Slashing Tires: Why President Obama Should Tread Lightly on Chinese Imports

Friday, September 11, 2009

PRESIDENT OBAMA has maintained a conspicuous ambiguity about trade policy, sympathetically absorbing and sometimes restating the arguments both for and against free trade but not really committing himself on any particular issue. Now time may be running out on that stance. By Sept. 17, Mr. Obama must decide whether to crack down on tire imports from China, and if so, how.

At issue is a recent increase in U.S. imports of cheap Chinese tires: from $453 million in 2004 to $1.7 billion in 2008. That boosted China's share of the U.S. market from 5 percent to 17 percent. U.S. trade law allows curbs on imports from China when they threaten "market disruption" and "material injury" to U.S. producers. China agreed to this rule as part of the deal under which it acceded to the World Trade Organization. (It is similar to the kind of import protection in agricultural goods that China has been demanding in global trade talks.)

The United Steelworkers of America (USW), which represents many tire workers, alleged a violation of the law; by a vote of 4 to 2, the U.S. International Trade Commission (ITC) agreed. It recommended that Mr. Obama slap a 55 percent tariff on Chinese tires next year, a 45 percent tariff in 2011 and a 35 percent tariff in 2012 -- before the China "safeguard" provision expires in 2013.

There's no dispute that the U.S.-based tire industry has closed plants, shed 5,000 jobs and lost market share since 2004. The question is whether this reflects Chinese market manipulation, as the Steelworkers claim, or the combined impact of the recession and a planned up-market shift by U.S. producers -- as tire importers and two dissenting members of the ITC argue. Both sides can marshal evidence: As the USW notes, a U.S.-based tiremaker was permitted to build a plant in China only if it exported everything it made until 2012; on the other hand, some of the job losses in U.S. plants stem from steadily rising productivity, a salutary consequence of foreign competition.

Unfortunately, the president's freedom of action is clouded by American dependence on Chinese purchase of U.S. government debt. He must also take into account the possible reaction of the Group of 20 countries that will assemble in Pittsburgh on Sept. 24 to discuss opening global markets, among other things.

All the more reason for him to focus on the one thing he can be sure of if he imposes tariffs or an import quota: Prices will go up for American consumers, and choices will go down. The pain would be concentrated where Chinese imports are concentrated: in the low-cost segment of the market. In short, consumers who can least afford it would pay the most.

Some benefits of this regressive tax would indeed flow to U.S. tire workers in the form of jobs saved, but some might accrue to low-wage tire producers in other countries. And all this for what would be at most a three-year respite from the alleged Chinese onslaught. This case gives Mr. Obama a chance to show that he defines American economic interests broadly, not in response to the demands of particular interests.

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