CASE

WILL TIRE TARIFFS LAUNCH A TRADE DISPUTE?

Trade policy can have a powerful economic and political impact both domestically and internationally, sending a message to both domestic constituents and foreign trade partners. This is the case of a U.S. trade policy action regarding imports of Chinese rubber tires. The ITC recommendations and USTR information led to a presidential decision in September of 2009.

A PRESIDENTIAL PROCLAMATION

ESIDENTIAL PROCLAMATION THE WHITE HOUSE Office of the Press Secretary For Immediate Release September 11, 2009 TO ADDRESS MARKET DISRUPTION FROM IMPORTS OF CERTAIN PASSENGER VEHICLE AND LIGHT TRUCK TIRES FROM THE PEOPLE’S REPUBLIC OF CHINA BY THE PRESIDENT OF THE UNITED STATES OF AMERICA, A PROCLAMATION

1. On July 9, 2009, the United States International Trade Commission (USITC) transmitted to me a report on its investigation under section 421 of the Trade Act of 1974, as amended (the ‘‘Trade Act’’) (19 U.S.C. 2451), with respect to imports of certain passenger vehicle and light truck tires from the People’s Republic of China (China). In its report, the USITC stated that it had reached an affirmative determination under section 421(b)(1) of the Trade Act that certain passenger vehicle and light truck tires from China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products.

2. For purposes of its investigation, the USITC defined certain passenger vehicle and light truck tires from China as new pneumatic tires, of rubber, from China, of a kind used on motor cars (except racing cars) and on-the-highway light trucks, vans, and sport utility vehicles, provided for in subheadings 4011.10.10, 4011.10.50, 4011.20.10, and 4011.20.50 of the Harmonized Tariff Schedule of the United States (HTS).

3. The USITC commissioners voting in the affirmative under section 421(b) of the Trade Act also transmitted to me their recommendations made pursuant to section 421(f) of the Trade Act (19 U.S.C. 2451(f)) on proposed remedies that, in their view, would be necessary to remedy the market disruption and the basis for each recommendation.

4. Pursuant to section 421(a) of the Trade Act (19 U.S.C. 2451(a)), I have determined to provide import relief with respect to new pneumatic tires, of rubber, from China, of a kind used on motor cars (except racing cars) and on-the-highway light trucks, vans, and sport utility vehicles, provided for in subheadings 4011.10.10, 4011.10.50, 4011.20.10, and 4011.20.50 of the HTS.

5. Such import relief shall take the form of an additional duty on imports of the products described in paragraph 4, imposed for a period of 3 years. For the first year, the additional duty shall be in the amount of 35 percent ad valorem above the column 1 general rate of duty. For the second year, the additional duty shall be in the amount of 30 percent ad valorem above the column 1 general rate of duty, and in the third year, the additional duty shall be in the amount of 25 percent ad valorem above the column 1 general rate of duty.

6. Section 421(m) of the Trade Act (19 U.S.C. 2451(m)) provides that import relief under this section shall take effect not later than 15 days after the President’s determination to provide such relief.

7. Section 604 of the Trade Act (19 U.S.C. 2483) authorizes the President to embody in the HTS the substance of the provisions of that Act, and of other acts affecting import treatment, and actions thereunder, including the removal, modification, continuance, or imposition of any rate of duty or other import restriction. NOW, THEREFORE, I, BARACK OBAMA, President of the United States of America, acting under the authority vested in me by the Constitution and the laws of the United States of America, including but not limited to sections 421 and 604 of the Trade Act, do proclaim that:

1. In order to apply additional duties on imports of the certain passenger vehicle and light truck tires

from China described in paragraph 4, subchapter III of chapter 99 of the HTS is modified as provided in the Annex to this proclamation.

2. The modifications to the HTS made by this proclamation, including the Annex thereto, shall be effective with respect to goods entered, or withdrawn from warehouse for consumption, on or after 12:01 a.m. EDT on September 26, 2009, and shall continue in effect as provided in this proclamation and its Annex, unless such actions are earlier expressly modified or terminated.

