World cannot afford another trade war

Beijing's response to the US slapping tariffs on Chinese tyre imports has predictably been swift and to the point. It has lodged a complaint with the World Trade Organisation. An investigation has been threatened into possible unfair American practices in exports of automotive products and chicken meat. Is a tit-for-tat trade war looming?

Neither country can afford a trade lockdown, and so far actions have been relatively measured. Their recovery from the financial crisis depends on their maturing trading partnership. Economies so powerful and so deeply entwined have to be handled with care. In short, Beijing and Washington need one another.

But trade spats have the potential to spiral out of control.

Domestic pressure probably drove US President Barack Obama to ignite the dispute last Friday. Unions - key supporters of his campaign - contend that 5,000 American jobs have been lost to China's alleged dumping of cheap tyres. A 35 per cent tariff was put on the tyres and a preliminary decision made to impose duties of up to 31 per cent on steel pipes from China. Obama has insisted that the dispute will not escalate, but he has set a precedent by applying a previously unused part of the trade law known as Section 421. It allows US industries and workers to seek protection from sudden increases in Chinese imports with a minimal burden of proof. In recent months there have been complaints about perceived surges of all manner of Chinese goods, among them shoes, blouses, women's underwear, computer monitors, hearing aids and T-shirts. The floodgates could be in danger of opening.

China's economy, naturally, is directly affected by tariffs. The cost of the duty on tyres is estimated at US$1 billion, not accounting for the impact of lost jobs. This, in turn, strikes at Beijing's efforts to meet the 8 per cent GDP growth target seen as essential to preventing social unrest. There is potential for a knock-on effect beyond economics to other aspects of relations.

The actions come at a sensitive time. Obama is scheduled to meet President Hu Jintao at the G20 summit in Pittsburgh next week. He will also make his maiden trip as president to China in November. Washington needs Beijing's help on a range of issues, from global warming to Iran's nuclear programme. China generally does not counter trade moves with just a trade-related response; Washington may find relations will cool at all levels.