of its own claiming that U.S. countervailing duty and antidumping laws are not consistent with WTO rules.

 

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While the two WTO complaints do not directly involve the fashion industry, apparel importers and retailers have a lot of exposure in potential trade disputes with China. Companies imported $41 billion in apparel and textiles to the U.S. from China in the year ended July 31, according to government data.

Experts said the tit for tat is all part of the process of raising trade issues and disputes within the WTO, which serves to tamp down escalating tensions.

But the latest heated trade dispute comes at a critical time for both the U.S. and China. The Republican Party, in its party platform for the presidential election, called on a tougher stance against China regarding its currency and trade policy. Meanwhile, China has been struggling with its own issues ranging from questions over leadership succession at the upcoming Party Congress next month to a dispute with Japan (see related story below) to economic slowdown and rising labor costs. These have forced many companies to move production out of the country either to other low-cost Asian manufacturing hubs or back to the Western Hemisphere.

In that defensive position, China could be more prone to retaliation, which many said was seen in the filing of its own trade case against the U.S. shortly after the U.S. filed its case.

“The tension is relatively high anyway,” said Dave Redlawsk, political science professor and director of the Eagleton Center for Public Interest Polling at Rutgers University. “China is addressing an economic slowdown themselves.…One of the really telling things in the last few years is that China has continued to do well while the rest of the world economy seemed to tank. China clearly needs the exports to help drive recovery of their economy, so clearly this kind of thing [a WTO case] makes that more difficult.”

Redlawsk said ultimately the two WTO cases might be more about the struggle between a superpower and a rising economic powerhouse than an actual brewing trade war.

“To some degree, the U.S. wants to keep China in its place while China wants to assert itself on the world stage,” Redlawsk said. “A lot of this seems like posturing on the world stage, in the case of China, and on the election stage, in the case of the U.S.”

“Certainly from a business perspective we all hope that both sides can avoid a trade war,” said Julia Hughes, president of the U.S. Association of Importers of Textiles and Apparel. “Even though there is the traditional heated rhetoric on the campaign trail, everyone in the business community will be watching it closely. But I do not expect that it will escalate into a trade war.”

Gary Hufbauer, senior fellow at the Peterson Institute for Economics, said it has definitely gotten the attention of the Chinese government, which is “very intently trying to read the tea leaves to see whether it is a momentary [tool] for the campaigns or whether it presages a worsening economic relationship.

“I don’t think China sees this as representing a fundamental change in policy,” he said. “However, if either the Obama administration or a new Romney administration goes in for a much more forceful attack on China by changing subsidy laws to include undervalued currency or bringing a big WTO case that includes everything but the kitchen sink, that would be a different story.”

The timing of the filing of the U.S. case coincided with the final stretch of the presidential campaign and occurred on the same day Obama was campaigning in the industrial state of Ohio, which has been hit hard by manufacturing job losses. Obama and Romney spent Monday sharpening their political attacks over their opponent’s policies toward China.

“Now I understand my opponent has been running around Ohio claiming he’s going to roll up his sleeves and take the fight to China,” Obama said at a grassroots event in Cincinnati. “But here’s the thing: his experience has been owning companies that were called ‘pioneers’ in the business of outsourcing jobs to countries like China. Pioneers! Ohio, you can’t stand up to China when all you’ve done is send them our jobs.”

Romney, who has accused Obama of not being tough enough on China on trade and an undervalued currency, dismissed the administration’s WTO case. “I will not wait until the last months of my presidency to stand up to China, or do so only when votes are at stake,” Romney said. “From Day One, I will pursue a comprehensive strategy to confront China’s unfair trade practices and ensure a level playing field where our businesses can compete and win.”

A senior administration official, who spoke on the condition of anonymity on a conference call with reporters Monday, said: “We have said many times that we are not desirous of or seeking a trade war with China.

“China has moved in a direction of having industrial policies [such as illegal export subsidies] that have operated either to the benefit of their manufacturers or have induced manufacturers to move from the U.S. to China. That is why we made a commitment to…say to China, Europe or Mexico [or any other country] that you have to play by the rules,” he said.