3. Any provisions of previous proclamations and Executive Orders that are inconsistent with the actions taken in this proclamation are superseded to the extent of such inconsistency.

IN WITNESS WHEREOF, I have hereunto set my hand this eleventh day of September, in the year of our Lord two thousand nine, and of the Independence of the United States of America the two hundred and thirty fourth.

THE INVESTIGATION

In 2009, international competition in the production of passenger vehicle and light truck tires led to heated competition in the U.S market. In keeping with its congressional mission to identify and remedy trade injury, the U.S. International Trade Commission (ITC) conducted an investigation concerning whether China was in violation of a U.S. – China agreement relating to China’s accession to the World Trade Organization. A June 18, 2009, news release from USITC offers the following summary: Section 421 was added to the Trade Act of 1974 by the U.S.-China Relations Act of 2000 and implements a transitional bilateral safeguard provision in the U.S.-China agreement relating to China’s accession to the World Trade Organization. Domestic producers can obtain relief under this provision if the Commission finds that Chinese products are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products. The statute states that market disruption ‘‘exists whenever imports of an article like or directly competitive with an article produced by a domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry.’’ ‘‘Significant cause’’ is defined by the statute as ‘‘a cause which contributes significantly to the material injury of the domestic industry, but need not be equal to or greater than any other cause.’’ Similar to global safeguard investigations, if the Commission makes an affirmative determination, it also proposes a remedy to the President. The President makes the final decision concerning whether to provide relief to the U.S. industry and if so, the type and duration of relief.2

