Friday, September 18, 2009

Of Tires and Tariffs

President Barack Obama has just fired his first shot in the Trade Wars.

Acting upon a recommendation by the US International Trade Commission,
The President has imposed a three-year term of punitive tariffs on Chinese tire
imports - a 35% tariff beginning in January, 30% the year after that, and 25% in 2012.

The action is a response to a tripling of tire imports from China between
2004 and 2008, and a quadrupling of tire imports overall in the same period.

The complaint was originally brought by the United Steelworkers
(which represents unionized tire workers) in 2008, but the
Bush Administration twice declined to take any action.

China, as usual, was quick to respond - but instead of blasting the US action
across the pages of Xinhua, the response was confined to a relatively mild
press release from the Ministry of Commerce (you can read that release

In most instances, The Thinking Nationalist is in favor of Free Trade -
nations that trade with each other don't go to war against each other.

But, free trade also requires other conditions that don't necessarily
apply in today's world - that markets are perfectly competitive, that
exchange rates are not manipulated, that technology is not transferred
across borders, that there are no economies of scale, and that governments
don't subsidize or regulate imports or exports.

And exactly none of these conditions apply in today's global tire market.
Rather, the global tire market is characterized by a relatively small number
of producers, with enormous economies of scale, who compete in an imperfectly
competitive market that is manipulated by governments almost everywhere.

And almost none of these players are American. Firestone - at one time
an iconicAmerican tire brand - is now a wholly-owned subsidiary of Japan's
Bridgestone Tire, itself a pre-eminent global brand.

And B.F.Goodrich and Uniroyal, two other famous American tire brands,
are both product lines of Michelin, the world-renowned French manufacturer.
Continental Tire - an OEM supplier to Ford - is a German company.
Dunlop Tire, a major premium manufacturer, is of course, British.

And all of these companies manufacture around the world. Michelin alone
has plants in 40 countries - and Michelin plants in fifteen of those countries
export to the United States.

Of all the well-known players, only Goodyear remains principally American -
and almost all of its future growth and expansion is targeted overseas. The
last two plants it built were located in Mexico.

Given these facts - that the principal tire players in the US market are
both foreign-owned and located overseas in the first place, why should we
discriminate against China?

In my opinion, we shouldn't. Because what we would be doing is penalizing
China for competing too effectively in the United States against Japan, France,
and Germany. And the last time I checked, those countries weren't exactly
open to US exports of almost anything, let alone tires.

And this isn't even the whole story. China, which is eager to build up
a competitive domestic tire industry across all market segments, competes
in the US principally in the "value" portion of the market - the store brands
sold by discounters and warehouse clubs.

At the time the Chinese import "surge" began in 2004, China's share of the
US market overall was 5%, with a 17% share in the "value" segment. This
is hardly a threat to the major players in the "value" tire market - which
in order of market share, are South Korea, Mexico, China, Taiwan, and Brazil.
In 2004, China was in fifth place, but today it is still behind value market leader
South Korea and NAFTA-protected Mexico.

It should be noted that US manufacturers are largely absent from this market .
US name-branded value tires are mostly manufactured in Mexico. And those
US vendors affected by the tariff - such as Cooper Tire - will simply shift
production to Mexico or Korea , where Cooper also has plants and production

This doesn't sound to me like creating or saving US jobs. More like a political
payoff to a powerful union. If President Obama were serious about creating
or preserving a US tire industry, he would impose tariffs on all foreign
producers and require that foreign manufacturers manufacture a certain
percentage of their sales here.

But that might violate WTO rules. But WTO or not, quotas, tariff and
non-tariff barriers, and domestic production and employment requirements are
imposed on US companies moving overseas. And most US companies are
fine with that.

They aren't interested in developing true overseas markets. That takes time
and money, and hurts the short-term bottom line. But when the object is
just to remove the American worker from the "global" supply chain,
that's OK.

As long as the burden of competition is borne by the American worker and not
by transnational corporations, there's no WTO rule against that. Both foreign
governments and the shareholders will love you.

"Free Trade" shouldn't mean wholesale abandonment of an entire industry.
If we want a domestic tire industry with domestic manufacturers employing
US workers, we should say so - and act accordingly. In other words,
we should act the same way the Japanese, the Europeans, and the Chinese do,
by imposing tariffs, quotas, non-tariff barriers, and domestic employment
regulations. Without fear or favor towards any one nation.

Above all, we should not do what we are about to do - which is to take jobs
from Chinese workers and give them to Korean or Mexican workers.

I don't see how that creates jobs here. But maybe withdrawing from NAFTA or
the WTO might.

That would be change we could believe in.

1 comment:

  1. We must withdraw from the WTO- it might even eliminate many of our problems such as trade imbalances and outsourcing if the USA no longer cares about WTO retaliation for protecting American workers and jobs.

    We can and should use protectionism against the Chinese economy; if we curry favors to the Euros in this manner exports of American products may rise as a quid pro quo and should increase economic and political cooperation between America and Europe. China is a rival and Europe is an ally in need.