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US Tire Tariffs: Will China Retaliate?

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The US tonight imposed steep tariffs on tires, a move directed against Chinese imports. From the Wall Street Journal:

The Obama administration will put steep import duties on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs, U.S. Trade Representative Ron Kirk announced Friday night.

The announcement of 35% import tariffs, which would decline to 30% in the second year and 25% in the third, comes at a sensitive time. The heads of state of the 20 largest economies arrive in Pittsburgh in less than two weeks for a summit of the Group of 20, amid rising trade tensions and looming economic disputes. The United States needs China to help float a U.S. deficit expected to reach $1.56 trillion this year. President Barack Obama is also likely to seek new sanctions against Iran to combat its nuclear program, and China’s vote on the United Nations Security Council is pivotal….

Between 2004 and 2008, China’s tire production capacity surged by 152% and is projected to jump an additional 16% by 2010. At 235.2 million tires, China’s production capacity in 2008 was more than three times greater than its shipments to its home market. U.S. imports of tires from 2004 to 2008 jumped from 14.6 million to 46 million. China’s share of the U.S. tire market surged 255% in that time, to 16.7% from 4.7%.

Meanwhile, four U.S. tire plants closed in 2006 and 2007. Three more are planned for closure this year. There were 5,168 fewer workers in the U.S. tire industry in 2008 than there were in 2004.

The New York Times stresses that this is the first time the US has invoked a specific safeguard included as a condition of China’s entry to the WTO:

Under that safeguard provision, American companies or workers harmed by imports from China can ask the government for protection simply by demonstrating that American producers have suffered a “market disruption” or a “surge” in imports from China.

Readers are welcome to correct me, but it looks as if Team Obama has chosen to take a stand on a pretty narrow matter. Given this Administration’s history of brave talk combined with cautious to no real action, this is more likely to be meant to be a concession to labor than a shot across China’s bow.

But it is easy to see that the Chinese may view this differently, particularly since given the precedent set by relying on a heretofore unused mechanism.

And it is hard to know what the Chinese will do. On the one hand, China is clearly wedded to mercantilist trade policies and it is hard to see them making serious changes when their economy is flagging. So they could see this as a frontal challenge at a time not of their choosing. The rhetoric from the Chinese, at least as reported in China Daily, says the Chinese regard this move as an affront, but the Chinese so frequently go into high dudgeon mode, it is hard to tell when they are merely posturing and when they are quite serious:

Experts have called the proposal “unreasonable and unfair” and said that Chinese tire manufactures “largely do not compete against their American counterparts in the US.

Chinese tires have been “targeting the budget and no-brand replacement tire market for US consumers with severe budget constraints,” a sector that the US tire makers
gave up long ago and are unwilling to enter again, said China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters in a letter to President Obama….

But the Chinese government will not turn away from issues that will harm the interests of Chinese industries. Officials from the Bureau of Fair Trade for Imports & Exports with the Ministry of Commerce said China has prepared an assortment of plans for countering different possible results from the Obama administration.

“We will surely protect local tire manufacturers from being hurt when needed,” they said.

China will likely take retaliatory measures against the US industries. The Tire Industry Association has petitioned China to launch restrictive measures.

Moreover, experts suggested the Chinese government clamp down on US auto imports. During the first half, China imported more than $1 billion worth of automobiles from the US, up by 9.1 percent year-on-year.

“It’s unfair for Chinese laborers, after we made the American automakers happy, if the US launches sanctions against Chinese tire imports,” said He Weiwen, a council member of the China Society for American Economy Studies.

Stay tuned. This could get interesting in a bad way.

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30 comments

  1. David S

    It appears Obama is less conciliatory than Bush on China trade. His administration has also imposed tariffs on steel pipe, an important export for the PRC. China reserves its high dudgeon and bluster when it’s beating the drum against the Dalai Lama and Taiwanese revanchists. Where business is concerned the response will be real, and even disproportionate. What’s really puzzling is whether Obama’s move is part of a strategy that results in a broader negotiation, or if it’s merely short term politics. If the former, there have been no clues to inidicate a broader strategy for the US-China relationship. This is going to get very ugly.

