Congressman Sander Levin

Decision on Tire Imports from China - The Facts

Setting the Record Straight

There are two essential parts to an effective trade policy in this era of globalization: it is necessary to expand trade; it is also necessary to create and implement rules that govern that expansion. Enforcement of those rules is the opposite of protectionism – and indeed is a weapon against it.

Embracing one of these parts and rejecting the other is self-defeating, accentuating the polarization that has handicapped the discussion and development of effective trade policies.

Another key to avoiding a polarizing debate is to get the facts straight.

The Obama Administration’s decision to provide temporary relief was recommended by the independent International Trade Commission (ITC). The ITC found a market-disrupting surge in tire imports from China based on the facts and spelled out in detail in the majority decision. In the responses to the President’s decision there have been numerous misstatements of the facts. Correcting the record is essential to a useful discussion as the Administration and Congress develop a new and effective U.S. trade policy.

Background

Questions and Answers

• Does the United States make the same low-end tires that Chinese producers do?
• After the tariff is imposed on Chinese tires, will imports from other low-wage countries entirely replace Chinese tires, with no increase in U.S. production?
• China has already indicated they will retaliate, won’t this start a “trade war?”

Setting the Record Straight

Numerous media reports since the tires decision have reported as facts importers’ and retailers’ arguments. But the independent International Trade Commission, and the Administration, thoroughly investigated most of these claims, and usually rejected them.

False Claims

• U.S. and Chinese tires don’t compete against one another.
• Imports from other low-wage developing countries will replace the Chinese tires, providing no benefit for U.S. tire producers.
• U.S. tire companies don’t support the petition.
• “China hadn’t violated trade rules.”
• Even with remedy, U.S. tire producers will not bring back lost jobs.
• Imposing relief will cost the United States more jobs (at tire distributors) than it
  creates, and it will cost consumers as well.
• China has already asked for WTO consultations, and has threatened to impose antidumping duties on U.S. chicken and auto parts exports to China. This cycle of retaliation begun by the imposition of the U.S. 421 remedy threatens to start a trade war that could undermine the entire world trading system.
• Imposing relief from the market disruption caused by imports from China would
  violate the pledge that President Bush made at the G-20 Summit in November 2008 (and the Obama Administration supported in the subsequent Summit in London) to
  “refrain from raising new barriers to investment or trade.”
• The United States needs to set an example of an open economy. If it fails to do
  so, others will follow with even more damaging forms of protectionism – just like Smoot
  Hawley during the Great Depression. And this action, combined with things like the “Buy
  America” policy in the American Recovery and Reinvestment Act, may trigger a trade war.
• The Bush Administration’s Steel Safeguard Lesson: President Bush imposed the steel safeguard to “show his trade toughness and help create a new pro-trade consensus in Congress.” But this decision backfired: it “undermined American trade leadership and Mr. Bush’s personal credibility around the world, making it easier for other countries to resist the Doha Round of tariff reductions. Eight years later, Doha still isn’t finished[.]”
• Increased productivity, through “competition” and “technological change,” is the cause of the hardship U.S. tire workers have faced in recent years.
• “The prospect of a trade war with China fueled fears of wider fallout … rattling bond markets[.]”

Background

When China joined the WTO, it agreed that other WTO Members would have the right, for a period of 12 years, to provide temporary relief from any “market disruption” to a domestic industry caused by a surge in imports from China. (Article 16 of the WTO Protocol on the Accession of the People’s Republic of China.) Under the rules governing China’s WTO membership, “market disruption” exists whenever imports “are increasingly rapidly ... 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 United States is required to consider factors “including the volume of imports, the effect of imports on prices ..., and the effect of such imports on the domestic industry[.]”

In the tires case, the independent, bipartisan International Trade Commission (ITC), after an extensive investigation, concluded that a surge of low-priced Chinese tires had injured the U.S. tire industry. Of particular note, the ITC found that there had been a substantial and sudden surge in Chinese tire imports (a tripling of imports from 14.6 million in 2004 to 46.0 million in 2008) and evidence of persistent underselling by the Chinese (Chinese prices were 23-25 percent lower than U.S. prices in 2007 and 2008, the highest years of the surge). Over the same period, the ITC documented that the U.S. tire industry’s sales fell by 30 percent, and more than 5,000 workers lost their jobs.

