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China vs. US Chickens

February 8, 2010

Douglas A. McIntyre
The Wall Street Journal
February 5, 2010

Obama will meet with China "enemy of the state,"
the Dalai Lama, spiritual leader of Tibet. The
Chinese government has already protested the
visit. The US will sell $6.4 billion in arms to
Taiwan, which China views as a rouge province
over which it should have dominion. The People’s
Republic say it will retaliate by cutting off
purchases of goods from the US companies which build the weapons.

All of this happens against a backdrop of
American government complaints about the value of
the yuan and a trade war which includes tariffs
of some Chinese-made rubber tires exported to the US.

The American chicken has become the latest victim
of the escalating tensions between the world’s No.1 and No.3 economies.

The mainland will levy heavy tariffs on the
import of American chicken products. Some of
these duties are as high as 80% and involve goods
from Tyson ((TSN) and Pilgrim’s Pride (PPC). The
two companies rely enough on exports that there
sales and earnings could be significantly affected by the Chinese decision.

The news shows the extent to which China is
willing to retaliate against US trade actions and
the extent to which the American government will
go to ignore Chinese wishes on military and human
rights issues. The pace at which the disputes are
growing is accelerating and 2010 may well end up
as the year in which the tensions  between two
radically different forms of government and two
widely different trade philosophies boil over.

It is hard to say what the effects of an all out
trade war between the US and China might bring.
China could substantially damage US companies
such as Wal-Mart (WMT) and McDonald’s (MCD) by
restricting their businesses in China which have
become a significant part of their global
revenue. The US could block the import of
inexpensive Chinese goods which are sold by
thousand of retail firms and product companies.
These corporations are unlikely to be able to
source inexpensive goods to replace those from
China, if they can be replaced at all. China’s
manufacturing capacity is unmatched around the world.

A severe limit on Chinese goods would probably
eventually help revive the crushed US
manufacturing base which has been decimated by
the collapse of American industries, especially
auto manufacturing. But, a drop in Chinese
imports probably means that US consumer will pay
more for many goods. US labor costs are not
likely to match those in China. “Made in the USA”
is nice in theory, but expensive for the people
who buy the products that are made.
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