Obama’s Trade Policy Taking Shape – Part I

WASHINGTON: Sometimes a small pebble, dislodged from a mountainside, turns out to be the trigger of an avalanche that leaves the environment vastly changed. Most of the time it doesn’t. Instead the pebble lands, bounces once or twice, kicks up a bit of dust – and then settles, leaving the landscape looking about the same. Experts or specialists who spot it and use the pebble’s fall to predict disaster then look a bit silly. This is likely the case with the Obama administration’s decision to impose a three-year tariff on Chinese automobile tires.

Experts and trade-watchers see the tariffs as a major event. For free traders, it risks being the first step towards a 1930s-style closure of world markets. Populists alarmed about competitive pressure, on the other hand, see it as a bold stand for American workers and against foreigners. Both are probably wrong. The tariffs on Chinese tires probably won’t cause a trans-Pacific trade war; nor will it make much difference for the American tire business either.

First some basic facts. About a third of America’s imported auto tires come from China. This spring the United Steelworkers union filed a case to impose three-year tariffs on the products. As the case points out, the tires have been rolling in fast – up from about four million tires in 2000, to 17 million in 2005, and 40 million last year. The total came to $1.2 billion worth of imports, or about $300 per set of tires, making up a small but noticeable slice of the roughly $340 billion in Chinese goods that landed at American docks last year. As China’s share of the tire market has grown, that of some neighboring countries – in particular Japan, Korea and Canada – has fallen back. American tire-making employment has dropped as well.

Enter the Steelworkers’ call for temporary tariffs. The U.S. International Trade Commission, the independent agency charged with evaluating petitions for temporary tariffs, recommended a three-year tariff starting at 55 percent. The Obama administration decided on a policy somewhat more modest: a tariff at 35 percent, then drifting down to 30 and 25 percent before returning to the normal four percent tariff policy in 2012.

Such things are by no means unusual. Each year the World Trade Organization counts 100 to 200 of them around the world, usually imposed through the “anti-dumping” and “countervailing duty” laws many countries have passed to defend industries against predatory export practices, such as below-cost sales and government subsidies.

India is the most frequent user of these laws, imposing about 30 anti-dumping penalties a year since 2000. The United States is a bit less enthusiastic, imposing about 15 anti-dumping cases a year. China and the European Union also record about 15 cases a year. According to the U.S. Commerce Department, China now maintains penalty tariffs like these on 17 types of American goods, including tariffs ranging up to 46 percent on optical fiber, 61 percent on Spandex, and 91 percent on chloroform. And a week before the administration’s tariff decision, in fact, the Chinese Commerce Ministry renewed anti-dumping tariffs on a grade of Russian, Japanese and Korean rubber known as “styrene butadiene” used precisely to make automobile tires. 

So occasional tariff decisions are not at all unusual. Typically they affect only a small slice of trade, and while annoying shoppers and exporters, pose no serious threat to broader flows of goods and services around the world.

The tire case does differ from this routine tariff-drizzle in some important ways.

One, it is the first American use of a special clause of the 1999 “accession” agreement which brought China into the WTO which makes import limits unusually easy. This clause, known as “Section 421” for its place in the big green book of American trade laws, allows American companies and unions to appeal for tariffs on fast-growing Chinese imports – not on grounds of unfair trading practices, but simply to provide help in a period of rising imports and competition. The 421 clause itself is temporary, lasting only until 2013, and the Bush administration did not use it at all, turning down all four 421appeals for Chinese goods. 

Second, the tire case has been filed by a trade union rather than a business association. Manufacturers like Cooper Tire, which make some tires in the U.S. and others in China, in fact mostly oppose the tariffs, presumably as they balance worries about competition here against long-term interests in China. The union’s decision-makers, concerned simply with their members in the United States and Canada, have no such ambivalent feelings. The very strong reaction of the Commerce Ministry no doubt reflects the fact that since 421 cases are relatively easy to win, Chinese exporters fear more trade-union based cases over the next three years. 

Such things are certainly possible. But in fact temporary import limits like these, in the United States and elsewhere, are both more common and less important than most trade-watchers are willing to admit. They tend to fade away fairly quickly, and often leave little behind.

The best-remembered of these was the Bush administration’s steel tariff policy of 2002-2003, which applied not to one country alone but to almost every world producer of steel. As the tariffs went into effect, steel imports fell modestly; then the tariffs came off and steel imports are now back to their typical levels. Employment and production trends in the United States remain unchanged.

Closer in time and nature to the tire case was the Bush administration’s decision in 2006 to impose a limit on imports of Chinese clothes, linens and other textile goods. This, like the tire-tariff, was the result of a unique feature of China’s WTO accession agreement. It had no visible effect on imports or employment at all. Importers of clothes simply shifted purchasing a few miles down the Asian coast, from China to Vietnam. They may well do the same after the tire decision, though perhaps tire factories will prove slightly less easy to move than garment shops.

Observers fundamentally should remember a few things. One, the tire tariff is within America’s WTO rights. Two, if the Chinese government has good reason to believe it isn’t, it has a right to sue at the WTO – and could win, as it along with Europe, Brazil and others did on steel a few year ago.

Every once in a while, of course, small events are precursors to much bigger ones. Some pebbles do change the scenery when they fall. Perhaps the fragile state of the world economy makes the tire tariff a bit riskier than temporary tariffs usually are; or perhaps the wariness of America’s shoppers will make it more effective in stabilizing employment than the Bush administration’s steel and textile policies proved to be. The most likely result, though, is something less than the excited editorials and media coverage suggest. The tire tariff will probably last its three years, have some modest effects on trade flows and production, and then, when the pebble lands, all will look much the same.