Connecting the classroom to the "real world"
Free Trade Threatened?
In Chapter 12, we briefly discuss the legal aspects of pricing. One issue that we discuss is a practice referred to as “dumping,” which is the practice of goods from one country being under-priced in a foreign market typically because a government subsidy exists in the originating country. There is a situation brewing currently between the United States and China that has the potential to escalate into just such a contest.
Yet a decision by the White House to impose punitive tariffs (35% for the first year, falling by five percentage points a year, to 25% in the third year) on Chinese-made pneumatic tyres now raises serious doubts about Mr Obama’s commitment to free trade.
The duties are to be imposed on September 26th under a part of American trade law known as “Section 421”. The American government argues that these tyres are being imported into America from China in “such increased quantities and under such conditions as to cause or threaten to cause market disruption to domestic producers” of competing tyres.
Allegations of dumping crop up from time to time and measures such as tariffs or import duties are enacted to protect domestic producers of competing products, but this can have the effect of beginning a trade war where more and more regulation is put in place. In the end, it can be difficult to even determine if the entire exercise was worth the effort in the first place.
Poultry and tyres sound like small change in the context of the economic relationship between the two big economies. But Eswar Prasad, a professor of trade policy at Cornell University and a former head of the IMF’s China desk, argues that the American action and Chinese retaliation may presage “more protectionist measures to come from both sides”. He notes that China could retaliate much more broadly than by raising a few tariffs: it could, for example, supplement its implicit export subsidies, including an undervalued exchange rate, with more explicit measures to support its export industries and block imports. This could “easily ratchet up into a broader trade war and inflict economic damage on both countries”.
It will be interesting to see how things pan out in the coming months.
America, China and protectionism: Wearing thin. Sep 14th 2009. From Economist.com
