China: the US is dumping its chicken feet in our market!

background

what dumping is

Dumping involves selling products in an export market.  Two conditions have to hold for sales to be dumping:

1.  the selling price must be below some concept of “fair value.”

Typically, this means the selling price abroad is lower than the selling price in the home market.  Alternatively, the country where the products are sold may claim the selling price there is below the manufacturer’s (average) cost of production–even though it may be the same as, or higher, than the selling price in the home market.  The “cost” is usually figured by the export country’s regulators.  That may be a lot higher than what’s shown on the financials of the manufacturer.  Historically, the US has been regarded as a master at ending up with a high number.

2.  the sales have to be shown to be doing damage to local industry participants in the export country.

special China-only ” safeguard” provisions

As one of the conditions for its joining the World Trade Organization, China had to agree that an increase in sales volume over stated limits would count as dumping during a number of transition years, even if conditions 1 and 2 above weren’t satisfied.  The rationale was to allow local industry participants time to adjust to a world with competition.

tires and chicken feet, a year ago…

As I outlined in a post when it happened a little over a year ago, President Obama invoked the “safeguard” provision regarding low-end auto tires produced in China and sold in the US.  There was no economic reason I can see for doing this.  It was purely back-room politics, a favor for the United Steelworkers union.

China responded by taking the first step in the WTO dispute resolution process.   It placed tariffs with equal revenue impact on imports of chicken feet (and to a lesser extent, wings) from the US.  At the same time, it opened an anti-dumping investigation of American chicken parts.

…and now

Over last weekend, Beijing released the findings of its chicken feet inquiry.  Yes, dumping has occurred (no surprise here–you can’t give away domestically all the chicken feet the US producers.)  Duties of between 50% and 105%, depending on the breeder, will be imposed for five years.

While presumably technically correct, the decision appears to be as economically self-wounding as the Obama decision a year ago.  Why?

Americans like white chicken meat.  To meet demand, US poultry companies breed chickens with gigantic breasts.  The chickens also have to have enormous feet and legs so they don’t topple over.  America doesn’t want all the feet breeders grow;  they’re more or less a waste product.  But they’re a delicacy in China, whose importers will reportedly pay up to 20x what the feet would fetch domestically.  (I’ve eaten chicken feet once or twice in Hong Kong and New York.  For what it’s worth, I don’t get the appeal.)

The result of the tariffs:  food costs go up in China; Chinese eat more of their skinny domestic chicken feet; American poultry producers, who should be allies of China in Washington, make less money; and the treasury in Beijing has more income–just what it needs.

there’s a deeper game afoot (as it were)


In other times, this situation would be pure comedy.  But, although I think the chances of truly damaging trade actions are slim, I don;t feel they can be completely ignored, as one would have done in the past.


From the US side, both parties in Washington appear desperate to find someone–anyone–other than themselves to blame for their poor stewardship of the US economy.  Moderation also seems to be in very short supply.  In addition, companies that sell Chinese products in the US–meaning just about everyone– are less vociferous inside the Beltway in their support for China, given recently announced limits on their ability to expand their operations in the Chinese market.


For its part, C

hina has been slow to recognize how big a burden it is putting on a country with a quarter of its population through the peg between the renminbi and the US dollar.  It has no reservoir of good feeling or obligation to the US, based on WWII and its aftermath, either.  Quite the opposite.  It is acutely aware of the Opium Wars and other abuses of the “Great Powers” of the nineteenth century–in which group it includes the US.  And it believes it is a major victim of the US financial crisis.


It’s not clear, to me anyway, that either side really understands the other’s position.  In the case of the US, I’m confident Congress is completely in the dark.


As a result, I worry that there’s some small chance that one side or the other will accidentally move the politics of trade beyond the only marginally relevant into areas where real economic damage can be done.  I don’t think this is likely, at this point,or even that this possibility should be factored into portfolio composition for anyone.  But for the first time in at least a decade, I think this is a situation to be thought about–in terms of what action to take if events take a turn for the worse–and monitored.

 

 

2 responses

  1. Pingback: C2 – China & Commodities (& the US Debt) | Special Situation Securities

  2. Pingback: China, Commodities, and the US Debt | Special Situation Securities

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