In tacit recognition of just how bad a decision the President has made, the White House quietly announced at about 9:45p tonight (Friday) that the United States would impose prohibitive tariffs on imports of Chinese consumer tires under "Section 421" of US Trade Law. Here's the WSJ with the pretty shocking news (emphasis mine):
The Obama administration will put steep import duties on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs, U.S. Trade Representative Ron Kirk announced Friday night.Wow. Where to begin. I'm going to leave the substance of the decision itself to my earlier posts and this great new analysis by Dan Ikenson on the case's merits and potential impact. Instead, I want to make absolutely clear just what happened tonight. (Bear with the excruciating detail; it's very necessary.)
The announcement of 35% import tariffs, which would decline to 30% in the second year and 25% in the third, comes at a sensitive time. The heads of state of the 20 largest economies arrive in Pittsburgh in less than two weeks for a summit of the Group of 20, amid rising trade tensions and looming economic disputes. The United States needs China to help float a U.S. deficit expected to reach $1.56 trillion this year. President Barack Obama is also likely to seek new sanctions against Iran to combat its nuclear program, and China's vote on the United Nations Security Council is pivotal.
But administration officials said the president could not ignore findings that they said were violations of China's obligations under the rules of the World Trade Organization.
"The President decided to remedy the clear disruption to the U.S. tire industry based on the facts and the law in this case," White House spokesman Robert Gibbs said in a statement.
Between 2004 and 2008, China's tire production capacity surged by 152% and is projected to jump an additional 16% by 2010. At 235.2 million tires, China's production capacity in 2008 was more than three times greater than its shipments to its home market. U.S. imports of tires from 2004 to 2008 jumped from 14.6 million to 46 million. China's share of the U.S. tire market surged 255% in that time, to 16.7% from 4.7%.
Meanwhile, four U.S. tire plants closed in 2006 and 2007. Three more are planned for closure this year. There were 5,168 fewer workers in the U.S. tire industry in 2008 than there were in 2004.
"When China came in to the WTO, the U.S. negotiated the ability to impose remedies in situations just like this one," Mr. Kirk said. "This Administration is doing what is necessary to enforce trade agreements on behalf of American workers and manufacturers. Enforcing trade laws is key to maintaining an open and free trading system."
Mr. Kirk said U.S. trade negotiators consulted with China and timed the release for the start of the Chinese business day. The first tariffs should take effect in 15 days. The tariffs would come on top of 4% tariffs already levied on all passenger and light-truck tires imported into the U.S. market.
Mr. Obama campaigned for the presidency using tough trade rhetoric and appealing to union workers. He said he would renegotiate the North American Free Trade Agreement to incorporate stricter labor and environmental standards. And he said China must abide by the rules of the WTO or face consequences.
Since Inauguration Day, however, the president has toned down his stand. At the April G20 meeting in London and the July G8 meeting in Italy, he led leaders pledging to resist protectionism as a global recession led to rising worker anger. But administration officials have indicated they were taking a stern look at the ITC's findings of an unfair Chinese export surge in the tire market. Mr. Obama announced last night he was instructing the secretaries of commerce and labor to expedite consideration of additional tire worker assistance under the Trade Adjustment Assistance program, which offers education, retraining and other aid to workers whose lives were disrupted by trade agreements and unfair trade practices.
First, let's correct the "record" above because it will be repeated ad nauseam over the next few days:
(A) Section 421 has nothing to do with "unfair" trade. It's only a determination of whether (i) the subject imports have "surged" and (ii) that surge has injured (i.e., created a "market disruption" for) US producers of like products. Here's the ITC's own summary of China safeguards under Section 421:
Under section 421 of the Trade Act of 1974, the Commission determines whether imports of a product from China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products. If the Commission makes an affirmative determination, it proposes a remedy. The Commission sends its report to the President and the U.S. Trade Representative. The President makes the final remedy decision. (For further information, see section 421, Trade Act of 1974, 19 U.S.C. 2451.)Please note the conspicuous absence of a word about "unfair trade" or "violations of US law." That's because, unlike antidumping or countervailing duty investigations, China-specific safeguards do not address or remedy unfair trading practices. So technically, China has done nothing "wrong" here other than to sell lots of tires - that Americans obviously want and benefit from - in the United States. Oh, the humanity! (Full text of Section 421 is here if you're interested.)
