Trade dispute set to escalate

Editorial comment piece from the May issue of Manufacturers' Monthly.DESPITE limited coverage in the media, the recent spat between the US and China has the potential to escalate to a major trade war between the two manufacturing giants, with ramifications for Australia’s manufacturing industry.

DESPITE limited coverage in the media, the recent spat between the US and China has the potential to escalate to a major trade war between the two manufacturing giants, with ramifications for Australia’s manufacturing industry.

The first move by the Americans has been to slap steep tariffs, close to 20%, on imported Chinese coated paper products. While not a big concern on its own, the friction has the potential to escalate across a wide range of Chinese products sold into the US, and has ominous implications for the global steel industry.

The US will now subject China, classified as a non-market economy, to the same treatment as other trading partners in the application of duties on products deemed to be receiving improper government subsidies.

The catalyst for the move is China’s growing trade surplus with the US, now a staggering $US232.5bn, some 10 times that of 2005 figures.

The Bush administration has been forced to act. It has been under growing pressure from manufacturers and unions through the Democrat-controlled Congress to toughen its demands that China revalue its competitive currency and stop subsidising its exports with grants, debt forgiveness, tax incentives and other preferential treatment.

The case has the potential to change the rules of the game. US laws, similar to Australia, allow the imposition of anti-dumping duties when imports are sold in the US at below what it costs to produce them. But anti-dumping duties tend to be small compared with duties imposed for illegal subsidies.

Since the 80s, the US has restricted anti-subsidy duties to free-market economies, but the US’s patience with China has now worn a bit thin.

The undervaluation of the yuan has been a constant source of irritation for US manufacturers (and Australian). China’s currency has appreciated by just over 1% this year and about 7% since the depegging from the US dollar in July 2005. Critics claim the yuan is undervalued by up to 40%.

Any move to revalue the yuan will be welcomed by local manufacturers, however Australia could be affected in the longer term because of a glut of steel in the rest of the world, especially Asia, if Chinese steel exports cannot find a home in the US.

Quality remains an issue

Most readers will agree quality in China used to be terrible. You only had to visit local industrial trade shows in the 1990s to see very crude Chinese made tools and equipment, often of very poor quality.

I remember visiting China in 2000 and seeing first hand the dubious quality of cars, forklifts and other industrial equipment as it came off the production line.

Back then, international standards were something to aspire to. The local market wasn’t exactly demanding; it would take what it could get.

But that was the early days. Since then there has been a stampede of foreign manufacturers, OEMs and their suppliers into China. Quality standards have undoubtedly risen and the industry has developed at a rapid pace. International vehicle makers and Tier 1s bring with them their well honed manufacturing systems and process knowledge.

And yet, China is not Europe, or the US for that matter. While precision engineering products from local suppliers might not be as good as elsewhere, there might be informal sourcing ‘directives’ larger manufacturers have to work with.

I’ve heard talk of political pressures on Chinese JVs that mean working with a labour/capital ratio that is not conducive to quality. Humans engaged in spot-welding are more prone to make mistakes than robots.

For all the assurances from companies in China that Chinese output meets international quality standards, there’s a growing suspicion that actually it doesn’t. It’s a sensitive area, for sure, and it becomes even more so once the Chinese goods gets exported.

Honda has been at the vanguard of using China for low-cost sourcing for international markets. It has even won the permission to have a majority stake in a Chinese JV, because the Chinese authorities were so pleased with its export strategy.

But Honda has just announced a major recall on some of its Chinese exports. Honda Motors says it will recall a staggering 528,406 Chinese-made cars, a record for China’s fledgling auto industry, to fix faulty power steering pipes and pumps and fuel pump relays.

Along with other recalls, it could be a sign of China’s growing pains and pressures to cut costs.

Even if that is so, Chinese manufacturing quality is sure to be under very close scrutiny as the industry’s output and international presence grows over the next few years.