Trade action: their tires vs. our chicken feet

A 35% tariff on low-end Chinese tire imports

President Obama has just approved the imposition of import tariffs for the next three years on low-end tires from China.  The duties, which will go into effect in about two weeks, start at an extra 35% charge for the first 12 months and decline to 30% and 25% in the remaining years.

Chinese tire imports have gone from next to nothing five years ago to about 1/6th of the US market in 2008, 46.9 million tires worth about $1.8 billion–or $38+ each.

A “safeguard” action

The tariffs are being imposed under the “safeguard” provisions of the World Trade Organization.  That is to say, there’s no claim that the Chinese tire makers have done anything unfair or illegal.  They’re not “dumping” output at a loss or below production cost.  They just make better cheap tires than we do–so much so that they’ve pretty much taken over the low end of the market.  “Safeguard” actions are temporary, emergency measures intended to allow a formerly protected industry time to catch its breath, regroup and reenter the fray with new, improved, better value-for-money products.

The way safeguard actions work, the US and China have a short period of time for consultations to try to resolve their differences.  Failing that, China can bring a complaint to the WTO, a process that can take two years.  Typically, the way safeguard rules are finessed, it looks to me like the tariffs tend to run out about the same time as WTO hearings are slated to begin.

China gets to put equal tariffs on imports from the US

Again, according to the rules, China gets to put tariffs on US products entering China during the time before hearings, up to the amount of the tariffs the US is putting on Chinese tires.  China has already picked out the areas it will tax:  unspecified auto parts, and cooked poultry (read: chicken feet).  The chicken feet people are understandably up in arms (as it were).  They get $.60-$.80 a pound for the things from China, “multiple” times what they get in the US.  Chicken exports to China amounted to $722 million last year.  Who’d a thunk it!!

Wait.  The story gets stranger.

Not a single tire company supported the request for tariff protection, which came from the United Steelworkers union.  Cooper, a US company that has a Chinese tire plant, actively opposed it.  That’s not quite as odd as it sounds at first, since other than Cooper and Goodyear most US-based tire plants are owned by foreign firms.  So they may be hesitant to speak their minds.  Still, no one appears eager to “regroup and reenter” the low end.  In fact, the prevailing strategy seems to be to concentrate on high-value tires within NAFTA and supply the low end through Chinese imports.

As a result, there’s no evidence that a single steelworkers manufacturing job will be saved by the tariff, though some Americans who work for the wholesalers and distributors of Chinese products will doubtless lose theirs.

Who will bear the cost of the tariffs?

The Chinese tire makers can’t eat much, if any, of it.  They say they have single-digit profit margins now.  If they lower their selling prices they open themselves to accusations of dumping.  US manufacturers don’t want the business.  Will Mexico export more?  Will the distribution chain take something off its markups?  I don’t know.  But it sounds to me as if the main effect of the tariff will be much higher prices paid by lower middle class and working poor American drivers.

And, of course, what will we do with all those tons of chicken feet that won’t make their way to China?  (Note:  for more on the virtues of American chicken feet, see the New York Times article of 9/16/09.)

Not a sensible economic move

All in all, what President Obama has done makes no economic sense.  And it has the potential to be an awful shoot-yourself-in-the-foot moment if, say, highway deaths of young families driving on worn-out tires are connected to this action.  Which implies that the president has done this for purely political reasons.  Help with a health care bill?  the price for dropping the “public option”, maybe?

Will events escalate?  I doubt it.  Autoworkers can scarcely complain about lack of government support, nor are they likely to criticize the steelworkers, no matter what China’s actions in response to the US are.  And apparently chicken ranchers aren’t labor-intensive enough, or don’t vote Democrat enough, to count.

From China’s point of view, plants producing low value-added pollution-causing chemical products, especially when owned by foreigners, are scarcely its vision for the future.  Especially for any under the patronage of unruly regional authorities, Beijing may be secretly pleased to have them shut down.  In fact, the whole “conflict” has the sense of being agreed to and pre-orchestrated behind closed doors before Obama’s tariff announcement.

The bottom line: from a human point of view, it’s hard to understand how the poorest Americans deserve to be treated this way.  From a narrowly stock market point of view, it’s a little bizarre, but this looks like a tempest in a teapot.

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