China Joint Ventures: Understanding the Intangibles at China Briefing

Americans believe relationship with China is most important at China Economic Review

Where To Locate Your China Business at China Law Blog

Multinational Companies Could Face Stricter Transfer Pricing Investigation By Chinese Tax Authorities at China Law Update

China Joint Ventures Again. This Time We Blame The Victims at China Law Blog

China Antimonopoly Law Update at China Realtime Report
Discussing two interesting lawsuits under the AML, one against China Mobile, and the other against Shanda and Xuanting.

Love The One You're With. When China Joint Ventures Make Sense at China Law Blog
Dan covers some instances where he thinks JVs are appropriate.

A Call For More Transparency In China’s Africa Investments at China Realtime Report

China Briefing's Series on Chinese JVs
China Joint Ventures as Strategic Investment
China Joint Ventures: Legal Due Diligence
China Joint Ventures: Financial Due Diligence

Preparing For Domestic Carbon Trading In China at China Law Update
Information on what may be China's first domestic carbon trading market.

Looking Under the Hood of the China Deal Machine at Deal Journal
Deal Journal getting excited about Volvo, Sino-Swedish relationships, and Qatari gas deals.

CIC Gives Rare Tally of Overseas Spending at China Realtime Report
It is what it is. Anybody else totally stoked about WSJ's way expanded China coverage?

China Antimonopoly Law Series at Antitrust & Competition Policy Blog
China’s Antimonopoly Law—One Year Down
China’s Antimonopoly Law—One Year Down: Part 2. China’s new merger review regime
China’s First Court Decision under the Antimonopoly Law: A Misreading of the Law?

Decoding China: Why Its Stock Markets, GDP Aren’t Linked at Deal Journal
"A unique characteristic of China’s equity market is the relatively high percentage of nontradable shares held by the central government, local governments and state-owned enterprises. One feature of this system is the transfer of risks to the country’s individual stock investors, causing price aberrations in the stock market, while keeping outsize returns for the government holders of nontradeable shares."

Head West, China: An Interview with Private Equity Consultant, Song Jin by Aimee Barnes

In the October 24th edition of The Economist is a concise case study of Infinity , a private equity company that has been operating successfully in China since 2004. The article identifies the two major problems that PE companies have in China, and the article identifies reasons why Infinity has been able to overcome these problems.

The two problems:

Western private-equity firms trying to enter China run into two problems: getting their money and getting their money out. The Chinese government keeps an asphyxiating foot on currency conversions. It is hostile to investment that involve restructuring (sacking people and selling assets) and financial engineering. And it has not interest in outsiders flipping assets for fast profits.

How Infinity has overcome these problems:

1. The "Chinese government entities are co-investors in the firm's two funds in the country."
   • Spreading the wealth around is sure to make friends.
   • Their website is too opaque to fleece out the legal structure of Infinity's firms in China. The company was issued a venture-license, which makes it possible to assume that the company is an FIEVC. What isn't clear is what the underlying structure of that FIEVC is? EJV, CJV, WFOE? Research has shown that CJV's are popular in private equity and venture capital as a means of creating the legal fiction of preferred equity in private equity firms, but there is nothing definitive on Infinity's structure.
2. Infinity's "investments have helped create viable Chinese companies in areas rich in technology and intellectual property."
   • Infinity's deals tend to be structured around the shifting of high tech manufacturing to China while maintaining ownership of the technology abroad. While it seems that the government would usually prefer the technology to be transferred to the Chinese entity, it appears that they are satisfied with the technology merely making its way into the country regardless of who actually owns it.
3. "Infinity raised $30m for its first fund in China, perhaps just enough to intrigue China's government but not enough to frighten it."
   • The just right, Goldilocks' sizing of the fund is certainly part of it. But I'd venture that Infinity's country of residence, Israel, plays a considerable role in it, too. Israel just seems less dangerous of a country of origin than, say, the United States, where the sophistication and capability of the PE firm is more presumed. That's not to say a fund from Israel is not sophisticated, but the optics count. Additionally, Infinity's website plays up the close ties between both Israel and China, and the Chinese and Jews in a way that I have never seen on a private company's website.