In response to this surge, and based on both the ITC investigation and its own independent assessment, the Obama Administration announced tariffs on Chinese tires. The tariffs, 35 percent in the first year, 30 percent in the second, and 25 percent in the final year, are aimed at returning Chinese tire imports to pre-surge levels, and restoring the health of the U.S. industry.

Questions and Answers

Question: Does the United States make the same low-end tires that Chinese producers do?

Answer: Yes. The U.S. International Trade Commission (ITC), an independent government agency, thoroughly investigated the claims that U.S. tire producers no longer make the type of low-end tires that form the bulk of imports from China. The ITC collected data on the number of tires sold into each market tier, and found that U.S.-produced tires and imports from China both have a significant presence in the lower two tiers of the tire market. ITC also found that both U.S. and Chinese tires were present in the top tier and the OEM market. Even the two ITC Commissioners that dissented (and voted against relief) acknowledged that U.S. tire producers are still present throughout all levels of the U.S. tire market.

Question: After the tariff is imposed on Chinese tires, will imports from other low-wage countries entirely replace Chinese tires, with no increase in U.S. production?

Answer: China had a small share of the U.S. market in 2004, and third-country tire producers did not flood the U.S. market. There is no reason to expect that they will do so now.

As recently as 2004, Chinese tires were less than 5 percent of the U.S. market. They surged to almost 17 percent of the market in 2008. Over that same period, U.S. tire makers went from supplying 63 percent of the market to supplying 50 percent of the market. However, third-country tires’ share of the U.S. market was virtually unchanged, rising minimally from 32 percent in 2004 to 34 percent in 2008. These data indicate that Chinese tires are competing with, and displacing, U.S. tires, not third-country tires.

When the ITC ran its economic model to determine its remedy recommendation, and when the Administration ran a similar model, both estimated the effect of increased imports from third countries as well. In both cases, while imports from third countries increased, they did not increase enough to prevent the U.S. industry from benefitting as well.

Question: China has already indicated it will retaliate, won’t this start a “trade war?”

Answer: China has a right to bring a complaint in the WTO, though it is highly unlikely that such a complaint would have merit. It also has the right to file antidumping cases. However, it does not have a right to file such cases merely to retaliate against a WTO-legal measure. Such retaliation is illegal under the WTO. (Article 23 of the Dispute Settlement Understanding.) If it does so, we may file a complaint against China. But the United States would not respond with retaliatory actions, so risks of a “trade war” are overblown.

Setting the Record Straight

Numerous media reports since the tires decision have reported as facts importers’ and retailers’ arguments. But the independent International Trade Commission, and the Administration, thoroughly investigated most of these claims, and usually rejected them.

CLAIM: U.S. and Chinese tires don’t compete against one another. The United States makes “high-end tires, leaving cheaper grades to foreigners.” Thus, the remedy will not help U.S. tire producers. (“Tracking Tires,” Art Pine, The National Journal, September 21, 2009; see also “First Strike in a Trade War?” David Broder, The Washington Post, September 17, 2009.)

THE FACTS:

The vast majority of tire market participants disagree with this claim. In its investigation, the independent ITC sent out questionnaires to U.S. producers, importers, and purchasers. Almost all respondents (45 out of 54) reported that U.S. and Chinese tires are “always” or “frequently” used interchangeably. The ITC compiled the results of its questionnaires in table V-6 of its report (which includes over 150 pages of data and analysis).

Perceived Degree of Interchangeability

The ITC also collected pricing data on six specific types of tires (e.g., each representing a particular size, speed rating, load index, and type), covering 14 percent of U.S. shipments and 36 percent of Chinese shipments. In all six cases, the data show that U.S. and Chinese tires competed against one another in the U.S. market.

Furthermore, the ITC devoted 11 pages of its decision to explaining why it believed that Chinese tires were a significant cause of injury to the U.S. industry, a decision based on the data gathered in the investigation. Among its findings, the ITC found that tires from China are sold in all three supposed “tiers” of the market, just like U.S. tires, and that U.S. producers continue to produce significant volumes of low-end tires.

