On the Verge of a Trade War?


By David Ethridge The Bush Administration's decision on Nov. 19 to impose temporary quotas on some textiles from China caused consternation in financial markets (See BW Online, 11/21/03, "Bush's Wobbly Line on Trade"). Nowhere was this more evident than in foreign exchange, where the U.S. dollar sank vs. other major currencies as investors worried that the move was the opening salvo of a broader protectionist push. The White House's apparent aim: saving jobs in key manufacturing states ahead of the 2004 Presidential election season.

China could soon come under Team Bush's trade microscope again, when the Commerce Dept. makes a preliminary ruling on a complaint filed on Nov. 10 that Chinese furniture imports are being "dumped" on the American market. There's little doubt at this point among forex traders that the U.S. is taking a more aggressive trade approach against China.

The key trade test for the Bush Administration and the U.S. dollar will be the President's decision on whether to lift or roll back tariffs on imported steel -- or leave them in place for another year, as U.S. producers would like. The clock is ticking down to a mid-December faceoff, when European trade officials threaten to impose countervailing duties on U.S. goods unless the tariffs are reduced (see BW Online, 11/11/03, "Will Bush Bend on Steel?").

HIGHER STAKES. The noises from the European Union come after the World Trade Organization ruled earlier in November that the tariffs imposed by the White House in March, 2003, were illegal. (Recall that the dollar also declined after that announcement.)

The stakes may be higher this time around. The current trade tiffs come as a weakened dollar is causing global currency markets to fret about how the U.S. will continue to fund its huge twin deficits -- the overall budget gap and the trade imbalance -- at a time of comparatively low interest rates and a fresh wave of U.S. financial scandals. Indeed, no less a figure than Federal Reserve Chairman Alan Greenspan entered the debate on Nov. 20, attacking "creeping protectionism" from Congress and the Commerce Dept.'s ruling to cap Chinese textiles imports.

The forex market remains worried that the Bush camp is moving toward a broad protectionist stance that leaves the dollar more vulnerable, just as the U.S. needs to attract investment inflows to continue funding its trade deficit. Persistent murmurings have it that a trade war could be triggered, adding to global instability alongside seemingly unresolvable political issues in an increasingly violent Iraq.

ANOTHER QUAGMIRE? One can argue that Team Bush is following a "targeted protectionism," in the case of steel and textile imports. The White House did show some caution, after all, in refraining from labeling China and other Asian exporters as "foreign-exchange manipulators" in the Treasury's annual review of trade.

Still, global investors fret that 2004 election politics will trump the Administration officials' dedication to free trade as they seek to secure votes in key swing states. As such, the steel issue is a critical test for avowed free-trader Bush to either step back from the brink -- or risk an ugly trade war that will likely see no winners. Ethridge is a currency market analyst for MMS International


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