Not surprisingly, the White House released a press release this past Friday night in hopes that the weekend might deflate the impact of the President’s decision to impose a 35% import duty on low-end tires from China in response to a controversial trade case brought by the United Steelworkers union. The media published several stories on the case most of them somewhat critical of the President’s action as fears of protectionist sentiment take root just days before the G20 summit meeting in Pittsburgh. The details of the case can be found here.
To quickly summarize the case details as we previously noted, according to the Cato Institute’s international trade policy expert Daniel Ikenson, It is really nothing more than a matter of a US union objecting to management’s decision to produce its lowest grade (lowest quality, lowest priced, lowest profit margin) tires abroad. The United Steel Workers filed the original petition in the tire case. Their goal was to cap Chinese imports to 2005 levels.
We look at this case a bit differently than the mainstream press.
First, the President had to pick something in which to show union support. Though Obama has implemented some of the Big Labor platform, the biggest issue ” Card Check will come to the fore later this year or early next. Obama likely needed to “come out big” in support of labor before that legislation makes it to his desk.
Second, this was a dumb case to invoke the never-before-used Section 421 Rule. “Section 421 of the Trade Act of 1974, as amended, is a special statute that applies only to imports from China. It became U.S. law as a condition of China’s accession to the World Trade Organization in 2001. The provision aimed to assuage fears about Chinese competition by establishing a special safeguard to deal with increased imports from China for the first 12 years after China’s entry into the WTO.1 It’s dumb because the case was not filed by tire producers (whom we would all expect to be the ones in opposition) but by the workers of tire producers. Obama should have picked a case brought by US producers, (nearly all anti-dumping cases are brought by producers). The “harm” typically decided in these anti-dumping cases involves harm to the domestic producers of the same goods. Therefore President Obama should have picked a different case to make his trade point.
Third, and this is the one that bothers me the most ” these new duties will not make two beans of difference for workers who have lost their jobs! Why not? Because most companies who buy tires from China have likely already put together contingency sourcing plans to either procure the low end tires elsewhere or simply raise the price for consumers. The alternative global sources will still appear well below the cost of making in terms of make vs. buy decision-making. (We also highly doubt that anyone at the White House thought through the manufacturing consequences, but hey, maybe I’m wrong on that) It’s hard to see how raising the tariff applied to Chinese imports only will likely bring those manufacturing jobs back to America. According to Ikenson citing ITC data, “…the average unit price (based on the customs value) of a tire imported from China in 2008 was $38.98.10 A 55-percent tariff would drive up the unit value to $60.42. But, in 2008, U.S. producers sold 159 million tires, valued at $11 billion, for an average price of $68.60 Factoring in mark-up of the Chinese price, it is reasonable to conclude that prices of American- and Chinese-produced tires might retail for about the same price. But that outcome is highly unlikely to be incentive enough for globalized tire producers to divert production from China to the United States. Instead, producers are much more likely to shift production to Mexico, Brazil, or Indonesia, where the unit prices in 2008 (based on customs value) were $56.26, $48.93, and $32.10, respectively.12
Finally, we all know that China will retaliate, in fact, the media reports the Chinese government has already blasted the decision, according to China’s minister of commerce, Chen Deming, “This is a grave act of trade protectionism,” he is quoted as saying. The Chinese will retaliate by announcing their own increased tariffs placed on imported products from the US. What’s completely unfair is that those tariffs will likely apply to products made from a different part of the manufacturing industry and not the tire industry sector.
Does this decision mean Obama is anti-free trade? No, we wouldn’t go so far as to say that. He has a big labor constituency he must thank and support for his presidential win. Unfortunately, the Chinese will likely not see it that way.
Postscript: This article appeared on Bloomberg late Sunday afternoon