When the financial crisis began to trash global exports a year ago, Cassandras predicted an upsurge in trade protectionism. As the world’s largest maker of cheap goods and with a trade surplus a smidgeon below US$300 billion last year, China was the most obvious target of a damaging new round of tariffs.
Worried pundits even invoked the names of Smoot and Hawley, the US senators responsible for the infamous Tariff Act of 1930, which raised duties on 20,000 imported goods, leading to retaliatory action across the world. US exports and imports halved, global trade foundered – and many historians now blame Smoot and Hawley for accentuating the Great Depression.
But despite a few sparks here and there, a protectionist conflagration has so far been averted. If anything, the crisis has been marked by an admirable unwillingness by the world’s major economies to pull up the drawbridge to foreign goods.
Until last month, that is. US President Barack Obama’s decision to slap a 35% tariff on imports of Chinese tires (on top on existing 4% tariff) is the most significant protectionist move yet. Only the week before Obama’s long-awaited decision, viewed by some commentators as a litmus test of his free-trade credentials, Beijing had denounced another decision by the US to impose preliminary duties on imports of Chinese-made steel pipes. The inevitable "trade war" headlines followed as China said it would retaliate by investigating imports of US poultry and auto components.
Undoubtedly, Obama is setting a dangerous precedent. Protectionist moves by one country to keep out more competitive foreign goods have the nasty habit of being copied by others. Why should Michelin and Pirelli have to compete with cut-price competition from Chinese tire makers when their US competitors do not have to?
Beijing already feels it is being unduly targeted. Earlier in the summer, the Ministry of Commerce asserted that trade partners had filed 67 cases against Chinese exports worth US$8 billion. Yet, despite these prostrations, there is little evidence that China is feeling the brunt of a new wave of protectionist sentiment. According to the Global Antidumping Database, which collates data on trade actions under the WTO, there was no rise in investigation levels against China from the onset of the crisis last year to June this year.
Of course, investigations take time to prepare, and putting in place safeguards takes even longer. China may yet find itself genuinely the target of anti-trade measures. If that happens, Beijing will retaliate: China’s leaders have to answer to their nationalistic wing, just as Obama needs to court favor with his allies in the labor unions. Protectionist tariffs are always more about politics than economics.
But Obama has given no indication that he is a dyed-in-the-wool protectionist. Far more probable is that he’s playing a delicate political game: Placating the labor unions now is a necessary first step to pushing through potentially controversial trade agreements later in his tenure.
It is worth noting that the 35% tariff on Chinese tires is significantly lower than the 55% safeguard recommended by the US International Trade Commission. It is too early to conclude that we are teetering on the edge of a new protectionist abyss.