Potential trade wars heating up

The United Steel Workers (USW) are requesting a that the ITC conduct a section 421 review of tire imports from China. The ITC also voted 6-0 last week in favor of domestic steel companies concerning the issue of China dumping steel pipe used in oil production. We are now seeing a China probe of imports of US steel.

Section 421 was added to the Trade Act of 1974 by the U.S.-China Relations Act of 2000 (H.R. 4444), which established permanent normal trade relations with China and cleared the way for China's accession to the World Trade Organization (WTO). The China-specific safeguard provision was added to U.S. law in order to alleviate concerns over possible market disruption due to increased imports from China during the first 12 years that it is a WTO member.

In Section 421 investigations the ITC determines whether imports of a product from China are being imported into the U.S. in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products. If the ITC makes an affirmative determination, it proposes a remedy to the President and the President makes the final remedy decision. Such remedies can include quotas and other relief.

There were a number of investigations during the Bush administration bu no action was taken This will be an interesting test for the Obama Administration because it could heat up a trade issue while the US is in a recession and China is suffering from lower growth and a fall in exports.

Why is this important for financial markets? A surprise reaction in asset prices will come from a unexpected event and a heating up of trade issues may lead to changes in capital flows. The buying of Treasuries is a financial lever that can be used by our trading partners who are unhapy with protectionist action. A decline in trade will lead to a fall in FX flows as well as capital which will have a direct impact on currencies.