In an interesting demonstration of the extreme specificity of international trade, China's Ministry of Commerce recently levied a 30 percent tariff on imports of a specific artificial fiber -- nylon 6 -- from the United States, Russia, the European Union and Taiwan. Monday's announcement was greeted with displeasure by companies that produce the material, including Honeywell (HON) and BASF (BASF).
In some ways, the Chinese tariff on nylon 6 operates as a useful lesson in the dangers of trade restrictions. As the Chinese Ministry of Commerce noted, one of the fiber's major uses is as a material for tire cords. Given the US' recent decision to levy tariffs on cheap Chinese tires, the move to limit imports of nylon 6 seems like a not-so-subtle hint about the interconnectedness of global industry. Effectively, the Chinese seem to be conveying the message that restrictions on the free flow of goods can cut both ways.
If a trade war is to commence, the next move would be for the United States to limit imports of yet another Chinese product that uses nylon 6. This could include toothbrushes, hosiery, guitar strings, rope, nets, threads, and surgery sutures. Positioned as a move to stimulate domestic consumption of the fiber, this would actually have the net effect of benefiting an American industry, undermining a Chinese industry, raising prices for consumers and spreading the impact of the current trade war.
While much has been made about the positive effects of tariffs on American business, US tire manufacturers like Bridgestone (BRDCY) and Goodyear (GT) have been less than enthusiastic about the move. This is hardly surprising; both companies have factories in China that produce their cheapest tire models. In fact, a case could be made that the 35 percent tariff on economy tires is, essentially, a 35 percent tax on the people who buy those tires. This, in turn, would affect tire buyers, tire sellers and tire companies. In fact, the only group that seems truly overjoyed at the tariff is the United Steelworkers, which blames Chinese tire imports for the loss of thousands of American jobs.
From one angle, China has much to lose from a trade war. Although the Middle Kingdom is trying to amp up its domestic consumption, America still remains the biggest market in the world, and limiting China's access to Walmart and Target would be devastating. Analysts have predicted that the 35 percent tariff on tires, for example, could cost Chinese companies as much as $1 billion and will probably result in the loss of 50,000 to 60,000 jobs. If this expands into other industries, the effect on China could be devastating.
As we have so often heard, China has an ace in the hole. The continued health of the American economy -- not to mention the Obama stimulus program -- is dependent upon China's willingness to continue financing American debt. As Daily Finance's Charles Hugh Smith notes, if the Chinese chose to dump their "$2 trillion stash of US bonds and dollars," the plummeting dollar would kill American sales, as imported goods would suddenly become prohibitively expensive.
For China, however, this would be suicidal. Not only would it price itself out of the world's biggest market, but it could, conceivably, lower the price on American manufactured goods to the point that they would be positioned to compete with Chinese products on the world market. Also, as recent events have shown, in the event of a Chinese move to destabilize the dollar, European markets would likely move to keep the dollar propped up. After all, regardless of anything else, America is still the world's marketplace.
Ultimately, then, America and China seem locked in a Mexican standoff that is oddly reminiscent of the Cold War. As each side maintains a stockpile of tools of economic destruction, the key seems to lie in moderate responses to the trade imbalance. China's lax quality inspections, cheap labor and antidemocratic government put it in a position to undercut most other countries when it comes to manufacturing consumer products. A measured American response to these cheap goods seems likely to stimulate American business; similarly, a measured Chinese response is hardly likely to pull the rug out from under American industry. As this back-and-forth play continues, the best hope is that these two close economic partners will reach a sustainable equilibrium.