U.S., European problems with Chinese subsidies could cause a ''legal trade war.''

Despite a series of meetings of world leaders bent on heading off protectionism, political pressure for protectionist measures is increasing in both the U.S. and Europe. At issue for these two major traders are the substantial subsidies that China provides its domestic industries, which allow Chinese firms in some sectors to sell at low prices, thereby threatening the market share of OECD manufacturers in those sectors. To counteract dumping, the WTO mainly allows injured countries to restrict imports and impose countervailing tariffs. This could lead to escalating trade conflicts between China and some OECD countries.

Dumping risks. Dumping charges can lead to proliferating trade conflicts beyond the grasp of existing WTO provisions:

--Beijing has poured hundreds of billions of dollars in subsidies and preferential loans, for the most part into state-owned enterprises (SOEs), which are able to produce goods while facing far fewer constraints than others.

--In the 2009 investment plan, some 130 billion renminbi in budgetary allocations and bank loans are to be poured into large SOEs, represented as 'technology upgrade and innovation.'

--Many local governments have also rolled out subsidies and preferential buying policies to help local industries, which decrease the competitiveness of both local domestic firms from out of region and foreign firms.

--Perceived dumping is the reason given for proposed or actual retaliatory tariffs in the U.S. and in Europe. As a growing number of U.S. and European manufacturers come under pressure from their well-financed competitors in China, they can be expected to pressure their governments increasingly to impose anti-dumping tariffs.

Source: www.forbes.com