US stock markets have had a very wobbly opening this Monday as fear spreads that the Obama administration has fired the first salvo in a trade war with China. President Obama made a long-awaited decision on Friday about imposing sanctions on China over alleged “dumping” of low-cost tires on the American market. Obama sided with trade unions and imposed stiff duties on $1.8 billion worth of Chinese tire imports.
The United Steelworkers brought the case against China back in April claiming that more than 5,000 tire workers had lost their jobs since 2004 because of cheap Chinese tires flooding the U.S. market. Obama’s order raises tariffs for three years on Chinese tires — by 35 percent in the first year, 30 percent in the second and 25 percent in the third.
The Chinese government hit back fast and on many fronts. On Sunday, Beijing announced it would investigate complaints that American auto and chicken products are being dumped in China or benefit from subsidies. China says the U.S. imports have “dealt a blow to domestic industries.” You can be sure Beijing won’t have much trouble arguing that U.S. farmers and automakers are heavily subsidized.
On Monday Beijing escalated its action with a complaint to the World Trade Organization (WTO). The Chinese complaint to the WTO in Geneva triggers a 60-day process in which the two sides are to try to resolve the dispute through negotiations. If that fails, China can request a WTO panel to investigate and rule on the case
With unusually swift and coordinated action the official Xinhua new agency quoted the government as saying, “China believes that the action by the U.S., which runs counter to relevant WTO rules, is a wrong practice abusing trade remedies.” The government said the U.S. imports have “dealt a blow to domestic industries.”
So far it’s a trade spat, not a “war” but it is an irritant as Washington and Beijing prepare for a summit of the Group of 20 leading economies in Pittsburgh on Sept. 24-25. Obama is set to visit Beijing in November and his reception could be very frosty.
Amazingly, American tire companies had begged the President not to go ahead with sanctions against China. “By taking this unprecedented action, the Obama administration is now at odds with its own public statements about refraining from increasing tariffs,” said Vic DeIorio, executive vice president of GITI Tire in the U.S. “This decision will cost many more American jobs than it will create.” GITI Tire is the largest Chinese tire maker, and a U.S. retailer of low-cost imports.
Although investors are not yet facing World War III between the two economic superpowers, it’s enough to make the markets very nervous. The Chinese ADR Index tumbled heavily at the markets’ opening but recovered swiftly as cooler heads prevailed.
Alarmists are worried that China, which holds about a trillion dollars worth of U.S. financial instruments could declare a real economic war. The tools Beijing could use are worrisome. China could:
1. Sell dollars they hold faster than they already are
2. Not buy at the treasury auctions in the near future
It’s a little too early for China to exercise the nuclear option in this trade dispute, but the events have spread fear in otherwise buoyant markets. Investors in U.S. stocks should exercise caution and consider diversification as worries about devaluation of the U.S. dollar, inflation and trade wars continue to loom.
Holders of Chinese ADRs should ride out this rough period if they are confident that the shares they hold are from companies which continue to grow profits by double-digits.
And, more importantly, they should not be invested in companies dependent on foreign exports.
Source: Jim Trippon’s China Stock Digest