WASHINGTON, Sept 17 (Reuters) - U.S. President Barack Obama has slapped a 35-percent "safeguard" tariff on tire imports from China, inflaming trade relations and raising concerns about a possible trade war.
Obama's decision, announced on Sept. 11, responded to demands from U.S. union groups, manufacturers and lawmakers who view the Asian export powerhouse as an unfair trader.
That perception is shaped by the U.S. trade deficit with China, which hit a record $268 billion in 2008.
Here are some ways the dispute could play out:
LEGAL BATTLE AT THE WTO
Obama imposed the tire tariffs under an anti-import surge mechanism known as Section 421 which applies only to China and does not require proof of unfair trade.
It was the first time the United States used the mechanism against China, which agreed to the measure as a price of its admission to the World Trade Organization in 2001.
China has requested WTO consultations with the United States over the tire case. Beijing says there is no justification for imposing safeguard tariffs even though U.S. tire imports from China tripled from 2004 to 2008.
Many U.S. trade experts believe the United States will prevail if the case goes to litigation at the WTO.
If China were to win, it could slap retaliatory duties on U.S. exports unless Washington removed the tariffs which are due to last three years.
However, the United States could appeal, keeping tire duties in place until the WTO issues a final decision. The whole process could take one to two years.
OBAMA APPROVES MORE CURBS
Encouraged by the tires case, other U.S. union groups and manufacturers are expected to ask for protection. It takes about six months for a petition to reach the president's desk so Obama could decide on new cases in the first half of 2010.
Total U.S. imports from China peaked at a record $338 billion in 2008 before falling this year, offering many potential targets for new duties including steel, clothing, paper, machinery and consumer goods, one lawyer said.
The China safeguard mechanism expires in 2013. So as that date approaches, it becomes a less attractive trade remedy tool unless the Obama administration announces it will provide import curbs beyond the end of the provision in the WTO.
That could make 2010 the peak Section 421 year, as groups scramble to file cases in time to get three years of relief.
CHINA HITS BACK HARDER
China responded to Obama's decision by launching anti-dumping cases against U.S. poultry and auto products.
The more safeguards Obama imposes, the more anti-dumping investigations China could file in response.
Last year, U.S. exports to China hit a record $70 billion, giving Chinese bureaucrats plenty of targets.
Beijing also could thwart U.S. business in other ways, from turning a blind eye to piracy and counterfeiting of U.S. goods and a deaf ear to complaints about industrial policies that limit market access for American companies.
On the broader front, the trade disputes could corrode U.S.-Sino cooperation in areas ranging from climate change to Iran and North Korea's nuclear weapons programs.
Both Obama and Chinese President Hu Jintao will attend the United Nations summit next week in New York before heading to Pittsburgh for a Group of 20 countries meeting focused on reviving global growth.
WTO'S DOHA ROUND GETS MORE COMPLICATED
Obama's decision could encourage other countries to impose their own safeguards on Chinese goods and also further complicate the Doha round of world trade talks.
Last year, talks in Geneva collapsed because the United States balked at demands from developing countries for a special safeguard to curb surges in farm imports.
Washington agreed in principle to the provision but said developing countries wanted terms that could totally close those markets for its farmers who were also facing the prospect of lower subsidies.
Another contentious issue was the U.S. demand that China and other big developing countries agree to cut tariffs near to zero in at least two industrial sectors.
Having been stung by the tires decision, China may be less inclined to cooperate with the United States in bridging the difficult issues remaining in the round.
OBAMA KEEPS THINGS COOL ON CURRENCY
A semi-annual decision due next month offers Obama a chance to keep things cool on another sensitive issue with Beijing -- its currency regime which critics say keeps the yuan artificially low, helping Chinese exporters.
During last year's campaign, Obama joined labor groups, manufacturers and lawmakers in criticizing Bush for repeatedly refusing to label China as a currency manipulator.
Yet, when Obama's Treasury Department had its first chance to rule on the matter in April, it also decided against hitting Beijing with the stigma of that designation.
Calling China a currency manipulator would require Treasury to step up pressure on Beijing to move to a more flexible exchange rate and could fuel efforts in Congress to target China's currency practices as an illegal trade subsidy.
After doing unions a big favor in tires case, Obama may feel comfortable not labeling China as a currency manipulator when the reports come up every six months.