Page 1 of 2 US drivers pay steep price for China tire tariff
By Peter Lee
A World Trade Organization appeals court has ruled in favor of the Barack Obama
administration on the issue of the tariff it slapped on imports of Chinese
tires in 2009. With President Obama's acceptance of the recommendation of the
US International Trade Commission, Chinese tires were assessed at an
eye-popping tariff of 55% in 2009, declining to 45% on 2010 and 35% in 2011.
A certain amount of misinformation is apparently de rigueur in cases of this
sort. No, for Tom Barkley of Marketwatch, the US levy was not a "punitive"
tariff. [1] It was a protective tariff, one that acknowledged that the Chinese
tires were cheaper, but that the influx was causing unacceptable hardship to
American industry.
The Obama administration imposed the tariff under Section 421 of the Trade Act
of 1974. Per the US China Business Council
backgrounder, "the statute allows the United States to impose duties or quotas
to counter 'market disruption' caused by rapidly increasing imports from China.
Unlike other trade remedies under US law, the imports don't have to be proven
to result from dumping or other illegal actions. [2]
As a price of acceding to the WTO, China agreed to accept imposition of
national protectionist measures - aka a "Transitional Product-Specific
Safeguard Mechanism" - if discussions failed to cope with a situation of
increased Chinese imports that "cause[d] or threaten[ed] to cause market
disruption to the domestic producers".
Paragraph 16.4 of China's Accession Protocol defines "market disruption".
Market
disruption shall exist whenever imports of an article, like or directly
competitive with an article produced by the 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. In
determining if market disruption exists, the affected WTO Member shall consider
objective factors, including the volume of imports, the effect of imports on
prices for like or directly competitive articles, and the effect of such
imports on the domestic industry producing like or directly competitive
products. [3]
It would appear to be a fool's errand to
challenge this ruling, giving the avalanche of Chinese tires that entered the
US in 2006-2008 and the obvious implications for employment in the US tire
industry.
According to the United Steel Workers Union, Chinese tire imports by volume
grew 215% from 2004 until 2008, reaching a volume of 46 million tires. [4]
However, the Chinese case was not quite as weak as one might think.
The PRC's representatives argued that US manufacturers had made a strategic
business decision to focus on the most demanding - and profitable - customers,
who would not accept a no-name import: the auto manufacturers (known as OEMs or
original equipment manufacturers) and the so-called "tier one" replacement
customers, who paid more for brand-name, high performance tires.
As a result, the Chinese and other suppliers rushed into the "tier two" and
"tier three", that is the cheap and cheaper unbranded market, to slug it out.
Perhaps more to the point, it appears the PRC was attempting to draw a
pre-emptive line in the sand and establish some procedural and interpretive
precedents to inhibit the serial imposition of protective tariffs in trade
disputes.
The PRC asserted that the US procedures leading up the imposition of the
penalties had been excessively subjective and slapdash and did not rise to the
standard of evaluation demanded by section 16.4. The effort was an outright
failure.
The appeals panel slapped down the Chinese, and received aid and comfort from
friends of the court briefs filed in support of the US position by the European
Union and Japan.
The ruling does not make for particularly inspiring reading. Especially at the
appellate level, the "rule based" world order that the US professes to promote
and, when convenient, adhere to, is largely a matter of legalistic wriggling.
The PRC asserted that the US had cherry-picked the data to focus on the year of
biggest increase, 2008, and had failed to define what "rapid growth" actually
was; the WTO ruled that there were no limits on subjective interpretation.
The WTO also ruled that "material" injury was a lower bar than "serious" injury
and relieved the US of any obligation to make the case that a specific amount
of injury had been caused by Chinese imports, as opposed to other factors such
as strategic decisions by US suppliers, the global recession, or competitive
pressures of other exporters.
For instance, since Chinese imports were cited as one of four factors in the
shutdown of a Bridgestone plant in Oklahoma, that was taken to be evidence of
"material" injury, albeit of an undefined degree, that justified the protective
tariff.
Moving beyond the ruling, the end result of this protectionist posturing was
not terribly impressive.
As free-trade advocates (and the Chinese) quickly pointed out, the result of
the protective tariff was not to spur a significant increase in US employment
in the tire sector.
Instead, the supply sourcing shifted from the PRC to Taiwan, South Korea,
Japan, and Indonesia, all happy to divvy up the low-end market, presumably at
higher prices now that the PRC, the most significant low-cost producer, was out
of the picture.
