Chicken Tariffs Just a Pawn in the Yuan Valuation Battle

Shopping for chicken in BeijingTariffs levied on some items traded between China and the U.S. are looking more and more like a proxy for the currency battle between the two nations.

China is set to raise tariffs on certain chicken parts imported from the U.S., which may be as high as 31.4%. According to the FT, "The Commerce Ministry ruled on Wednesday that US chicken producers have been receiving unfair subsidies and that these had hurt Chinese companies."

It's hard to say whether low chicken part prices are due to U.S. aid to the industry, or part of China's retaliation for tariffs placed on its tire exports to the U.S. in February. The 35% tire tariff led to the first accusation about chicken parts prices by the minister of commerce in the People's Republic.

The chicken price issue seems like a game of ping pong between the two nations on trade issues: The U.S. raises tariffs on one set of Chinese imports, and China hits back with tariffs on a selection of U.S. products. But it's surely more complex than that.

The U.S. government has called on China to allow the value of the yuan to float on currency markets, or at the very least, for the People's Republic to increase the value of its currency. Many economists argue that the current value of the yuan gives Chinese exporters an unfair price advantage and hurts U.S. exporters. In essence, China has rigged the export game.

The U.S. Treasury originally set its semi-annual review of currency manipulation for April 15. It appeared that there was some progress on the yuan value issue when Tim Geithner visited the mainland on April 9 for currency talks with Chinese Vice Premier Wang Qishan. There was further hope for compromise on the matter when Chinese President Hu Jintao came to the U.S. on April 12 for the Obama Nuclear Security Summit and the two presidents discussed the currency matter.

No solution came from any of the high-level conversations, and the matter seemed to have settled down. But in mid-March 130 Congressmen wrote to Geithner saying that if the Treasury was not ready to act on the yuan issue, it would be pressed by legislation. The yuan's value is often seen as the culprit for U.S. manufacturing job losses, which makes it a potentially useful campaign issue as the mid-term elections approach.

If the U.S. accuses China of being a currency manipulator and bars a number of Chinese goods from the U.S. or imposes huge tariffs on them, it could set off a trade war of unprecedented size and scale. The yuan issue has become a cat and mouse game played with chickens and tires. The U.S. swipes at China and costs the tire industry in the People's Republic money. China raises tariffs on chicken parts and that industry suffers in the U.S. That back and forth is likely to continue until the yuan issue is settled to a level that's acceptable to the American government. In the meantime, the ping pong game gets more and more dangerous.

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