(B) The decision also has nothing to do with "violations" of China's WTO obligations or general WTO rules. China agreed to accept the imposition of safeguards on its imports in its WTO accession protocol, but that agreement, which is reflected in US law by Section 421, does not deal with unfair trade or violations of China's obligations under WTO rules or of its agreement to join the WTO (China's "accession protocol"). In particular, Article 16 of the protocol allows WTO Members to impose safeguards on Chinese imports where "products of Chinese origin are being imported into the territory of any WTO Member in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products." (The whole text is here; see pp. 9-10.) And Article 16 goes on to define "market disruption" as--
whenever imports of an article, like or directly competitive with an article produced by the domestic industry, are increasing rapidly, either absolutely or relatively, 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 affected WTO Member shall consider objective factors, including the volume of imports, the effect of imports on prices for like or directly competitive articles, and the effect of such imports on the domestic industry producing like or directly competitive products.Please note the conspicuous absence of language on "violations" or "noncompliance" or "inconsistency" with WTO rules or obligations. By contrast, here's the latest WTO panel ruling that China violated its WTO obligations with respect to measures restricting trade in audiovisual products. The repeated use of the term "inconsistent" throughout that document indicates a "violation" by China of WTO rules. Section 421 and Article 16 have no such references because, again, they do not seek to remedy illegal behavior. Despite what USTR Kirk, Press Secretary Gibbs, USW President Leo Gerard, or anyone else claims.
(C) This decision will not help the "US tire industry," as not a single member of the US industry supported the tires case and most have argued against the ITC remedy. It will, however, help the USW and other unions that bring - or threaten to bring - similar cases, as well as the President's re-election and domestic policy efforts (of course).
Second, let's also be very clear that, contrary to USTR Kirk's statement, this decision also has nothing to do with "enforcing trade agreements" or enforcing US trade law. As I've said before, Section 421 provides the President with complete discretion under the law to disregard the recommendations of the ITC where "such relief is not in the national economic interest of the United States or, in extraordinary cases, that the taking of action pursuant to subsection (a) of this section would cause serious harm to the national security of the United States." See 19 U.S.C. 2457(k). "Not in the national economic interest" is then defined as where "taking of such action would have an adverse impact on the United States economy clearly greater than the benefits of such action." Id. There's plenty of evidence out there that these tariffs will not benefit American tire producers (who, again, didn't support the 421 relief) and would harm many more Americans - consumers, importers, tire merchants and automobile manufacturers - than were allegedly harmed by the surge in Chinese tires. However, even if one were to argue that the economic evidence is mixed on this issue, the express discretion provided under Section 421 means that a Presidential decision to reject the ITC recommendation is as much "enforcing" Section 421 as is a decision to impose the recommended relief. To claim that the President's action tonight denotes "stronger enforcement" of US trade agreements is therefore wholly misleading. Tsk tsk, Ambassador Kirk. Tsk tsk.
Third, tonight's decision provides ample evidence that, in the important choice between a coherent, economically-sound trade policy that advances American foreign policy interests and placating political supporters, President Obama strongly prefers the latter. We saw glimpses of this with Buy American and the NAFTA Trucking issue, but those costly international incidents theoretically could be blamed on a protectionist Congress and/or a new and unprepared White House staff. The Section 421 decision, on the other hand, forced President Obama alone to choose between--
- the narrow interests of the United Steelworkers Union (USW); and
- everyone else in America, the United States' image as the world's free trade leader, and the future of both the American and global economies. (More on that choice here.)
Finally, the timing of the announcement tells us a lot about the Obama Administration and it's true feelings about the Section 421 decision. The White House has become quite notorious for it's "Friday night news dumps," in which it releases bad or embarrassing news late on a Friday night (or in Van Jones' case, early Sunday morning) in order to keep it under the media radar. So if, as USTR Kirk claims, the President's decision to support the USW and effectively ban Chinese tire imports from the US market is a bold and important statement about enforcing trade laws in order to "maintain an open and free trading system," then why not release it first thing Monday morning? Or, better yet, why not do it mid-week as part of a strong statement on US trade policy in anticipation of the upcoming G20 summit? (The decision wasn't due until September 17th afterall.)
The answer to those questions seems pretty straightforward, doesn't it: the Obama Administration knows precisely how embarrassing the President's decision is, and it thus has cowardly tried to bury the story by releasing it at 10pm on a Friday night.
On the bright side, after months of ambiguity and delay, we now have a very clear view of the future of US trade policy under the Obama Administration. Unfortunately, it's a policy that will consistently favor short-term political gain over the United States' broader economic and foreign policy interests. We also get to sit back and watch the President get an absolute earful from his G20 counterparts. If you thought that last month's "Three Amigos" summit was bad, just wait 'till Pittsburgh.
But at least we trade lawyers should be busy with that flood of new Section 421 cases. Hooray, billable hours! (Ugh.)
UPDATE: Just because a few readers have asked, I am in no way involved in the Section 421 litigation. The comments above are those of an interested observer, not an advocate for any party involved in the case.