In 2010, the US China Business Council issued a widely-publicized (at least in
China) Issue Briefing that stated:
Comparing the first half of 2010
with the same period in 2009, total US tire imports affected by the 421 tariff
are up 21% by volume and 30% by value. China's share of those imports has
dropped from a peak of 45% in August 2009 to just 24% in June 2010. In other
words, Americans are buying more tires from overseas - we're just getting the
tires from places other than China. [5]
During the same period
that the Chinese tires were shut out of the US market, the price of tires
jumped over 10%.
Perhaps most students of international trade and foreign relations do not spend
much time reflecting on the plight of the financially strapped US buyer of
low-end tires - or the retailers that service them - but this October 2010
report from Barry Schlachter of McClatchy, provides some food for thought:
Overall,
consumers are paying about 12% more for blackwalls than a year ago, said Bonnie
Moreland of Texarkana, Texas-based Golden Star Tires, adding that the jump
would be even higher if he didn't absorb some of the waves of price increases
imposed by manufacturers.
Dealers who advertised specials like four ''economy'' tires for $99 three years
ago are selling them today at $299 to $340 - if they can find the products,
said George Salinas, co-owner of G&M Tires in Fort Worth, Texas.
The higher cost makes it harder to stock tires that are available.
''I used to carry 300 tires,'' Salinas said. ''Now I have less than 100 in
stock because I can't afford to have them sitting on the shelf.''
Jim Smith, editor of Akron-based Tire Review magazine, which covers the retail
industry, said: ''Dealers are terribly frustrated. They've always complained
about prices, but this is different from historical grousing. This is a
real-world, dollar-and-cents issue for them right now. They can't get customers
in the door because of the prices.''
Sam Timmons of Fort Worth Tire, which sells used and new tires, says it's
harder finding road-worthy tires for resale because they're being driven longer
and come in bald.
"Because of money problems, people are running them until they're as slick as
pavement," said Timmons, who laid off five employees in February 2009 and
hasn't been able to replace them. "We spend $20,000 a year getting rid of the
junk tires. We just get a trickle [of good used tires], and they're sold within
days." [6]
However, the true significance of the Chinese tire
affair - and even the jump in tire prices - is not the ancient story of the
futility of protectionism. It's more about the consequences of globalization.
Tire-making is a globalized affair, driven by the needs of the globalized
automotive industry. The automakers are world corporations pursuing world
markets. GM sells more cars in China than it does in the United States. And
global cars need tires from global suppliers.
When Chinese tires got squeezed out of the US market, they were replaced, of
course, by other imports. But not necessarily imports by foreign brands. Many
of the tires came from the global plants of the world majors, like Cooper
Industries and a host of others.
South Korea's Hankook Tires - which has no US factories and has announced its
strategy is to become the number one tire company in China - supplied 10
million tires to the US market in 2010. With a verbal awkwardness that is
somewhat charming, it stated in its 2010 annual report:
"[American
Regional] headquarters diversified production sources to circumvent the
additional 35% safeguard tariff on Chinese-made tires."
Bridgestone
Taiwan, which historically did not export, recorded a gratifying bump of one
million tires in 2009.
Significantly, when the anti-PRC tire action was first mooted, neither one of
the two nominally US tires suppliers, Goodyear and Cooper, supported the
effort. True to their globalized priorities, they cared for the continued
opportunity to maximize access to all markets for all their plants in every
corner of the world.
Cooper is headquartered in Findlay, Ohio. It has plants in China that were a
major source of low-end tires for the US market. When the protective tariff
hit, it didn't start sourcing cheap aftermarket tires from its US plants to
replace the Chinese supply. It shifted to its partners in Taiwan and South
Korea to supply the US market.
Cooper, in fact, filed a statement with the US International Trade Commission
opposing the protective tariff. In a public version made available by the
website US China Law Blog, Cooper stated:
Cooper Tire has not abandoned
the US tire market, and intends to continue some production in the United
States. Cooper Tire invested in China because it could not compete on costs
with lower-cost tires being imported by other US producers and importers from
many different countries, not just China. Cooper Tire's customers were
demanding lower-priced tires. The tires produced in China are made at a lower
cost and allow Cooper Tire to even-out its overall production costs, compete
for sales in the United States, and meet its customers demands. The reason the
tires in China can be made at a lower costs is due to lower labor costs
(including hourly rates and benefits), some (but not all) lower raw material;
and much lower litigation costs (for not only product liability issues, but
also US regulatory issues and other contractual disputes). [7]
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