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The United States has imposed a tariff on China-made tyres of 35 percent the first year, 30 percent the second year and 25 percent the third year. This is a clear victory for the complainant, the United Steelworkers Union, over tyre importers and some US tyre manufacturers with plants overseas. Under section 421 of the US Trade Law, the International Trade Commission (ITC) determines whether the subject imports have “surged” and injured US producers of like products. According to US data, imports increased in volume from 14.6 million tyres in 2004 to 46 million in 2008, and the value of imports from China from 453 million USD in 2004 to 1.8 billion USD in 2008. This case is likely to encourage more section 421 complaints.

It was President Obama who had to give the final green light. In his electoral campaign, Obama promised to stand up for American workers against unfair trade practices and to prevent companies moving their production abroad. But he also said that he supported open markets and liberalized trade, and since becoming President, he has stressed the need to fight protectionism. Obama’s fiat for curbs against tyres is highly controversial in his own country. The economics of the case are being seriously questioned. A convincing argument is that any reduction in imports from China will be replaced by imports from other states like Brazil, Indonesia and Mexico. This suggests that the possible gain is a short-term political one.

From an American viewpoint, US-China trade is not conducted fairly and manufacturing in China is helped by a range of governmental supports, such as an undervalued exchange rate, access to cheap credit, cheap land and to other subsidized inputs and non-enforcement of environmental and labour standards. While, Washington points out that safeguard provisions were expressly agreed by China in its WTO accession agreement, the decision about Chinese tyres is seen to be very unfair in China as the provisions were imposed and are therefore seen as discriminatory. Although protectionism hurts all countries, it is particularly damaging to China. One risk is that trade frictions will make multinational companies reconsider their dependence on Chinese factories in their supply chains, which could imply that they diversify their factory investments and components purchases to other countries.

Beijing reacted immediately and opened an investigation into whether car parts and poultry from the US are being unfairly dumped on the Chinese market, saying that it was responding to complaints from domestic companies. A complaint has been lodged with the WTO to have the American tariffs declared illegal. China is also considering the possibility of imposing countervailing duties on American goods, which receive government subsidies. The US motor industry received huge sums of money from the government during its bail out.

Was China’s choice to target vehicles and an agricultural product strategic? Two politically influential industries are involved, which may bring pressure on Obama in the future. General Motors’ Chinese subsidiary is the second largest automobile company in China. The US farm lobby seeks maximum access to the huge Chinese market. There is a history of dispute between China and the US over both automobile products and chickens. The two countries have already instituted trade-restricting measures and any new measures may not seriously hurt exporters. Imports from the US of chicken were blocked earlier this year in retaliation for a US block on Chinese poultry products. China has just reduced from 25 percent to 10 percent duties on auto parts after losing its appeal against a WTO ruling.

An all-out China-US trade war is not anticipated. The tyre tariff only affects about 0.3 percent of Chinese exports to the US. Both sides will want to avoid this and the Chinese reactions have been fast but measured. But the issue has to be seen in a broader context. According the WTO, the number of “safeguard” measures has increased from two during the first seven months of 2009 to 16 so far this year. This is a particularly pernicious measure as it is not necessary to prove unfair pricing.

The worry is that the US decision will encourage other countries to act. A trade war between China and the US would inevitably affect the EU, which incidentally is also in dispute with China. Brussels imposed new duties on the import of steel pipes, and China has complained to the WTO over anti-dumping duties on screws and bolts. The protectionist genie has been let out of the bottle and it might be difficult to get it back inside.

(Note: the above is being published as an Asia Briefing by the Brussels Institute of Contemporary China Studies.)

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Comments

  1. Not necessarily. In some fields, protectionist measures, like high tariffs are really necessary, especially when we talk about Chinese imports. The goods imported from China are everywhere, cheaper and preferred by many.

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  2. It is a positive news that Pres. Obama promised to stand up for American workers against unfair trade practices and to prevent companies moving their production abroad. There is a pros and cons here considering there will be some concerns that may be raised in the future, however, officials should always make a check on how he address the concerns of employees as well.

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  3. The problem with both comments is that restricting Chinese imports does not necessarily mean reducing imports because there is no shortage of low cost manufacturing countries. It does, however, penalise US companies producing in China

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  4. Apparently President Obama rides the economic bike with two wheels going into opposite direction. Result: he stays put and will probably come with other and more favorable options for China as soon as he visits the country.

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