So, sounds like a good model for succeeding in PE in China. There are two extra hurdles, though: 1) you must have some technology that you want to manufacture in China, and 2) the "transfers of technology and production across multiple countries and entities is horribly complex."

China's New Patent Law Effective October 1, 2009 at China Law Update

China’s Energy, China’s Power: An Interview with China Energy Specialists, Elizabeth Balkan and Chris Brown by Aimee Barnes

UBS Lays Out Their China’s Big Four Themes. Forgets One at All Roads Lead to China

Yuan May Rise Later Rather Than Sooner at China Journal

While some blogs seem obsessed with drywall and its litigious matters, we here at this blog don't seek to lay blame, we are just concerned with how the homeowners stuck with toxic walls can get a tax deduction.

In 2006 alone, enough drywall for 32,000 homes was imported from China into the US and used to build homes in Florida, Virginia and Louisiana. People spent good money for those homes, or at least took out bad loans to finance the purchases. These homes became worthless when it was discovered that the walls were toxic. If an individual sells their home at a loss, they can not use that loss as a deduction against their income. Deductions can only typically be taken on losses from transactions entered into for profit and for casualties, and although a home is considered to be an American's biggest investment, a home purchase is not considered a "transaction entered into for profit" according the US Tax Code.

But Senators Jim Webb and Bill Nelson are doing all that they can to allow taxpayers to take a casualty loss for the houses they have purchased that used the defective drywall. The IRS is currently awaiting reports by the CPSC and the EPA before making any definitive ruling about whether these homes will be deductible as casualties.

I will hazard the guess that, absent a limited policy exception, these homes will not be deductible as casualty losses because the loss to the taxpayer is not a casualty. A casualty loss must be sudden, unusual, and unexpected. Toxic drywall, even if, as it appears, it only amounts to the emission of sulfur gases and does not rise to the level of radioactivity, is quite unusual. Whether the loss is unexpected would require a factual inquiry into the taxpayer's awareness of the possibility of sulfur-ridden drywall. Even if it is unexpected, the toxic drywall isn't sudden. It was made in a far off land, shipped here, installed, the houses were held on the market for some period of time, sold to home buyers, and then started causing problems. There is nothing sudden about that.

The casualty loss provision is simply not for losses of this nature. The kinds of losses that fall under this provision are the ones where there is some sort of event, such as a fire, a flood, or the first instance of a plague of beetles that eat your trees over the course of 5-10 days. Not the walls of your house emitting sulfur gas.

I guess we might actually need those trial lawyers to start suing away.

Why Did 70% of Caijing's Staff Resign? at Cup of Cha

Dual Language China Contracts Double Your Chance Of Disaster at China Law Blog

Money well spent? at Free Exchange

The Tangled China Immigration Web Some Weave at China Law Blog
I'm a sucker for war stories, and there are some good ones in here.

What is that makes a good China business book?

1. A detailed, refined case study comparison of a hand full of major players in a single industry over the course of almost 30 years; or
   
2. A rip-roaring romp through booze-fueled negotiations, shady backroom dealings, and outsized personalities.

The king of the latter is undoubtedly Mr. China. Haven't read it? Shame on you. Mr. China also takes on the mantle of greatness by offering several good lessons.

As for the former? Until Chocolate Fortunes by Lawrence Allen landed in my mailbox, I was unaware that such a staid book could make such a fascinating read. Mr. Allen meticulously describes the Big Five chocolate sellers' forays in China with attention to company goals both globally and in China, manufacturing, logistics, the products, marketing, and retailing. Mr. Allen has spent career in chocolate, and he knows his subjects.

The Big Five are Ferrero Rocher, Cadbury, Hershey, Nestle, and Mars. Fascinating absent the China angle are the profiles of these companies. I found myself deeply fascinated in the different approaches these companies took in their global development and in their internal structure. Mars and Nestle were particularly interesting, mostly because I simply was not aware of either how vast an empire each commands nor was I aware of how Mars' status as a private company translates into how privately it indeed conducts itself.

