US tire tariffs shortsighted and unwise

• Source: Global Times
• [00:05 September 08 2009]
• Comments

Editor's Note:

US President Barack Obama is facing a tough decision in US-China relations. He must make a decision on whether to impose tariffs on the Chinese tire imports by September 17. The proposed tariff of 55 percent was approved by the US International Trade Commission and sent to the president for a final decision. It could be the first major test of the White House's trade policy toward China. The Global Times (GT) special correspondent Li Yan asked Michael Spence (Spence), a Nobel-winning economist, and Barry Bosworth (Bosworth), former presidential advisor and currently senior fellow at Brookings Institute based in Washington, to analyze the decision's potential impact on China-US relations.

GT: Do you consider the China tire tariff as a case of trade protectionism? If so, how does it compare to the trade protectionism in the past?

Spence: As I understand this case, it is brought under the heading of significant damage to the US domestic industry and hence is potentially eligible for temporary protection under WTO rules. In that sense it is not new; these rules have been in place for some time. And cases like this have come up in the past.

Bosworth: Yes. It's really an action with very little merit. The whole idea of the 401 cases, based on a faulty premise of disruption to the US economy, rather than some form of unfair trade, is a bad idea, but China had to agree as part of its entry to WTO. The 401 provisions will go away in a few years.

These imports of low-price tires are not a competitor to the US producers and not a cause of the decline in production of domestic high-quality tires. If it is enforced, production will simply shift to some other low-wage producer.

GT: President Obama must make a decision by September 17. If he backs the tariffs, it will raise concern among Chinese that the trade protectionism will extend into other industries. Do you think it will happen?

Spence: I would expect the president and his advisors to make the decision on the merits of the particular case. I don't think that any single case is likely to determine a pattern.

It's worth noting that globally the car industry was hit heavily by the crisis, and that included suppliers to the secondary and replacement markets. This kind of situation will become less frequent and less likely once the major economies emerge from the crisis and return to a normal pattern of growth.

Bosworth: Hard to say. It involves international versus domestic politics. I believe other countries will interpret it as a violation of the pledge to avoid trade protectionism. However, it is a complex legal issue because China did accept the provision to obtain entry to the WTO.

GT: As economic and trade experts, what are your suggestions to Chinese enterprises to deal with the tariff and tighter protectionism when exporting to the US?

Spence: First, export markets and opportunities will continue to be available and attractive to Chinese enterprises. The headwinds, if I can put it that way, in the short and medium run are likely to be slower growth and higher savings in the US and generally slower growth in the advanced countries.

Also the Chinese yuan is likely to resume the pattern of managed appreciation as the crisis abates, and this will bring increased pressure on margins and requires a focus on productivity offsets.

Structural change in the Chinese economy is well underway and I expect that Chinese enterprises will find it attractive to expand and adjust their product portfolios as the competitive conditions evolve.

In addition, expanding personal disposable income and consumption is likely to be a policy priority in China in the coming years. That will cause domestic opportunities to expand, in tradable and non-tradable goods and services sectors.

The economic growth in China seems to be coming back nicely. Chinese enterprises and the economy are dynamic and flexible, key positive attributes in a global economy that is evolving very rapidly.

Bosworth: It is a foolish case, but China did agree to the 401 provisions. It would be best to avoid dramatic surges of exports so as not to give a basis for these actions.

China should, however, vigorously protest such actions as a violation of US commitments to the G20 efforts to solve the current crisis, and China should consider taking it to the WTO for adjudication.

GT: What do you think of the China trade policies of the Obama administration?

Spence: The Obama administration entered office in the midst of a global financial and economic crisis. As part of the crisis response, many countries, including the US and China, have introduced what look like protectionist measures.

This is understandable as the government is using resources to limit damage to the domestic economic and financial systems.

The challenge will be to remove the protectionist measures once the crisis is passed. This will be a major responsibility of the G20. In this context it is hard to know yet what the Obama administration's post-crisis policies with respect to trade and financial openness will be.

My best guess is that they will adopt an open trading policy and be supportive of restoring the openness of the global economy.

Bosworth: They have not dealt with any major issues yet. I do like the effort to have a greater exchange of views.