Sunday, February 1, 2009

The Criticisms on Potential Trade Protectionism by Chinese Premier

The criticisms on the amendments on the US Reinvention Bill H.R.1 by Chinese Premier Mr. Wen Jia-bao based on a free-riding on the European protests than on solid ground.

Three amendments regarding the proposed purchases of US manufactured goods for the projects funded by the H.R.1 Bill, in summary, are as follows:

1. would provide that funds appropriated are used to purchase iron, steel, and goods manufactured in the United States;
2. would expand the Berry Amendment Extension Act to include DHS to require the government to purchase uniforms for more than one hundred thousand uniformed employees from U.S. textile and apparel manufacturers, and
3. would require that any money spent under the bill be used to buy American-made products whenever possible.

H.R.1 Bill mainly focuses on the provision of infra-structural, rehabilitation, education, energy and green projects in which most components are iron ores, steel, copper, cement, optical fibers, tool machinery, construction machinery, heavy machinery, steel fabricated products, bearings, shafts, pipes, communication hardware, and some specific parts. They are provided by USA based overseas ventures, European, Japanese, South Korea, Australia, and some South American countries (for raw materials).

On the other hand, China mainly exports daily consumer goods like home appliances, apparels, toys, electronic products, furniture, and household consumables to USA. Steel, copper, coal, and other raw materials produced in China are for domestic consumptions or as parts of the above mentioned exported goods. Chinese made vehicles, tools and machineries have not yet complied with the USA codes and standards. Also, Chinese made production facilities, which quality and adaptability are the main concerns, have not reached necessary competiveness for sales in USA market.

In brief, China will not be as directly affected as pretended.

It is undeniable that clauses on “purchased goods manufactured by USA whenever possible” may impose a threat to certain Chinese products. Nevertheless, the term “manufactured by USA” is vague: be it 100%, including even a button, or only certain percentage, is more likely “subjected to actual situation”, considering the fact that USA manufacturing industry is impossible to re-build their production facilities and fulfill the order placement on the tight schedule.

The criticism, therefore, is more a negotiation tactic. By free-riding on the pressure from European and Japanese counterparts that are truly affected by the H.R.1 Bill Amendments, Chinese can find a moral ground and bargaining chip on the bilateral trade and US bond purchases, the two sides of the same token.

The real risk with this strategy is the fact that there is no free lunch. The free-riders may be asked to pay during a nice ride. The European countries, under the huge pressure by far stronger labour unions than their counterparts in USA, are looking for excuses to impose trade embargo/restrictions inside WTO framework. While Chinese made products are not really directly related to USA stimuli plans, they are direct competitors to many European local small businesses. China has been the scapegoat for layoffs in European countries. By using USA as the decoy and the precedence, Europe can accuse China of unfair competition through China’s import taxes, subsidizes, manipulation of currency exchange rate, and even the labor working conditions and propose punishments. By that moment, China may lean towards and bind tighter to USA, which means that China’s walk-away from purchasing USA bonds will be more an attitude than an action.

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