Chocolate is a very special product for several reasons. Chocolate requires a wholly refrigerated logistics chain to maintain flavor and consistency, and this is difficult enough to achieve in 2009. Chocolate consumers are very loyal, and once a company establishes itself as a preferred brand, customers are slow to switch. There was essentially no chocolate in China between the late '30s and the entrance of Ferrero Rocher into the market in 1982. It is estimated that 70% of chocolate purchases are on an impulse basis. The Chinese viewed chocolate as an exotic delicacy. Chocolate enjoyed virtually no regulatory oversight by the government. Mr. Allen writes that this unique combination made it so that the Big Five were given a level playing field, and the game would be decided by the application of the executives' "experience, management skills, and leadership capabilities."

If you know your chocolate brands and you've been to Shanghai, you probably know who the winner is. But I don't want to spoil it for everybody else. I'm not going to give any names, but here's how it all broke down and why:

1. One company prospered, and continues to prosper, by offering a single unique, decadent product designed to take advantage of the gift-giving tradition in China.
2. Another had big dreams, but made big mistakes in its agricultural and manufacturing side that led to poor quality. There was a slight rebound, but management shakeups spelled its doom.
3. A household name, and a reluctant player on the international stage, found that the Chinese instantly took to one if its most iconic chocolates. Management problems found another victim, though.
4. The biggest of the five found some success, but didn't follow up the success aggressively enough. Probably didn't matter too much because all of their market shares were in line with their global market shares, and they were raking in dough hand over foot, but there were some weird things going on in the boardroom with the confectionery business
   
5. The tenacious one seemingly did everything right. But it took them a long time to start realizing a profit, a luxury the others were without.

The opportunity to view management decisions in a relative vacuum is enlightening. Mr. Allen shows and evaluates how management decisions affect the viability of the whole business model. He also shows his readers certain management techniques that are particularly effective and particularly ineffective in China. His analysis of managing in China is that it is different, but he soberly explains the difference.

This book is highly informative, and reads at a good speed. Recommended if you want to know more about managing a global business or if you like chocolate, highly recommended if you want to know more about managing in China. The book is not without its flaws, though.

There are a lot of China cliches. I don't necessarily know if this makes me like the book more or less, but my high school English teacher said cliches are bad, so I'll just follow her advice on this one.

The other glaring problem is that Mr. Allen's story doesn't come through enough in the pages. He was a senior executive at both Hershey and Nestle, but we don't really learn much about him. More personal anecdotes would have made the book that much better.

If you want to learn something about managing in China, do yourself a favor and buy this book. Be forewarned, though: there is not even a slight reference to baijiu in its pages.

Then read Andy Xie's latest opinion piece over at Caijing, Can interest rate adjustments, currency devaluation and zigzag policymaking help unwind economic stimuli? It depends. Something's brewing over at Caijing, but Mr. Xie will always come up with something interesting to write.

The stimulus for the article seems to be Australia's increasing its interest rate by 25 basis points, and Andy Xie carves out what he thinks is the best case global scenario if the central banks manage policy competently. And he thinks that central banks should make his scenario their goal.

The goal for the global economy? 2% growth and 4% inflation. "Mild stagflation."

In the US, he sees interest rates climbing 4.5% through 2012, with an inflation rate of 4-5% by 2012. He sees the current devaluation of the dollar as a down payment for the this future inflation.

Despite the EU's difficult internal economic problems, he doesn't see the European Central Bank allowing the euro to decline in value because the bank "was structured solely to maintain price stability." He thinks that this will result in lower real economic growth rates than in the US.

He sees the same thing happening in Japan because of the "strong yen psychology."

And in China? Well China and the rest of the developing world still have asset bubbles according to Xie and others (according to yet others, including the Economist, there is just a serious potential for asset bubbles in China). This means that China's central bank will pursue a zigzag policy in which the yuan will likely remain pegged to the dollar resulting in similar interest and inflation rates as in the US, and credit controls, through the expansion and curtailing of lending, will be employed by the state to heat up or cool down asset markets as the need arises.

Cheery, isn't it?

In their annual survey, the US-China Business Council's (USCBC) finds that US companies' China outlook since 2008 remains largely unchanged. This is probably because 84% of the companies China operations remain profitable, and 76% have experienced revenue growth. Of the top 10 business issues in China, there is one new problem, the economic downturns impact on China operations, and one problem has deteriorated since 2008, protectionism. The increase in protectionist worries goes in hand with the economic downturn, but the reality of the situation does not (yet) justify the fears of US companies in China.