CLAIM: Imports from other low-wage developing countries will replace the Chinese tires, providing no benefit for U.S. tire producers:

• “[T]ariffs on Chinese tires would probably boost U.S. imports from countries like Poland and Mexico.” (“Threat of Trade War With China Sparks Worries in a Debtor U.S.,” Steven Mufson and Peter Whoriskey, The Washington Post, September 15, 2009.)
  
  
• “Tire makers from other countries such as Mexico and Venezuela will be able to fill the gap[.]” (“Tracking Tires,” Art Pine, The National Journal, September 21, 2009.)
  
  
• Firms would “simply import cheap tyres from … India and Brazil.” (“Economic Vandalism,” The Economist, September 17, 2009.)
  

THE FACTS:

Data compiled by the ITC demonstrate that China took market share almost exclusively from U.S. producers, with third-country imports stable and virtually unchanged. As the following chart demonstrates, Chinese tires were less than 5 percent of the U.S. market in 2004. They surged to almost 17 percent of the market in 2008. Over that same period, U.S. tire makers went from supplying 63 percent of the market to supplying 50 percent of the market. However, third-country tires’ share of the U.S. market was virtually unchanged, rising from 32 percent in 2004 to 34 percent in 2008. These data indicate that Chinese tires are competing with, and displacing, U.S. tires, not third-country tires.

When the ITC ran its economic model to determine its remedy recommendation, and when the Administration ran a similar model, both estimated the effect of increased imports from third countries as well. IN both cases, while imports from third countries increased, they did not increase enough to prevent the U.S. industry from benefitting as well.

CLAIM: U.S. tire companies don’t support the petition. “The U.S. tire industry opposed the imposition of tariffs.” (“Tracking Tires,” Art Pine, The National Journal, September 21, 2009. “Economic Vandalism,” The Economist, September 17, 2009. “Getting a grip on Chinese tyres,” The Financial Times, September 15, 2009.) And “this complaint came from labour unions in the steel industry, which supplies tyre makers.” (“Getting a rip on Chinese Tires,” Financial Times, September 16, 2009.

THE FACTS:

The complaint came from the tire workers’ union, which is part of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, or USW. U.S. tire manufacturers did not take a public position on the petition, although two (out of ten) U.S. tire producers opposed the ITC’s recommended 55 percent remedy. Their silence likely reflects the fact that many of them also produce tires in China. What is more, U.S. manufacturers operating in China likely fear that expressing their views in this case could cause Chinese officials to retaliate against them (a concern many U.S. companies operating in China have expressed over the past few years).

CLAIM: “China hadn’t violated trade rules.” (“Tracking Tires,” Art Pine, CongressDailey, September 21, 2009; see also interview with Daniel Price on PBS News Hour with Jim Lehrer, September 15, 2009.)

THE FACTS:

The 421 law does not require a finding that the market-disrupting Chinese tires be unfairly traded. The law was crafted this way to take into account trade distortions that may result from China’s ongoing transition from a completely state-run economy.

The China safeguard, like the predecessor statute it is based on – section 406 of the 1974 Trade Act – aims at addressing market disruption due to trade with an economy where trade patterns do not necessarily result from comparative advantage or market conditions. The Senate Finance Committee described section 406 in the following terms:

“The Committee recognizes that a communist country, through the control of the distribution process and the price at which articles are sold, could disrupt the domestic markets of its trading partners … in particular, exports from communist countries could be directed so as to flood domestic markets within a shorter time period than could occur under free market conditions. … In the face of such imports, traditional unfair trade remedies … have proved ineffective because of the difficulty of their application to products from State controlled economies.”

Nevertheless, the ITC investigation in this case revealed that China appears to be engaging practices that unfairly distort Chinese tire exports. It appears that at least one U.S. tire producer operating in China was required to agree to export all of the tires it produces at one factory in China. Such export requirements are trade distorting and clearly inconsistent with the commitments China made when it joined the WTO. Further, tire exports from China are heavily distorted as a result of China’s massive interventions in the exchange-rate market, which effectively keeps the prices of China’s exports artificially low. And, during the period of the tire investigation, China provided foreign-invested enterprises with subsidies for exporting products – a practice prohibited under WTO rules. It only agreed to end those subsidies when the United States filed a formal WTO challenge.