THE DETERMINATION AND REMEDY

The U.S. International Trade Commission (ITC) announced that it had made an affirmative determination, finding that certain passenger vehicle and light truck tires from China were being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products. On June 29, 2009, the USITC announced the remedy proposals it would forward to the president and the U.S. trade representative (USTR). Four of the six members supported the following remedy proposal, while two dissenting members offered the statement found below the remedy. Remedy Proposal of Chairman  L. Aran off, Commissioner Charlotte R. Lane, Commissioner Irving A. Williamson, and Commissioner Dean A.  In accordance with Section 421 of the Trade Act of 1974, we have determined that imports of certain passenger vehicle and light truck tires from China are being imported into the United States in such increased quantities that they are causing market disruption to the domestic industry producing such tires. Under Section 421(f) of the Act, we have the responsibility of recommending actions that will remedy the market disruption. We have considered the relevant factors set out in the statute, the written and oral submissions of all parties, and other information obtained in the investigation. To remedy the market disruption caused by rapidly increasing subject imports, we propose that the President, for a three-year period, impose a duty, in addition to the current rate of duty, on imports of certain passenger vehicle and light truck tires from China. This duty would be 55 percent ad valorem in the first year, 45 percent ad valorem in the second year, and 35 percent ad valorem in the third year. In our opinion, these tariff levels would remedy the market disruption that we have found to exist. Finally, we note that as a result of recent amendments to the trade adjustment assistance provisions administered by the United States Department of Labor, groups of workers who are covered by a petition for such assistance and whose firms are part of the domestic industry that is the subject of our affirmative determination of market disruption shall be certified as eligible to apply for trade adjustment assistance. If applications are filed, we recommend that the President direct the United States Department of Labor and the United States Department of Commerce to provide expedited consideration of trade adjustment assistance for workers and/or firms that are affected by subject imports. Statement of Vice Chairman Daniel R. Pearson and Commissioner Deanna Tanner Okun Regarding Remedy While we did not find market disruption to exist, we intend to submit views on this matter, as has been done previously under Section 421 investigations. Briefly, our views on remedy will urge that no traderestricting action be taken. It is our view that whereas subject imports have not been a significant cause of market disruption, any trade-restricting remedy will not benefit the domestic tire industry, its workers, the broader U.S. economy and society as a whole. This is an industry in which the trend toward gradual downsizing appears likely to continue regardless of the Commission’s action today. Thus, we urge the U.S. government to be prepared to provide economic adjustment assistance to displaced tire workers. We note that Trade Adjustment Assistance already has been provided to some tire industry workers and recommend that the President utilize similar measures to help workers who find that their employment alternatives are changing. Implementing a trade restriction would be far more likely to cause market disruption than to alleviate it.3 SELECTED ARGUMENTS The following excerpts from the United States Trade Representative’s Trade Policy Staff Committee (TPSC) hearing offer perspectives presented by U.S. and Chinese industry representatives and economists. Leo Gerard (International President of the Steel Workers Union): As you consider what remedy to recommend, I urge you to keep in mind that this isn’t just statistics and numbers. These are lives. These are hard working women and men, many of whom have spent their entire adult careers in the industry. Their jobs provide the income, the health insurance, and the retirement benefits that sustain a middle class family . . . These workers can make as many tires and whatever kinds of tires the market demands, but these workers cannot compete when the market is being overwhelmed by a massive flood of tires from China. Since 2004, imports of tires from China have more than tripled, seizing a sizable share of the U.S. market almost entirely at the expense of the domestic industry. After closing factories and slashing more than 5,100 jobs, the industry is still operating at a loss. Another 3,000 layoffs have already been announced for this year. If an effective remedy is not provided, the pain of those layoffs will continue to spread. Each of these lost jobs has a much broader impact. The industry declines. Workers and supplier firms also suffer . . . In addition, every worker directly employed in the tire industry supports many more jobs in the communities where the tire workers live and raise their families. Mary Xu (Secretary General of the China Rubber Industry Association): The increase of Chinese tire imports is the result, not the cause of the U.S. tire plant’s closure. Since the 1990s, top tiers tire makers gradually exited the lower end market segment, and they shifted their production to other countries, such as China. After discounting the reduction of 16 million imports from Canada, Japan and Taiwan, the net increase of Chinese tire imports would be only nine million pieces from 2005 to 2008. In addition, the largest increase in part of China in year 2006 and 2007 was just after United States tire plants’ closure around year 2004 and 2005. That means the increase of Chinese tires is the result not the cause. The second point of mine is the latest trade statistics show that imports of Chinese tires have fallen in the first half of 2009 compared with 2008, and comparing 2008 and 2007, the increase in rate is only 2.7 percent. While imports may have experienced a minor bump in recent months, it’s because the importers are afraid of the threat of the prohibitive tariffs. The overall change of Chinese exports is clearly downward. My third point is the ITC has proposed a remedy in this case of a tariff rate beginning at 55 percent. A tariff rate of this size will make Chinese tires unmarketable in the United States . . . Our direct competitors in the

