Tariffs on Chinese Tire Imports – Continuing Mistakes from The Great Depression

posted by Nima

September 13, 2009 · Posted in Global Economics 

So far, the US government has been diligently repeating each and every mistake committed during The Great Depression. The only thing they had left undone so far was to match the Smoot-Hawley Tarriff Act from 1930, widely recognized as the worst decision during that period:

In mid 1930 the Smoot-Hawley Tariff is signed into law, raising import tariffs to record highs, and spreading protectionism all over the world – consumers and exporters suffer from the ensuing decline of international trade

Now, president Obama is rushing in to fill that void:

In a break with the trade policies of his predecessor, President Obama announced on Friday night that he would impose a 35 percent tariff on automobile and light-truck tires imported from China.

The decision is a major victory for the United Steelworkers, the union that represents American tire workers. And Mr. Obama cannot afford to jeopardize his relationship with major unions as he pushes Congress to overhaul the nation’s health care system.

But China is certain to be antagonized by the decision, made less than two weeks before Mr. Obama will come face to face with Chinese leaders at a summit meeting in Pittsburgh for the Group of 20 industrialized and fast-growing emerging nations.

The decision signals the first time that the United States has invoked a special safeguard provision that was part of its agreement to support China’s entry into the World Trade Organization in 2001.

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.

Unlike more traditional anti-dumping cases, the government does not need to determine that a country is competing unfairly or selling its products at less than their true cost.

The International Trade Commission had already determined that Chinese tire imports were disrupting the $1.7 billion market and recommended that the president impose the new tariffs. Members of the commission, an independent government agency, voted 4-2 on June 29 to recommend that President Obama impose tariffs on Chinese tires for three years. Mr. Obama had until this coming Thursday to make a decision.

American imports of Chinese tires tripled between 2004 and 2008, and China’s share of the American market grew to 16.7 percent, from 4.7 percent, according to the United States Trade Representative. Four American tire factories closed in 2006 and 2007, and several more are set to close this year.

The Tire Industry Association has opposed the tariffs, arguing that they will not preserve American jobs but will instead cause manufacturers to relocate plants to other countries where they can produce tires cheaply.

President George W. Bush received four similar recommendations from the trade commission, the most recent one involving steel pipe in December 2005, but he rejected all of those recommendations. Under the law, the president is allowed to accept or reject the commission’s recommendations.

“The president decided to remedy the clear disruption to the U.S. tire industry based on the facts and the law in this case,” the president’s spokesman, Robert Gibbs, said in a statement Friday night.

Mr. Gibbs said the United States, which already imposes a 4 percent tariff on Chinese tires, would impose an additional tariff of 35 percent for one year. The tariff will be reduced to 30 percent in the second year and 25 percent in the third year. The tariff is to take effect on Sept. 26.

The trade commission proposed higher tariffs than the president actually imposed, recommending an initial levy of 55 percent.

The president of United Steelworkers International, Leo W. Gerard, applauded Mr. Obama’s decision, saying, “The president sent the message that we expect others to live by the rules, just as we do.”

Senator Sherrod Brown, an Ohio Democrat who had pressed for the tariffs, also praised the decision.

He said in a statement, “If American workers and manufacturers are going to compete in the global market, they need to have a government that uses trade enforcement tools.”

The stupidity behind those tirades is so rampant and obvious that most people will of course be able see through it easily. If American workers want to be competitive in the global market they need to be productive and their services priced competitively when compared with workers from other countries.

The very reason why higher tariffs are introduced is the fact that they are NOT competitive, and they will stay uncompetitive without the necessity to outstrip competition. We have already seen this with the big auto manufacturers. Now they are moving down the supply chain to wreck yet another industry. This will of course ultimately discourage investment and destroy jobs.

“The president sent the message that we expect others to live by the rules, just as we do.”

What is he talking about? Which rules? The rule that a Chinese entrepreneur should not benefit US importers by offering affordable goods which in turn benefits those consumers who buy end products from them?

Reactions to follow

To every action there will be consequences. China will probably retaliate in kind and impose similar tariffs. On top of that, other labor associations may feel encouraged now and start pushing for more similar tariffs. Up to now, it seemed to be a gentlemen’s agreement among governments not to resort to protectionism because they all claimed to understand the disastrous long term consequences on global trade. Now it seems as though all that is forgotten and all bets are off.

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