Protectionism: China and chickens versus Canada and Buy American

This is an update on trade and protectionism because the last posts I wrote on protectionism were in December. Since then, the only two major events on the protectionist front happened last Friday.

Canada and the Buy American Fiasco

The National Post of Canada trumpeted Protectionism ‘breakthrough’ reached on Friday because Canada received an exclusion to the contentious Buy American provision imposed in last year’s stimulus bill. The post is subtitled “Canadian victory” and begins with a picture of an American and Canadian flag waving right next two one another.  I think you know how this one will read.

With official confirmation that Ottawa and Washington have struck a deal on Buy American provisions, Veso Sobot is letting out a major sigh of relief — as well as a laugh or two. He can’t help but be a bit giddy.

"Oh my goodness, absolutely, we are very happy," said Mr. Sobot, director of corporate affairs at IPEX Inc., a Toronto-based pipe manufacturer that gained notoriety after the introduction of Buy American rules for having its pipe fittings pulled out of the ground in California because they had the ‘Made in Canada’ designation on them.

"This will allow us to compete again. We are tickled pink and we are going to be aggressive about trying to compete for business in the Untied States, and I hope this can help bolster our 2010 and bring back jobs to Canada."…

The crux of the deal will see Canada agree to provide U.S. suppliers with access to a range of construction contracts across Canada’s provinces and territories, as well as in a number of municipalities. In return, the United States has agreed to provide Canadian suppliers with access to state and local public works projects in a range of programs funded by the American Recovery and Reinvestment Act of 2009 – through the U.S. departments of energy, housing and environment.

The deal will be structured to allow the White House to use executive power to treat sectors of the Canadian economy as American by claiming supply chains are so integrated they cannot be separated. This has been done because Barack Obama, the U.S. President, cannot rely on Congress to pass legislation exempting Canada from Buy American provisions.

The piece is much longer and is a must-read for anyone looking for insight into the politics of trade. Many Americans really don’t appreciate the degree to which American protectionism creates political problems with trading partners.  The Canadian government was hard pressed to mollify domestic industry which was being shut out of the American market. It was getting to the point where either a symbolic tit-for-tat measure was going to be necessary or incumbent politicians would feel it from voters.

What about China and their currency manipulation?

Instructive, however, is the difference between the way the Obama Administration has hammered out an agreement with Canada – even at the risk of Congressional ire from its end-run around legislative approval – and how the Administration approaches China. Stephen Roach makes the case.

The United States needs to face up to its own imbalances rather than engage in more China bashing over trade, said world-renowned economist Stephen Roach.

"The West, especially the United States, needs to take a long hard look in the mirror and face up to its own imbalances. Hypocrisy is not a recipe for global statesmanship," wrote Roach in Singapore’s leading financial daily Business Times this week.

As U.S. congress and the White House look toward the mid-term elections of 2010, Washington could well up the ante on China bashing — moving from a rhetorical assault to widespread trade sanctions, predicted Roach, chairman of Morgan Stanley Asia.

He noted that the United States has already imposed trade sanctions on Chinese exports of tyres, coated paper product and steel piping and grating in recent month.

Roach argued that the expected salvo from Washington was apparently built on hypocrisy as the United States itself should also be held accountable for the global economic imbalances.

–Economist warns against China bashing from Washington over trade, Xinhua, 17 Jan 2010

Of course, China has a fixed exchange rate with the U.S. And this is the source of much of the antagonism from Washington.  However, China is starting to overheat and has an incipient inflation problem. Inflation is eroding Chinese competitiveness. So, devaluation of the remnimbi could actually be the first currency move from the Chinese.

For now, the tensions are rising with the Chinese instituting the latest tit-for-tat salvo.

China, the largest market for U.S. chicken, will impose anti-dumping duties of as much as 105.4 percent on imports of American poultry products, threatening to deepen a trade rift.

Importers of U.S. broiler-chicken products will be required to pay after an investigation showed they had caused “material damage” to local suppliers by selling at below-market prices, the Ministry of Commerce said in a statement on its Web site, citing a preliminary ruling. The duties are effective Feb. 13.

The ruling may further strain trade relations between the U.S. and China, which began its investigation in September, two weeks after the U.S. imposed tariffs on Chinese tire shipments. Ties have soured over proposed U.S. arms sales to Taiwan and President Barack Obama’s plan to meet the Dalai Lama this month.

“This is probably a result of political tension, although a trade war between the two economies is unlikely,” said Li Qiang, a managing director of Shanghai JC Intelligence Co. China consumed almost 800,000 metric tons of U.S. chicken in 2008, valued at $722 million, according to the USA Poultry & Egg Export Council.

China’s chicken probe also was a response to a decision by Congress that effectively bans imports of cooked poultry, James Sumner, the president of the poultry export council, said on Sept. 14.

–China to Impose Dumping Penalties on U.S. Chicken, Bloomberg, 5 Feb 2010

I am not anywhere near as sanguine about avoiding a trade war as Li.  Michael Pettis has it right when he explains in the FT why a trade war is very likely to break out this year.

if deficit countries demand structural change faster than surplus countries can manage, we will almost certainly finish with a nasty trade dispute that will slow the global recovery and poison relationships for years.

Now that consumer demand is slack everywhere around the world, politicians are desperate to demonstrate they are doing something for their voters’ jobs. Bashing foreigners is an easy way to score political points. But it is also a dangerous game that is likely to lead to a bad outcome. The U.S. avoided such an outcome with Canada; with China, I am not so sure.