economy segment of the U.S. tire market are producers in other countries with low production costs, such as Indonesia, South Korea, Mexico, India, Brazil. Price ultimately is often the deciding factor in whether a sale is made. The feedback our tire members received from the U.S. tire dealers . . . indicates that many U.S. consumers are delaying their tire replacement beyond the limit of minimum safety requirements. My fourth point is the rapid development of Chinese tire industry is not a threat for the U.S. market, but meets the faster growing Chinese auto market. Earlier this year, the Chinese auto market became the largest in the world, surpassing even that of the United States. The Chinese auto market is expected to exceed 11 million new cars in 2009, and the Chinese tire industry has been gearing up production capacity just to be able to meet this surge in demand. So in closing, I would like to emphasize that the import restrictions sought by the Steel Workers Union on fairly traded goods would be protectionist, and would not provide any benefits for the U.S. tire industry or its workers. Those would simply shift to producers in other countries, while Chinese producers and the U.S. consumers would pay a very steep price. Tom Prusu (Professor of Economics at Rutgers University): Let me begin by reminding you that one of the most robust findings in all of international economics, namely, that a tariff always imposes costs on downstream consumers and that these costs are always larger than the benefits that accrue to the protected sector. The petitioners want you to think that the benefits exceed the costs to consumers, but that simply cannot be the case. The real question is how much larger are the costs than the benefits. Are they just a little bit bigger or are they a lot bigger? In this case, there is little doubt that the costs are far, far larger than the benefits to the tire workers. The proposed tariff will result in at least a dozen job losses for every job saved. That’s the best case scenario. In fact, it is far more likely that the ratio of job losses to jobs saved will exceed 20 to one. In dollar value, consumers will pay over $300,000 per job saved. I note that the U.S. auto companies have submitted comments which imply that the additional cost for just new car buyers will be something like $800 million per year. The auto maker estimates suggest my benchmark estimates understate the consumer cost. In my benchmark simulation using the ITC’s elasticities, I find that a 55 percent tariff will dramatically scale back imports from China. However, it will not result in any significant increase in domestic employment. Rather, in the short run, the primary effect will be higher prices, limited increase in imports from non-subject suppliers, and very high consumer costs.4 THE RESPONSE Following the presidential proclamation, China immediately voiced its opposition. Foreign Ministry Spokesperson Jiang Yu offered the following comments: We are strongly dissatisfied and resolutely opposed to the US decision on September 11 to impose special safeguard measures on passenger vehicle tire imports from China despite China’s solemn position. The US decision, an abuse of trade remedies and a practice of grave trade protectionism, breached its commitments at the G-20 Financial Summit. It will not only hurt bilateral economic cooperation and trade between China and the US, but also affect an early recovery of the world economy. China has made solemn representations to the US and reserves all rights to take responsive actions.5 The press in both nations reported extensively on the issue. This excerpt from a New York Times article covered the U.S. trading relationship with China and the Chinese retaliation. HONG KONG (September 14, 2009)—China unexpectedly increased pressure Sunday on the United States in a widening trade dispute, taking the first steps toward imposing tariffs on American exports of automotive products and chicken meat in retaliation for President Obama’s decision late Friday to levy tariffs on tires from China. The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. ‘‘The U.S. is shameless!’’ said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds. The impact of the dispute extends well beyond tires, chickens and cars. Both governments are facing domestic pressure to take a tougher stand against the other on economic issues. But the trade battle increases political tensions between the two nations even as they try to work together to revive the global economy and combat mutual security threats, like the nuclear ambitions of Iran and North Korea. Mr. Obama’s decision to impose a tariff of up to 35 percent on Chinese tires is a signal that he plans to deliver on his promise to labor unions that he would more strictly enforce trade laws, especially against China, which has become the world’s factory while the United States has lost millions of manufacturing jobs. The [U.S.] trade deficit with China was a record $268 billion in 2008.6 THE SHORT-TERM OUTCOME Only four months after the imposition of the tire tariff, the Washington Post reported that protectionist policies from both the United States and China have impacted exports as diverse as chicken, steel, nylon, autos, paper and salt. In October of 2009 China imposed duties as high as 36 percent on U.S. nylon exports, to which the U.S. retaliated with duties on Chinese-made steel pipe. The United States also launched probes into Chinese salts and glossy paper used for magazines. In November the Chinese government threatened to impose tariffs on an industrial acid used in the production of nylon and medicine, and perhaps most significantly, began an investigation of U.S.-made passenger cars, indicating that it might penalize U.S. automakers. While academics and policy-makers differ on whether these disputes represent a normal component of a growing trade relationship or a dangerous deterioration, it appears that protectionist policies are on the rise globally. A recent study by the Global Trade Alert reports that protectionist measures have spiked, while the World Trade Organization reports that anti-dumping disputes reached 437 in 2009, more than double the 2008 figure.7

Questions for Discussion

1. Is the ITC recommendation rational? Is it in favor of business?

2. What other political issues may have had an impact on President Obama’s decision to accept the ITC remedy? Does the political context change your view on the appropriate trade action?

3. What are some alternative ways to offer relief to suffering local industries?

4. Discuss the implications of an escalating trade war between the United States and China. Does one country stand to lose more than the other?

5. Are there other industries waiting for favorable trade treatment?