The obvious problem that the downturn has led to is in a reduction in sales in China, further investment in China, and employment of staff in China. The not so obvious problem, and the one that is raising cries of “Protectionism!” is the perception that FIEs are being excluded under the “buy local” requirements in much of China's $600 billion stimulus package. The worry is that the products of FIEs will not be included as “domestic” under the provisions of these rules. The facts just don't bear this fear out, though.

FIEs are domestic Chinese companies, so their products should be domestic. The report's take on the legal issue:

[T]he Ministry of Commerce and NDRC have publicly stated that products manufactured in China by FIEs should be considered “domestic.” This position was confirmed by Vice Premier Wang Qishan in the outcomes issued jointly by the United States and China following the July 2009 meeting of the Strategic and Economic Dialogue.

Sounds open and shut, but the optics aren't there for the US companies.

The problem seems to be in what US companies aren't perceiving any stimulus benefit, what companies are optimistic about the stimulus, and what companies have received a stimulus benefit. Companies in the consumer goods, IT, payroll, services, logistics industries have not reported any benefit from the stimulus. Pharmaceutical companies are optimistic about “capacity-building projects in the stimulus plan and the healthcare reform plan,” but these have yet to be implemented. Companies in the heavy equipment, infrastructure, high-tech component, and telecom industries have reported benefits from the stimulus package.

Frankly, it sounds like some companies are disappointed by their China performance and are looking for a scapegoat. There have been complaints about this before in regards to the “domestic” policies in the financial incentives given for boosting indigenous innovation, even though companies were unable to point to a single clear instance of discrimination.

Much ado about nothing? Time, I suppose, bears all out, but for now, looks like it.

Just for Fun:
Ferrari Makes One For China at Autopia
"Ge Kiln porcelain is known for its “cracked” glaze pattern and Lu has incorporated this elegantly colored design with clearly defined cracks etched at different depths."

Regular 'Ole Favorites of the week:
Online Gaming Industry Banned From Foreign Investment at China Briefing
WoW Backlash: Weather Control Sets Sights on Blizzard. What are the Zerg going to do about it?

Banks and The China UnStrategy at Silicon Hutong

China’s NPLs: Another financial time-bomb? at Dragonbeat
If the growth rates can erase the NPL damage, no. The estimated RMB 3,300 billion in NPLs resulting from the 2008-10 lending expansion should be taken care of by the estimated growth rates through 2020. But, the author warns, this is China's last chance at an unnatural expansion of commercial lending. Natural? I suppose that word works.

Tax Related
China’s Export Tax Rebates Up 8.6 Percent at China Briefing

Meet the New IPO Sheriff in Town: China at China Journal

The New Chinese Growth Enterprise Market Is Launched -- Stock Transfer Duties On "State-Owned" VC Firms and PE Funds? at China Law Update

China Crystallizes Royalty Clause of Tax Treaty at China Law Update

China Strengthens Supervision of State-Owned Asset Restructuring at China Law Update

US-China Tire Case Part II - US Politics at China Hearsay

EU Afraid To Share Sensitive Proprietary Info With China at IP Dragon

Understanding China FCPA Risks. Who Is A Foreign Official? at China Law Blog

What’s behind China’s skyrocketing residential property market? Subsidies … subsidies … subsidies at dragonbeat

Blame the PRC Ministry of Foreign Affairs for the Broad J-1 Exchange Visitor Skills List at lawandborder
Interesting information on the fruits of the PRC's lobbying efforts from the US State Department.

Coming soon: new design law for China at Class 99

Why foreigners are beating China’s tea-makers on their home turf at dragonbeat

Brick mill worker gets 615,000 yuan in worker's compensation claim at Chinese Law Prof

China Clarifies Nonresidents' Eligibility For Treaty Tax Benefits at China Law Update

"Socialized" Medicine In China And The US. What's That You Say, Mrs. Robinson? at China Law Blog

Tire Posts
China Strongly Opposes US Tire Import Duties at Tax-News.com

Barack Obama does a bad thing at Free exchange

Barack Obama Does Something Really Stupid: Tire Tariffs at Grasping Reality with Both Hands

