Are the U.S. and China Headed for an All-Out Trade War?
By Jason Simpkins
And William Patalon III
First it was intellectual property.
Then it was exchange rates and the trade imbalance.
Now it is food and drug imports.
Could a ruinous trade war be next? It sure looks that way.
In the latest round of trade tensions between China and the United States, the two economic heavyweights are now sparring over food-and-drug imports. China has just suspended meat imports from seven U.S. companies, including Sanderson Farms Inc. (Nasdaq: SAFM) , Intervision Foods, Triumph Foods, and Tyson Foods Inc. (NYSE: TSN), the world’s largest meat processor.
According to a notice posted on the website of China’s General Administration of Quality Supervision, Inspection and Quarantine, the meat products contained unacceptable levels of salmonella, anti-parasite drugs, and feed additives.
This seems to be a direct response to recent bans on Chinese imports enacted in the United States. A number of products either from China, or containing Chinese ingredients or raw materials, were blocked or recalled – including pet food, toothpaste, and seafood.
But at a time when trade relations between the two countries have become increasingly acrimonious, such tit-for-tat trade restrictions could spiral into a damaging trade war that neither country can really afford.
In the United States, where the economy is already burdened with a housing downturn that can no longer be viewed as just a “slump,” high energy prices that are threatening to jump-start inflation, and financial-system problems that could spill over into the stock and bond markets. China’s economy is continuing to grow at a frenetic pace, but a lot of its growth has been fueled by the sale of exports to consumers here in the United States. If a full-blown trade war didn’t bring that to an abrupt halt, it would at the very least have damaging effects that were very long lasting.
Morgan Stanley Chief Economist Stephan Roach recently told China’s state-run Xinhua News Service that there is a strong chance the United States will impose trade sanctions on China before the end of this year. Roach has testified before Congress three times on this topic, and said, “This is very rare. It shows me that the American Congress is very serious about taking actions against China.”
Even so, “in its rush to impose trade sanctions on China, the U.S. Congress risks making a policy blunder of monumental proportions,” Roach told Xinhua. “The United States runs trade deficits not because it is victimized by unfair competition from China or anyone else but because it suffers from a chronic shortfall in domestic savings.”
That’s hardly a universal view, however.
“This again highlights the ineffectiveness of the policy tinkerings that have so far failed to tackle the root cause of China’s bloated trade surplus: The significantly undervalued [Chinese] currency,” Hong Liang, a Hong Kong-based analyst for Goldman Sachs Group Inc. (NYSE: GS) recently wrote in a research note to his clients.
Last year, the United States recorded an $836 billion trade deficit, of which the Chinese bilateral deficit accounted for 28% – by far the largest portion.
Just last week, China said that total trade for the first six months of this year was $980.9 billion, with a surplus of $112.5 billion. China is projecting full-year trade totals of $2 trillion with a record surplus of $200 billion.
China just last week revised its 2006 gross domestic product growth to 11.1% from 10.7%, the fastest yearly growth the country has seen since 1994. Overall Gross Domestic Product reached $2.79 trillion for 2006. Standard practice means there will be one more revision.
Congressional leaders and some economic experts contend that China’s currency, the Yuan, is drastically undervalued, and is being exploited by the Chinese government to an unfair trade advantage. China has amassed an estimated $1.2 trillion in foreign currency reserves, including $420 billion in U.S. Treasury bonds.
Earlier this year, in one of the most heartbreaking product problems in decades, pet food containing Chinese wheat gluten contaminated with the chemical melamine was blamed for a sudden and widespread rash of pet deaths. Emotional reports on evening news programs night after night heightened the anger and frustration of U.S. consumers and likely spurred American trade officials to be react aggressively to these problems.
The pet-food scandal was followed by the fear-stoking revelation that 360 tubes of toothpaste containing diethylene glycol, a thickening agent used in antifreeze, were found in El Salvador and Spain.
In June, federal safety officials in the United States ordered a tiny tire importer to recall as many as 450,000 tires that it bought from a Chinese tire producer and then sold to tire distributors throughout the U.S. market. Because of a missing gum strip – which keeps the steel “belts” in modern radial tires from separating or cutting into or through the rubber – federal officials feared the tires could suffer tire-tread separation and possibly even fail, the problem that spawned the largest-ever U.S. tire recall back in 2000.
China recently executed the former head of its food and drug watchdog unit for approving untested medicine for cash. The penalty was as harsh and quickly administered as it was because China is trying hard to position itself in a favorable global light in advance of the 2008 Summer Olympic Games, which it is hosting.
Despite recent troubles, however, Chinese exports are typically held to a high standard of safety, as they are more lucrative than their domestic counterparts.
Even so, the U.S. Food and Drug Administration announced it would hold all farm raised catfish, shrimp, and eel shipments arriving from China until they are tested for residues from drugs not approved for use in farm-raised fish.
China took exception to the U.S. reaction and has fired back. The head of China’s Administration of Quality Supervision, Inspection and Quarantine, called the FDA action “unacceptable,” and said that “China, too, detects many substandard food products from the U.S.,” according to the Xinhua report.
Now this dispute over food quality has grabbed the spotlight from the much-publicized dispute over the undervalued Yuan, China’s currency, which has been blamed in part for a skyrocketing U.S. trade deficit with China.
