A Blowout in U.S.-China Trade?

On Friday, September 11, President Obama decided to levy new tariffs on imported tires from China over a three-year period, after a U.S International Trade Commission (USITC) finding that the domestic tire industry had been harmed by a surge in tire imports of 215 percent since 2004. The decision was taken under Section 421 of the Trade Act of 1974, as amended, which implemented a special safeguard provision to which China agreed in acceding to the World Trade Organization (WTO) in 2001 that allows a country to impose otherwise WTO-inconsistent trade remedies against China if that country experiences a damaging surge in imports from China. While other countries have brought trade actions under this provision in the past, this is the first time the United States has utilized the special safeguard against China. China has reacted to the president’s decision with vehemence, charging the United States with “serious commercial protectionism” and vowed retaliation. The sudden uptick in trade friction between the two countries comes less than two weeks before the meeting of the G-20 group of countries in Pittsburgh on September 24–25.

Q1: Why would the president take this kind of action right before the G-20 meeting?

A1: The president was operating on a fixed timetable set by virtue of a June 2009 finding by the USITC that the surge of Chinese tires “cause[d] or threaten[ed] to cause market disruption to the domestic producers of like or competitive products” and a subsequent recommendation that the president impose new tariffs. The specifics of the case required the president to decide whether to impose those tariffs by September 17. That the president announced the decision nearly a week ahead of schedule probably reflects a desire to let the dust settle on the issue ahead of the G-20 meeting.

The president campaigned on a platform focused on trade remedy enforcement, so delivered on at least part of his campaign promises to a critical part of his political base. He would have been subjected to heavy criticism by organized labor had he rejected the request for tariff protection.

The administration has been quick to point out that invoking a provision of U.S. trade law to which China agreed in 2001 is not necessarily “protectionism.” Even so, the president’s decision is unquestionably a capitulation to domestic political interests that are averse to open markets and free trade. As such, the decision cannot help but cloud discussions between the United States and China at the upcoming G-20 and cast a pall on the administration’s credibility in any efforts to discourage protectionism as part of global economic recovery programs going forward.

Q2: Who is helped by the decision? Who is hurt?

A2: Organized labor certainly scored a big political victory in an ongoing battle to reduce untrammeled access of imports into the United States. Under President Bush, four different Section 421 petitions asking for new tariffs against China were denied. If President Obama had turned down the petition on tires, Section 421 would almost certainly have been eviscerated as a trade remedy tool.

The tire industry did not support the 421 action, in part because most tire producers are foreign multinationals with significant production in other markets. Fewer than 50,000 Americans now work in tire production, and they will undoubtedly feel some temporary relief from a near-term threat of unemployment. However, the heightened tariffs will phase out over three years, so U.S. tire producers will need to significantly restructure if they want to compete with international producers. That would mean streamlining employment in U.S. production, which does not bode well for workers in U.S. tire factories. One other factor threatening U.S. tire production employment: the new tariffs only apply to imports from China; so one possible result will be a shift of imports from China to other low-cost production countries, many of which have capacity to expand production for the U.S. market.

Consumers will be hurt by the decision, because tire prices will inevitably increase (although perhaps only marginally, since imports from other markets will supplant those from China). Tire companies that have recently invested in China—in at least one case specifically to serve the U.S. market—will be badly hurt by the decision. More broadly, the retaliation China has threatened will almost certainly hurt the business community and its ongoing plans for expansion in China’s market.

Q3: Is this the start of a trade war with China?

A3: The special safeguard provision in Section 421 is particularly sensitive within China because it only applies to China and therefore is perceived to be inherently discriminatory against China. Chinese negotiators agreed to the provision under extreme pressure from the United States, and some Chinese public commentators and some in the Chinese leadership have compared it with the “unequal treaties” of nineteenth-century European colonial adventurism. Accordingly, sensitivities to the provision run deep, and China’s domestic politics will demand some retaliatory response to the president’s decision. Retaliation will almost certainly affect U.S. economic interests in China, which could, unless cooler heads prevail, lead to tit-for-tat protectionism. The two sides ultimately have too much at stake in positive economic relations to allow a total meltdown in commercial relations, but given the fragility of the economic recovery, any sign of distress between two of the world’s economic behemoths is not good news for global financial markets.

Charles W. Freeman III holds the Freeman Chair in China Studies at the Center for Strategic and International Studies in Washington, D.C.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2009 by the Center for Strategic and International Studies. All rights reserved.