    1. ndk

      It was back in 2007, but I vividly remember early candidate Obama during the Chinese Toy Scare calling for a complete ban on their import. The Foreign Ministry saw fit to blast him directly. That was pure political posturing, and I have no reason to doubt this is the same.

      Between that, Bush, and the recent WTO rulings in favor of the US, there’s a lot of history accruing. I suspect there are others behind the scenes smoothing things over, but we’ve stuck a lot of fingers into the hornet’s nest recently. I don’t share your conviction that this will get ugly, but I do shares Yves’ that it could.

  2. DoctoRx

    Might there be at least a glimmer of hope that Team O worked out a deal w the Chinese to make a quiet concession elsewhere, so that the Chinese might posture, expressing faux outrage?

    (Not that I’m suggesting that the Administration is so competent as to do so . . .)

  3. Rahul Deodhar

    The exchange rate game starts unfolding. Obama does not have many cards – he has to give in to some demands. The pressure to maintain or help create grass roots jobs will start mounting and it will be a choice between aligning with China or with US workers.

    Rahul

  4. Dick Durata

    Since US tire manufacturers do not compete against the low price Chinese tires, it’s hard to understand why Obama has chosen to make this a trade issue.
    To please labor? What’s in it for them if jobs are not the issue?
    This seems like a manufactured dispute, for reasons we will not be informed about, and yes, those are often the ugliest.

      1. John Thacker

        It’s possible, but China doesn’t own all of the low-price tire market. It’s also possible that we’ll just import more cheap tires from Malaysia and India instead.

  5. Swedish Lex

    I would not be surprised if some of those new Chinese factories turn out to be owned by non-Chinese, even by U.S. investors.

    Anti-dumping cases are always blurred by special interests trying to bend the law to fit their commercial aims.The last time I looked at such a case, it was on the face of it an EU-Chinese thing but in reality not at all. The case pitched those EU manufactureres who had gone global, and thus achieved lower production costs, against their EU competitors (often from the same country) who were stuck with expensive factories at home. The latter group was thus trying to bend the rules to compensate for their lack of foresight.

    Often a lot of propaganda surrounding these cases and difficulties in understanding what the econoic reality actually is.

    From a PR-perspective, the timing right ahead of G-20 is weird, though.

  6. Charles

    For the US (and Europe actually), curtailing trade through tariffs is just part of the plan : It is the only way to generate the inflation that will bring down the Debt/GDP ratio.
    Commodities will NOT shoot to the roof, because lowering world trade will pop the manufacturing economies bubble (and China is the biggest one there…) that are the only source of increase of commodity consumption.
    Inflation generated by repatriation of industrial jobs and salary increase for the working class, thanks to trade protection, can actually be a successful political strategy.
    Europe will ultimately be vowed to get into the scheme, as they also need to repatriate jobs in Eastern/Southern countries so that the latter can pay back their debts to German/Dutch/French creditors.

    Such a strategy requires a compliant central bank that maintains negative real interest rates, while enforcing credit restriction from a qualitative standpoint (maximum leverage ratio, etc…). It is a given in the US. Europe will soon see that they wil have to do it also or face massive disruption in the banking sector / sovereign EU states market.

  7. Kees van der Hof

    Dear Yves Smith,

    From The Netherlands/EU a response to your blog on US Tire tariffs.

    Mercantilist China doesn’t need a Smoot-Hawley Tariff Act. Beiijng already wages a protectionist trade war on basis of ‘ invisible restrictions, barriers and regulatory inhibitions to trade and investment’, not to mention a myriad of export promoting subsidies.

    Two links to the WSJ and UK Telegraph :

    EU Imposes Tariffs on Imports of Steel Pipe From China – July 29 2009

    http://online.wsj.com/article/SB124879089698686945.html

    Lord Mandelson accused China of failing to keep “to the spirit” of its free-trade commitments, and warned that China’s back-door protectionism was costing Europe more than ever in lost trade revenues – September 8 2009

    http://www.telegraph.co.uk/finance/china-business/6157968/Lord-Mandelson-warns-China-about-trade-restrictions.html

    Greetings/Kees van der Hof

  8. purple

    Beijing has engaged in protectionism for years. The US didn’t bat an eyelash because we are a finance dominated economy. As Western finance wakes up to the fact that they will never be allowed to operate in China to any significant degree, there will be less pressure against the protectionism pushed by U.S. industrial capital.