Obama tires of free trade at Shadow Government

US-China Tire Case - Part I at China Hearsay

Tax Specific
Changes to Chinese Input VAT Credits on Fixed Assets at China Briefing

China Tightens Double Tax Treaty Reporting at China Briefing

Draft Foreign-Invested Partnership Regulations - A Move to A National Framework for FIPs at China Law Update

Just returned from attending a talk at Columbia University by RBS Chief China Economist Ben Simpendorfer on the topic of his recently released book, The New Silk Road: How a Rising Arab World is Turning Away from the West and Rediscovering China. What follows at a summary of Mr. Simpendorfer's thoughts on China soaring exports to the Middle East (ME), what role oil plays in the China-ME relationship, the next 10 years for China-ME relations, and China's foreign policy objectives in the ME. After that I'll give you Mr. Simpendorfer's response to my inquiry about Islamic finance in Hong Kong and China.

Before all that, a brief introduction to the main theme behind Mr. Simpendorfer's theories. He does not doubt that the US will maintain its global hegemony over the decades to come, but he finds that US influence around the world "is being eroded at the margins." The common narrative in the media is that Beijing and the Party are actively directing this policy, but Mr. Simpendorfer instead has found that "individuals are driving the change" through trade and interaction. And this is as much true in China as it is in the Middle East.

Chinese Exports to the Middle East Are Soaring
Mr. Simpendorfer said that the increase in exports from China to the ME is due to events less than a decade ago, and to Chinese traders catering specifically to the ME. But he also suggests that comparing China's activity in the ME with China's activity in Africa is a useful exercise.

Until a few years ago, the US was the number one exporter of goods to the ME. Then China's exports surpassed the US. My initial was response was that makes perfect sense because China is a huge exporter everywhere. But that only explains half of the story. The other half is that ME traders appreciate the comparative ease with which they can travel to China instead of the US since the events of September 11, 2001. ME travelers to the US have declined significantly since then, and Chinese visas for ME travelers have become much easier to get. The exact figure eludes me, but the average time for a MErner to get a visa to the US was greater than 15 days, while it took a single day for MErner to get a visa to China. Thus ease of access to the supplier is very important.

Chinese traders have also played a significant role in bringing in ME business. One city in particular, Yiwu, has become a hub for ME traders in China with Islam being the prime draw. Yiwu has a robust Huizu (回族 - Han Muslim, not an ethnic minority) population. Some local business leaders speak Arabic fluently, and have encouraged students to learn Arabic to become translators. The city has built a mosque. There is a lot of halal food available. And orders are available at a smaller scale than in Guangzhou. In Guangzhou you typically order by the container, whereas in Yiwu traders can order by the box. Today Yiwu receives 200,000 ME visitors per year while there are only 680,000 ME to the entire US each year. By catering to their partners linguistic, cultural, religious, and more financially modest needs, Yiwu has turned itself into a ME export power.

But Mr. Simpendorfer says that we need to put this in perspective by comparing the ME to Africa. There are still a lot more Chinese in Africa than the ME, and there are still significant restrictions in ME countries on foreign traders operating domestically.

Oil
China imports ~50% of its oil from the ME, and the amount of oil that China plans on importing from the region should only increase. This suggests a warm relationship. This is not so much the case with Saudi Arabia. Although Mr. Simpendorfer thinks relations between between Saudi Arabia and China should warm, there are several major problems with the relationship:

• There is tension because Saudi Arabia is a religiously orthodox state and China is "an increasingly capitalist atheist state."
• China only has a functional relationship with Saudi Arabia of about 10 years whereas the US essentially built Saudi Arabia's oil industry.
• China has been publicly and aggressively hedging its exposure to Middle Eastern oil by investing heavily in Africa and by investing heavily in alternative energies. Chongqing's announcement that all cars in Chongqing will eventually be electric was not well received by the ME.
• China has yet to seriously independently analyze the US. Mr. Simpendorfer said that China has several journals dedicated to ME policy, but all the footnotes cite to American analysis. This means that China is largely analyzing the ME through US eyes. Mr. Simpendorfer told us that he has discussed this with John Altman and several of his ME friends, and they all get a big kick out of it.

