U.S. tariff damages China relations -- Expect higher prices

April 4, 2007

Last week, the U.S. Department of Commerce announced its preliminary decision to apply penalty tariffs to paper imports from China. It claims that the Chinese government unfairly provided subsidies of 10-20% to its manufacturers of the glossy type of paper used in books and magazines. Although the trade volume is only $224 million, (less than .1% of the $288 billion in goods imported from China in 2006) it has grown 177% in one year. New Page Corp brought the anti-dumping case to the Commerce Department, saying it cannot compete against these subsidized prices.

The Chinese are concerned that other industries in the U.S. will follow, such as textiles, garments, as well as iron, steel and plastics. Other countries, notably Japan, Mexico and Canada, are likely to file anti-dumping resolutions as well, further hurting China’s export trade.

What the U.S. tariff means to relations with China:
First, since it is a preliminary decision, the Chinese may remove the subsidies to avoid an actual tariff. However, if the tariff is instituted, then it could trigger a trade war. This would result in higher prices for imports, which could then lead to inflation.

The Chinese believe that the Commerce Dept. is reacting to pressure from the U.S. Congress to reduce the $233 billion trade deficit with China. In response, China could allow the yuan to rise in value, allowing U.S. exports to be priced in cheaper dollars. The mechanism is in place, since China has already signaled that it will reduce its holdings of U.S. Treasury notes (See “Paulson to visit China”). The declining dollar would reduce the trade deficit, but also increase the cost of imports, also triggering inflation.

Action steps:
Protect yourself from inflation and a declining dollar by increasing your holdings of commodities. Find other suggestions in the World Money Watch Special Report “The Declining Dollar.”

Source: People’s Daily Online, “U.S. to Impose Penalty Tariffs on Imports from China,” “Ill-Conceived U,S. Tariff,” “ China Strongly Dissatisfied About U.S. Trade Sanctions,” Frank Lavin, Undersecretary of Commerce for International Trade, Remarks at the National Association of Manufacturers’ Conference.

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