CLAIM: Even with remedy, U.S. tire producers will not bring back lost jobs. The Economist stated that “no one can seriously imagine that any American tyre-making job will be saved.” (“Economic Vandalism,” The Economist, September 17, 2009.)

THE FACTS:

U.S. tire producers have numerous plants still producing passenger tires. Indeed, tires produced in the U.S. in 2008 still held 50% of the U.S. tire market. Moreover, with several scheduled closures this year and last year, producers may even reconsider, and re-open. The tire market has obviously been affected by the recession in the larger economy, but at the very least, the remedy may well stem the massive job loss the industry has seen during the course of the Chinese surge.

CLAIM: Imposing relief will cost the United States more jobs (at tire distributors) than it
creates, and it will cost consumers as well. (Thomas J. Prusa, “Estimated Economic Effects of the Proposed Import Tariff on Passenger Vehicle and Light Truck Tires from China,” July 26, 2009. Prepared for American Coalition for Free Trade in Tires. Cited in “Obama’s Trade Test,” The Wall Street Journal, August 4, 2009.)

THE FACTS:

There is no reason to think that tire distributors will need to lay off workers as a result of the remedy. Following imposition of the remedy, tires (whether U.S., Chinese, or third-country) will still be present in the U.S. market. Furthermore, as recently as 2005, U.S. production and third-country imports together were enough to supply 2008 U.S. demand.

It is also important to remember that economists rarely take into consideration the long-term economic benefits of having a large and healthy manufacturing sector and middle class workforce. Temporary relief from a surge in imports can contribute to these long-term benefits. In past instances where the United States has provided safeguard relief, such as the section 201 decision on motorcycles in the 1980s, the long-term benefit to the U.S. economy from the temporary import restriction became clear years later: Harley-Davidson emerged as a world class manufacturer of motorcycles.

CLAIM: China has already asked for WTO consultations, and has threatened to impose antidumping duties on U.S. chicken and auto parts exports to China. This cycle of retaliation begun by the imposition of the U.S. 421 remedy threatens to start a trade war that could undermine the entire world trading system. (“Tired Protectionism,” New York Times, September 19, 2009. “First Strike in a Trade War?” David Broder, The Washington Post, September 17, 2009.)

China’s threats of retaliation were a “measured” and “tit-for-tat” response to the U.S. 421 action. (See “Getting a grip on Chinese tyres,” The Financial Times, September 15, 2009.)

THE FACTS:

Unilateral retaliatory measures are a clear violation of WTO rules and a threat to the multilateral trading system.

A frictionless U.S.-China relationship – based on the United States not exercising its legal rights – cannot be the standard for how the United States approaches trade policy. When it joined the WTO, China granted the United States the right to impose this safeguard. China should not take offense when the United States exercises the right China granted to it.

It is also important to understand what a remedy would do. It is not designed or expected to eliminate tire imports from China, but simply to return those imports to their pre-surge levels of a few years ago. Finally, it is important to put this decision in perspective. Tire imports represent just 0.5 percent of total imports from China. And the United States has applied other trade remedies (in the form of antidumping duties and duties to address trade-distorting subsidies) to imports from China without harming the U.S.-China relationship.

CLAIM: Imposing relief from the market disruption caused by imports from China would
violate the pledge that President Bush made at the G-20 Summit in November 2008 (and the Obama Administration supported in the subsequent Summit in London) to “refrain from raising new barriers to investment or trade.” (“Obama’s Tire Tariff: Bad Policy, Right Message,” Robert Samuelson, The Washington Post, September 21, 2009. “Economic Vandalism,” The Economist, September 17, 2009.)

THE FACTS:

Section 421 should not be viewed as a “barrier” to trade. It was part of a bill to liberalize
trade (more specifically, to grant “permanent normal trade relations” to China). It is a tool to address trade-distorting government policies as China transitions into a market economy. For example, in this specific case, when a U.S. tire producer sought to open factories in China, it appears the Chinese government mandated that all tires produced in those factories would be exported to foreign markets for the first five years of operation. That trade-distorting policy of the Chinese government is cause for concern; efforts to address it through WTO-negotiated rights are not.

