Say Hello To Protectionism

by Pejman Yousefzadeh on September 12, 2009

I didn’t like the steel, lumber, and paper tariffs that the Bush Administration imposed in order to coddle American industries and keep them from having to undergo the rigors of international competition. And I certainly don’t like the Obama Administration’s decision to keep the protectionist tariff tradition going:

In one of his first major decisions on trade policy, President Obama opted Friday to impose a tariff on tires from China, a move that fulfills his campaign promise to “crack down” on imports that unfairly undermine American workers but risks angering the nation’s second-largest trading partner.

The decision is intended to bolster the ailing U.S. tire industry, in which more than 5,000 jobs have been lost over the past five years as the volume of Chinese tires in the market has tripled.

It comes at a sensitive time, however. Leaders from the world’s largest economies are preparing to gather in Pittsburgh in less than two weeks to discuss more cooperation amid tensions over trade.

The tire tariff will amount to 35 percent the first year, 30 percent the second and 25 percent the third.

Unsurprisingly, with this decision, we are sacrificing the formulation and implementation of intelligent economic policy in favor of kowtowing to union special interests:

Although a federal trade panel had recommended higher levies — of 55, 45 and 35 percent, respectively — the decision is considered a victory for the United Steelworkers union, which filed the trade complaint.

“The president sent the message that we expect others to live by the rules, just as we do,” Leo W. Gerard, president of the union, said Friday night.

But of course, as the story reveals, these measures are utterly and completely silly:

The tariff’s detractors said higher tire prices could lead some consumers to wait longer before replacing tires, creating a safety risk. Moreover, they said, the tariff won’t result in more jobs. Tires will simply come in from other low-cost countries, they say, and U.S. manufacturers, keep making their cheaper tires in China.

“U.S. tire manufacturers years ago decided to move production of low end tires off-shore,” said David Spooner, a lawyer representing the Chinese tire industry. “Frankly, a temporary tariff is not going to get them to change their business plan.”

As Daniel Ikenson points out, the imposition of new tariffs “amount to a crystal clear U.S. disavowal of its pledge to the G-20 to avoid new invocations of protectionism, just one week ahead of the G-20 summit in Pittsburgh.”

Ikenson’s paper on the subject is well worth reading. Key graf:

For a law that is characterized by its champions as a tool to support our producers vis-à-vis Chinese producers and to ensure a level playing field, this test case for Obama pits American workers against American producers, and American workers against American workers. By going after Chinese producers, petitioners ensnare their own employers, as well as fellow American workers, organized or otherwise. Although the lightning rod is China (with all of the negative perceptions that have been cultivated about its trade practices), this case has little to do with China per se, and everything to do with organized labor begrudging U.S. producers for pursuing profit- maximizing strategies in a globalized world. In seeking sanctions, petitioners are asking Obama to indict globalization.

And as Ikenson writes, David Spooner–whose point is mentioned above–is right when he says that this decision will do nothing to change the practice of having U.S. tire manufacturers make their products offshore:

According to data compiled by the ITC staff, the average unit price (based on the customs value) of a tire imported from China in 2008 was $38.98. A 55-percent tariff would drive up the unit value to $60.42. But, in 2008, U.S. producers sold 159 million tires, valued at $11 billion, for an average price of $68.60. Factoring in mark-up of the Chinese price, it is reasonable to conclude that prices of American- and Chinese-produced tires might retail for about the same price. But that outcome is highly unlikely to be incentive enough for globalized tire producers to divert production from China to the United States. Instead, producers are much more likely to shift production to Mexico, Brazil, or Indonesia, where the unit prices in 2008 (based on customs value) were $56.26, $48.93, and $32.10, respectively.

Furthermore, the ITC’s recommended remedy would be in place for three years. The statute expires in four years. What kinds of changes should be expected during the interim that would make the United States a more cost-effective place to produce Tier-3 tires, or any tires for that matter? There are no changes—short of technological advances that raise productivity and reduce the demand for labor—that could make the United States a better place to produce tires. But this case is about jobs and nothing else, so even that outcome wouldn’t satisfy petitioners. Three years of “relief” will do nothing but perhaps defer the day of reckoning, while imposing heavy costs on the rest of the economy, taxing our relationship with China, and further sullying America’s international standing.

(Footnotes omitted). Bear in mind as well that these actions are being taken by an Administration that has done nothing to try to ratify the bilateral trade agreements that have been conducted between the United States and other countries, like Colombia. Its protectionist tendencies are clear, and those tendencies will simply serve to harm American economic interests.

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