China Tells

Chinatells – Wu Shu – Singapore

In the game of Texas, sometimes one need to play cool just to hold off on your bottom line, sometimes one need to bluff to scare the other players away.

China government’s reaction to President Obama’s decision to impose import tariff on Chinese Tires to USA is the key to determine how this trade battle will develop in the next phase, either an escalated war or a dust in the river of history.

There seems no doubt that US is on the proactive side in terms of aggression, and whether it is a rational decision remains to be seen. It is questionable whether the imposition of tariff on Chinese tires would make a difference in securing more jobs for American labors as there would be cheaper tires from Mexico, India and Brazil. In addition, most American companies have waned away from tire production anyway so the workers for the total sector is tiny compared to the mighty work force that is enduring the highest unemployment rate in the last 26 years in the States. For Obama Administration, the only tangible benefit in pleasing the unions by committing the promise to enforce trade laws seems to be a better negotiation stance in the health care reform, which is one of the biggest challenges for the current US government.

On the other hand, the risk on the table is huge as well. Obama administration will have to ask themselves: is it worth to antagonize the biggest trade partner of US on a sector that helps little on its employment rate? Does it open the door for other sectors to follow suit and file more complaints against Chinese import? Does it send a message to most industrial sectors that US government is not afraid to start a trade war with China in the spirit that the government keeps its promise to ‘enforce trade laws’? Is it contradictory to Mr. Obama’s open stance to promote free trade?

Whatever answers to above questions, Mr. Obama moved the step on the chessboard. Right or wrong, he needs to make a decision. The decision reflects the judgment that to please the union’s request is on a higher rank of priority on government’s agenda and they do not see a huge risk of any sort of escalation of Chinese’s reaction.

The ball is rolled over to the other side. So far China government’s reaction is all within expectation. First she condemns the imposition of tariff and denounces it as against WTO rules. Secondly the government and the government influenced media did not over-react by taking any extra measure.

It is a smart move from China government. Besides WTO rules, it seems that China government does not have any other material weapons to deal effectively with the ‘protectionism policy imposition’ of American government, or any other governments. One potential option is protectionism retaliation by imposing tariff on American export into China, which is a clear message of escalating the war teeth to teeth. However, is it worth to risk other sectors of export in the current period when China need export the most? There doesn’t seem any real benefit to respond to a provocation by an equally aggressive retaliation at the current environment.

On top of the plus and minus as above there is an issue of timing as well. President Hu Jingtao is going to meet President Obama in late September on G20 summit, followed by Mr. Obama’s visit to Beijing in November. Instead of feeling threatened, China government shall see more opportunity from the aggressive move from her biggest trading partner. It is almost un-doubtful that the tire tariff will be mentioned as an important stake of China government to negotiate more openness of US market to China in other sectors. Of course the US government might react with an even firmer stance, but that has to be based on an assumption that there is more benefit to be an eagle than a dove.

To wrap up the options to China government, there is no real effective measure to warn or punish the aggressive partner, and therefore no real need to shoot up a trade war, and there are more stakes of an urgent need to secure export market on the table. Therefore one should not expect her to over react to the tire tariff. Perhaps this is also one of the main reasons why Mr. Obama takes the step to go ahead with the stick rather than the carrot. If China government reacts within the expectation and the US government ‘returns a favor’ in G20 or November meeting, then the tire tariff incident could be a good opportunity for both parties to strengthen the tie and achieve a ‘win-win’ benefit.

Like the old saying – it is just a game!

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