The Next Decade for China and the ME
Mr. Simpendorfer stressed that he did not see an inevitable upward trajectory for China-ME relations. He offered potential roadblock, a way to avoid that roadblock, and a reason why the next decade might work out well for the two.

The potential roadblock is that there have been several factory closures in the ME as the work goes to China. Textiles in particular have been hit hard in the ME. Unfortunately the reality in the ME is that the population is very young, unemployment is very high, and there is a strong possibility that this could result in anger being directed at China. Mr. Simpendorfer suggested that as oil prices and transport costs increase, Chinese manufacturers might find it advantageous to setup manufacturing facilities in the ME for goods that are destined for Europe which could potentially solve this problem.

Where China will really be of service to the ME is in its lessons for development. Mr. Simpendorfer said that the US and China basically offer the exact same lesson for reform, that the free market and adequate access to capital markets will bring peace, prosperity and stability, but that when MErners, such as the frequent China visitor President Mubarak, visit China they can see and feel what China has gone through to go from point A to point B, as opposed to when they visit Washington, D.C., and feel like America is trying to get them to move from point A to Point Z.

China's Foreign Policy Objectives in the Middle East
This part of the talk was worth the price of admission (a subway transfer and a walk in the rain). The US and China simply have the exact same ambitions in the Middle East: stability and a low oil price. There is plenty of room for cooperation between China and the US, but Mr. Simpendorfer, who has the access, has witnessed that bureaucratic inefficiencies in Washington are preventing the US State Department from working jointly with China in the Middle East.

The US government economic sectors understand the deep connection between the US, China, and the ME, but there are deep divisions and little intra-sector cooperation within the US political and security sectors that are preventing them from putting the pieces together that the US and China could achieve a lot in pursuing their ME goals together. Or at least this is what Mr. Simpendorfer's experiences have shown him.

China itself has been able to get away with not taking much of a position on anything in the ME. Mr. Simpendorfer says that this is for two reasons. The first has to do with Iran, with which China has had a close relationship. China defers to the US on everything Iran when Iran is at the top of the US list, and China does what it wants when Iran is low on US priority. Quite convenient. China has also had the advantage that most ME issues pit the US and the UK versus France and Russia. And again China is conveniently able to not take a position. Mr. Simpendorfer does not think that this convenient foreign policy will be sustainable, though, and China will need to start taking a position. Let's hope we can start working together in a meaningful way. China would be a useful ally because they have a long history of having a well integrated Islamic minority, the Huizu.

Islamic Finance and China
I always find Islamic finance interesting, so I asked Mr. Simpendorfer, "To what extent have you seen the Hong Kong financial industry embracing Islamic financial products in investment, offerings, or the creation of derivatives?" I had no idea what to expect, but I got a good answer.

Hong Kong is very enthusiastic about Islamic finance with Donald Tsang and the Arab Chamber of Commerce as the leading cheerleaders. Hang Seng Bank offers an Islamic fund, but as far as Mr. Simpendorfer knows, it is simply indexed to the Dow Jones Islamic Fund. Hong Kong's current goal is not to compete with Bahrain as a center for Islamic finance, but to offer Islamic bonds.

The problem with Hong Kong is that, unlike in Yiwu, it does not cater to Muslims. Mr. Simpendorfer said that 3 mosques and not a single halal restaurant in Hong Kong are serious barriers to Islamic finance.

There has been an interesting development for investors who want an Islamic option for investing in China. Previously Islamic banks have tried opening up shop in China, but the combination of religion and no interest rates prevented the Chinese authorities from granting a license. But Mr. Simpendorfer noted that a foreign bank may have recently setup shop in China that offers Islamic investment and lending without calling itself such.

Conclusion
At the core of this relationship is Islam, and the Chinese entrepreneurs catering to the religion. A strong lesson that cultural accommodation or at least respect can be a powerful tool in building a strong economic relationship.

The talk was good, and I think I might have another book to read.

Yesterday the OECD, the UNCTAD and the WTO issued a joint report on G-20 trade and investment measures under the headline G20 governments refrain from extensive use of restrictive measures, but some slippage evident. The slippages were not where you would expect them.

New antidumping investigations for 2009 remained at the same level as in the first half of 2008. But they only remained at the same level because of a sharp decline in new antidumping investigations by the US, Brazil, and the EU member countries. Making up for the decline? India, Canada and Argentina had an increase in the number of new antidumping investigations. But China's increase in new antidumping investigations from 3 to 14 was greater than the increase in those three countries combined.