  9. Chen

    According to data, 2/3 of the China tire export to USA are made by US-invested manufacturers in China. The US tire manufacturer association and distributor alliance all came out against this measure back in August.

    Those import will simply switch to Mexico, Poland, etc.

    Purely political game without real benefit to consumers.

  10. chen

    2/3 of China tire export to the USA are done by US invested manufacturers in China. US tire association and distributors alliance all came out against the measure back in August.

    Those imports will simply switch to Poland, Mexico, etc

    No benefit, only politics

  11. ronald

    China must export or its miracle economy dies along with the commodity boom spec economy. Its exports while reduced are putting greater pressure upon Western economies that are suffering major unemployment. The international business model of using low cost labor to produce its goods while expecting the folks back home to live on unemployment benefits and reduced wages may be coming to an end.

  12. lark

    Hooray. Obama shakes up the (finance dominated) status quo. Finally some politician has the balls to not bow and stoop to what the patsy economists recommend. This is a natural follow on to the fact the govt snatched Brad Setser from CFR (he now works, I think, for Summers).

    My industry as been effected by the offshore outsourcing all the finance types have been promoting. I am past sick of it. The truth is this “free trade” ideology has been pursued past the point of sense or reason, and has done real harm to American workers. You can’t support consumers and destroy workers. There is a contradiction there.

    Those of you who are against this are supporting Chinese mercantilism.

  13. Yves Smith Post author

    This is a comment from Lulu I am reposting. I was tagging spam comments (stuff on a very old post with messages involving Ugg Boots and Vista, for instance) and mistakenly designated this comment, which came in the middle of a batch of spam comments. Apologies, Lulu.

    Get a clue, no one will be buying tires this year or maybe even next. Tires, cars, they are not going to move. Harming free trade harms workers by making the goods they purchase more expensive. It doesn’t matter if everyone in America is working if there is a reduction in the goods available for them to buy. Example to those with poor memory–lines for bread in Soviet Russia. Prices go up because demand goes up due to scarcity. Protectionist policy is destructive to American workers. I do not want those companies that have relocated offshore moving back. Let’s move forward with a consumer driven economy.

  14. SillyMoves

    If this follows through, US can fully expect a retaliation from China. A lot of people don’t understand that China is already the 2nd largest trader in the world, behind only US. So US wants to start a trade war with China without consequences?

    Auto and chicken meat imports form the US are already mentioned by China as potential targets. So let’s see, the OA wants to save some American manufacturing jobs in the tire industry, and risk losing jobs in other industries, like chicken farming? Welcome to the world of global economy.

    The bottomline is, China is no longer a push-over, such games don’t work anymore.

  15. Willnevergiveup

    The US reports are leaving out some “details.”

    2/3 of tires shipped from China are coming from four US companies manufacturing in China.

    The petition against China was initially filed by the Steelworkers Union.

    When hired as head of the “Auto Recovery Task Force” and now “Manufacturing Czar,” Ron Bloom, served as special assistant to the President of the United Steelworkers Union since 1996.

    http://willnevergiveup.wordpress.com/2009/09/13/tires/

  16. Jack

    When Americans can’t compete on the open market, they
    call for their Govt to intervene. The Chinese tyres are
    there not because the Chinese dumped them there, but
    because on price alone there is market for them at the lower end.
    And you can’t cut the prices on your home made tyres because you used to getting that big fat paycheque?
    I can see this is going to be a lose-lose situation for
    everyone

  17. larry li

    I’m sure Obama is not a fool, but what he made is really a foolish decision. It can not only harm the Chinese but also thd Americans.

  18. Kelley2218

    I can’t tell if you are being sarcastic but the consumer can not lead this particular economic recovery. Even you know that “no one will be buying tires”. Not importing cheap Chinese tires is not going to cause tires to all of a sudden become scarce. The scarcity of bread in Russia was caused by state run supply and a misunderstanding/convolution of Communism (which has proven to be a failure). Here if things are scarce we would see a business opportunity since we are “capitalist” someone would take up the slack as there would be profit to be made (as long as credit is available).

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