It is also worth noting that the massive and unprecedented global trade imbalances –
due in part to trade-distorting policies such as exchange rate intervention – contributed to the global economic crisis that the G-20 leaders were attempting to address last November. Section 421 helps to address those imbalances, through a WTO-sanctioned mechanism, when a surge in imports from China causes “market disruption” in the United States.

CLAIM: The United States needs to set an example of an open economy. If it fails to do
so, others will follow with even more damaging forms of protectionism – just like Smoot
Hawley during the Great Depression. And this action, combined with things like the “Buy
America” policy in the American Recovery and Reinvestment Act, may trigger a trade war. (See “Playing with Fire,” The Economist, September 17, 2009. “Present at the Trade Wars,” David Rockefeller, The Washington Post, September 21, 2009.)

THE FACTS:

Trade liberalization and expansion can provide tremendous benefits to workers and businesses both here and abroad. But a sudden, “market disrupting” surge in imports (in this case, more than a doubling of imports and a substantial decline in U.S. production between 2004 and 2008) can cause more harm than good to the economy. Temporary import relief not only is justified, it is also necessary to restore the public’s confidence in what is generally a very open U.S. trade policy. (The United States has one of the most open economies in the world.)

Further, the China Safeguard should be viewed in its broader context. Section 421 was
part of a larger package (China’s entry into the WTO and permanent normal trade relations legislation) that liberalized trade between China, the United States, and other WTO Members. The United States recognized that, while China was making its transition to a market economy, U.S. industry and workers should have recourse when they are harmed by competition with Chinese government supported businesses.

CLAIM: The Bush Administration’s Steel Safeguard Lesson: President Bush imposed the steel safeguard to “show his trade toughness and help create a new pro-trade consensus in Congress.” But this decision backfired: it “undermined American trade leadership and Mr. Bush’s personal credibility around the world, making it easier for other countries to resist the Doha Round of tariff reductions. Eight years later, Doha still isn’t finished[.]” (“Obama’s Trade Test,” The Wall Street Journal, August 4, 2009.)

THE FACTS:

Waiving the rights that we negotiated in past trade agreements (such as the right to
temporary relief from market-disrupting surges in imports from China) does not undermine U.S. leadership or our credibility with trading partners. Such a passive approach is rarely a good recipe for success in international trade negotiations.

Moreover, there is simply no basis for the claim that the steel safeguard is contributing to the ongoing struggle in the Doha Round – “eight years later”. Indeed, President Bush self-initiated the safeguard case in June 2001, and the Doha Round began five months later. Just as it would be nonsense to suggest that the steel safeguard caused WTO Members to initiate the Doha negotiations, it would be nonsense to suggest that the steel safeguard has impeded progress in the Doha Round. (Also note that the steel safeguard was a “global” safeguard that applied to imports from all countries, whereas the safeguard in this case only applies to imports from China.)

CLAIM: Increased productivity, through “competition” and “technological change,” is the cause of the hardship U.S. tire workers have faced in recent years. (“Getting a grip on Chinese tyres,” The Financial Times, September 15, 2009.)

THE FACTS:

There is no evidence in the ITC report supporting this claim. But there is evidence to the contrary: data from the investigation show that productivity at U.S. plants dropped from 2004 to 2008, with its lowest level coming in 2008. This drop is not consistent with technological change, but rather downsizing when productive factories are closed.

CLAIM: “The prospect of a trade war with China fueled fears of wider fallout … rattling bond markets[.]” (“Threat of Trade War With China Sparks Worries in a Debtor U.S.,” Steven Mufson and Peter Whoriskey, The Washington Post, September 15, 2009.)

THE FACTS:

On September 14th, the first trading day after the decision, the Wall Street Journal said that “Treasury prices slipped Monday as market participants took some profits after hefty gains last week and as stock prices perked up. The losses came on what was an overall subdued day of trading, with no key economic data to digest.” This description hardly matches predicted rattling of bond markets. Similarly, the exchange rate between the U.S. dollar and the Chinese yuan has barely budged since the remedy was announced.

(Updated September 23, 2009)