Safeguard investigations were a whole other story. New safeguard investigations increased from 2 in the first half of 2008 to 16 in 2009. China had no new safeguard investigations, the US had 1 new investigation, and India had 14 of the 16. FYI, Turkey had the other. I have no idea why India has so many new investigations. Let me know if you do.

If you've only been half paying attention you probably noticed that this post has been written in the past tense. If you're actually reading this blog, you probably have more than an inkling that my tense has to do with both last week's decision to impose countervailing duties (CVDs) on imports of Chinese steel pipe at a weighted average of 21% and with Obama's announcement at 9:45 pm last Saturday in response to the conclusions of the ITC's single safeguard investigation to impose an initial tariff of 35% on imports of Chinese tires. Interesting fun fact: recommendations on CVDs are fully out of the hands of the President; safeguard duties are solely at the discretion of the President.

These decisions, particularly the tire decision, have caused quite the hullabaloo in the blogosphere. Section 421(e) of the 1974 Trade Act gives the US special power to implement safeguards against Chinese imports that cause market disruption. Market disruption is defined as existing "whenever imports of an article like or directly competitive with an article produced by a domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry." This marks the first time the US has ever used section 421. The derision of the safeguard is twofold: 1) it is not supported by economics; and 2) it could set the precedent for further safeguard actions against China.

The Economist's Free Exchange suspects that Obama is trying to earn political points on a minor product, but that even this might be dangerous in a recession:

Mr Obama appears to be betting that because the products involved constitute a very small percentage of trade between the two economies, it is safe to earn some domestic political points on the matter without excessively angering Chinese officials or citizens. But this is a dangerous gamble, particularly amid a deep global recession.

Supporting Free Exchange's position is that the 35% initial tariff is well below the ITC's recommended tariff of 55%. China, unsurprisingly, filed a challenge to the complaint. We can say one reason that China challenged the complaint is obvious, and the other is speculation. The obvious reason is that China estimates that the tariffs could cost Chinese tire manufacturers $1.7 billion. The speculative reason is that China does not want the US to set an easy precedent for imposing safeguard duties against countries dominated or controlled by Communism (the wording of 421).

The political reaction was predictable. Democrats think the tire tariff is a great move towards getting those 4,000-5,000 American tire manufacturing jobs back, and that it sets a good example of strong trade enforcement. The Republicans said that the tariffs amount to a tire tax on struggling consumers enacted by a Democrat bowing to the pressure of unions. Yawn.

Now if you really want to read why this whole tire thing is either about scoring political points and/or establishing roadblocks to free trade with China, head over to one of Foreign Policy's blogs:

Here's the problem. The China safeguard is a bilateral policy in a multilateral world. The Chinese are often the lowest-cost suppliers of a good, but they're not the only suppliers. In the Bush cases, importers testified credibly that if Chinese imports were blocked, other countries would undersell U.S. manufacturers in these particular products.

So if you're not dominated or controlled by Communism, and you sell tires cheaper than a US manufacturer, then you can cause market disruption in the US.

The tire situation appears to be similar. U.S. tire producers did not even support the case; they said they were more interested in producing high-end tires. The petition was filed by the United Steel Workers. If U.S. tire producers are uninterested, then there is little prospect of gains for American workers. The tires will just be sourced from other countries at somewhat higher cost.

So the USW is using tires as a pawn in their trade disputes with China? Is there a less appropriate venue for the upcoming G-20 Meeting than Pittsburgh?

So where does this all leave us? New American jobs appear unlikely. Prices should rise a bit for U.S. consumers. Some lucky third country will gain new American orders, redirected away from China. And there is real concern that other countries will follow the U.S. lead. China is exploring ways to block U.S. cars and poultry. Later this month, Pittsburgh G20 discussions of how to pursue open markets together should be particularly awkward. But at least Obama retains the support of organized labor.

Ugh... The notion that this is a political play in health care reform to garner wider Democratic support and get them to stop their internal bickering over a health care plan is growing stronger. Could Obama have chosen some token other than free trade with China to throw under the bus?