Do Not Expect Significantly Worse Trade Relations over Latest U.S.-Chinese Trade Actions

China was quick to respond to the U.S. move placing tariffs on imports of Chinese-made tires by whipping up an investigation into whether the U.S. is dumping car parts and poultry into Chinese markets. That has raised the anxiety level about further protectionist measures – or even a trade war — that could disrupt a fragile world economy.

But the latest actions, by themselves, are unlikely to lead to significantly worse trade relations, Wharton experts say.
Is the situation serious? Yes, but for now it looks more like a brush fire that is not likely to spread to a forest fire, says Wharton management professor Stephen J. Kobrin. “It is serious in the fact that [President] Obama is responding to union pressure in imposing tariffs on Chinese tires.”

The good news is that both sides are talking about proceeding through the World Trade Organization. The “nightmare scenario that comes to mind immediately for many in these situations is what happened in the 1930s, when the world economy fell apart and put up protectionist walls that we did not recover from until the 1960s,” Kobrin adds. So, while one could argue that the risk of greater protectionism has increased by recent actions, the situation is being “kept in hand — and the two sides are playing by the rules of the road. In the 1930s they were not.”

Wharton finance professor Franklin Allen agrees the trade dust up is not likely to spin out of control. “I don’t think this is a positive development. However, I don’t think it is a very significant negative one, either. What is at stake is small relative to the financial relationship. I think both sides are warning the other. Hopefully, it will not get out of hand.”

For its part, the U.S. looks unlikely to gain much. The three large U.S. automakers, particularly GM, ship major auto parts (such as engines and transmissions) to China for assembly, says Wharton management professor Marshall W. Meyer. “Today GM is on a roll in China.” But China is saying, in effect, that if the U.S. imposes tariffs on tires to protect rubber workers’ jobs, it could cost the UAW jobs because China would retaliate with trade barriers against U.S. car parts, Meyer says. “Tit for tat.”

Both sides, he adds, "are desperately interested in keeping jobs — maybe China, where 23 million peasant workers are out of work, more so than the U.S.”

Still, some questions remain, Meyer says: “What happened to the SED (strategic economic dialogue)? Weren’t both sides trying to work out these issues quietly?"

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