Keys to avoiding a China-US trade war

As US President Barack Obama enters his second term, international trade has become a high priority. The US may be ready to negotiate a free trade agreement with Europe and complete the Trans-Pacific Partnership that involves Pacific Rim countries.

Left out is China, the world's second largest economy and America's top trade partner. As Obama champions trade pacts elsewhere, it appears that a trade war with China is brewing.

The president's first-term trade record proved to be more about politics than economics, particularly with Asia. The TPP is clearly intended to position the US as a geopolitical strategy to counter China's influence in the region. The US already has trade agreements with six of the nine countries involved in the TPP.

This is even more evident in his administration's actions on trade cases, which reveal his political, if not protectionist, sentiments on China. A series of government rulings clearly target Chinese companies, imposing punishing tariffs on imported products, particularly in the renewable energy sector. The most notable example is the Department of Commerce actions against imports of Chinese solar cells, imposing a series of antidumping tariffs as high as 250 percent.

There is obvious legitimacy given that US laws are written to deal with foreign subsidization and dumping situations that hurt American companies. But there is also increased politicization of the regulatory process that is causing injury not only to foreign producers but also to US companies, who are becoming the victims of heavy tariffs.

While America's trade laws are rightly intended to protect domestic producers from unfair trade practices, what is little understood is that the imposed tariffs actually penalize the US importers who end up paying the tariffs. In most cases, the vast majority of US importers are small and medium-sized US companies who are often unaware of this liability and must cope with what amounts to a heavy fine that can also be applied retroactively.

The duties, or tariffs, can be substantial. In a case involving the importation of wooden bedroom furniture, the duties for one Chinese exporter went from 16 to 216 percent, which amounted to an estimated $200 million liability that had to be paid by US importers purchasing the furniture. US importers are coping with millions of dollars in trade-related liability cases, ranging from garlic, crawfish and honey to citric acid, silicon metal, ironing tables, wooden bedroom furniture, steel wire nails and many products too numerous to mention, often causing US import companies to go bankrupt.

In some cases, prohibitive tariffs can be counterproductive. The Obama administration has clamped down on the importation of renewable energy products (wind towers, solar cells, etc), driving up costs of clean and efficient energy production, thus undermining what was a high priority for his first term. In the last two years, countless solar and wind towers plants have gone bankrupt due, in part, to the higher tariffs that make it difficult for these startups to be cost effective.

Reciprocity is inevitable if one country deems another of engaging in unfair or discriminatory trade practices. In response to the solar cells case, China has initiated an antidumping and countervailing duty case against the US for $2 billion worth of US-produced polysilicon that goes into Chinese solar cells, which are exported to the US. In a trade war, nobody wins.

How can we avoid going down the path of protectionism and possibly trigger a trade war with our most important trade partner? Congress should re-write US trade laws to insure more balance and fairness to replace the current laws that strongly favor one set of US companies over others. A key issue in the near future is making China a market economy country. If China becomes a market economy, the Commerce Department will have to use actual costs and prices in China to calculate dumping rates.

But there will be resistance, to be sure, from those domestic companies who will fight any changes in the current system that maintains their competitive advantage. They are well equipped in the lobbying business given the coalitions formed to promote their interests on Capitol Hill and before government agencies. The importing companies must likewise collaborate to more effectively get their side of the story to the decision-makers to insure that the effects of prescribed duties on US importers are properly considered.

This is not only about flaws in our trade laws, but it is also the politicizing of the bilateral trade relationship with China. Hopefully the second Obama term will be more about economics and less about politics.

Don L. Bonker, former US congressman and chairman of House Foreign Affairs Subcommittee on Trade and currently executive director at APCO Worldwide.

William E. Perry, formerly with the US International Trade Commission and US Commerce Department, is the international trade partner at Dorsey & Whitney.