Section 421: Administration Defends Decision To Protect US Tiremakers By Noting That It Could Dramatically Increase Other Tire Imports

As I've noted repeatedly, the Obama Administration's defense of the President's decision to restrict Chinese tire imports under Section 421 of US Trade Law has thus far rested on the flimsy assertion that the protection was absolutely necessary to ensure proper enforcement US law or global trade rules. Well, perhaps realizing just how misleading that argument is, United States Trade Representative (USTR) Ron Kirk today opened up a new, and bizarrely honest, line of rationalization. Here's the AFP with the news (emphasis mine):

A spat over US tariffs on Chinese tires need not trigger a trade war between Washington and Beijing, US Trade Representative Ron Kirk said Wednesday.

"I don't believe it should or need spark any trade war," Kirk said during a visit to Brazil.

"In the short-term it could mean that we buy a lot more tires from Brazil," he added to a conference of Brazilian businesspeople.

In other words, the United States Trade Representative is telling America's trading partners that their concerns re: Section 421, a US-China trade war and an increase in global protectionism are totally misplaced. Indeed, instead of being upset, they should actually be thrilled about the 421 decision because banning Chinese tire imports from the US market could lead to a big increase in their own tire exports to America. Huzzah!

Actually, Kirk is totally right about the inevitable "trade diversion" resulting from the tire tariffs. I'm just baffled that he has the audacity to acknowledge it, and I wonder whether Kirk's rare moment of unscripted candor is a real gaffe.

As I noted over the weekend, there is ample historical and empirical evidence that restricting imports of a product from one country typically leads to surges in other countries' imports of like products, rather than increases in domestic production. Indeed, this was the very argument offered up by economists, free traders, US tire dealers, and the Chinese and American tire producers as to why Section 421 protection was (and remains) a bad idea. Of course, President Obama ultimately disagreed with this argument and imposed 35% tariffs on Chinese tires, effectively purging them from the US market.

But here's where Kirk's statements in Brazil make things interesting.

As I've already noted several times, under Section 421 the President will impose trade protection unless he determines that "such relief is not in the national economic interest of the United States or... 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. In other words, in making his decision President Obama was required by law to restrict Chinese tire imports unless he found that the costs of such protectionism would be "clearly greater" than the benefits.

In this case, the "costs" to the US economy are those broadly borne by US tire consumers, as well as downstream companies (tire importers, tire retailers, auto manufacturers, etc.) and their employees. Rutgers economist Thomas Prusa estimates that the costs of 421 protection to consumers alone would be $600-700 million per year, and could also threaten the jobs of the approximately 200,000 Americans who work in the downstream US tire industry. So the potential costs are obviously pretty high. The potential "benefits" of tire protection, on the other hand, would be narrowly focused on US tire manufacturers and their employees (represented by the United Steelworkers Union). The USTR news release announcing the 421 decision highlights these alleged benefits in its opening paragraph: "Following what the ITC determined was a surge, production of similar products in the U.S. dropped, domestic tire plants closed, and Americans lost their jobs. Today's steps are designed to level the playing field for American workers in the tire market." So the intended benefits of keeping Chinese tires out of the US market are increased (or at least stabilized) US tire production and employment. (Lots of other public support for 421 also cites these "benefits.")

The President's Section 421 decision therefore reflected a statutorily-mandated determination that eliminating Chinese tires from the US market would provide benefits to the USW and the domestic tire industry that were greater or equal to the adverse effects of such protection on tire consumers and downstream users.

Now here's my two-part question:

(1) Given the USTR's candid admission in Brazil that the Chinese tires removed from the US market by Section 421 relief could be replaced by Brazil's (and probably other countries') tires instead of American-made tires, how would 421 "benefit" US tiremakers and the USW? Can there possibly be any tangible benefit at all? It would seem to me that there can't be much - that large-scale trade diversion would eliminate pretty much all benefits to the US industry, just as 421's opponents argued all along.

(2) If there is no (or very little) "benefit," then how could President Obama determine, as he was required to do so by law, that the harms of Section 421 protectionism were not "clearly greater" than the (seemingly non-existent) benefits to the domestic industry? Is Kirk's assertion that Chinese tires could be replaced by Brazilian imports unintentional recognition that the President's decision under 19 U.S.C. 2457(k) was bogus?

In other words, did USTR's new "defense" of Obama's Section 421 decision just effectively undermine that decision's requisite legal basis?

Granted, Kirk's statements contain lots of the usual equivocation and ambiguity, so I'm not calling for congressional investigations or anything. But it sure seems to me that this revelation is pretty important and definitely warrants further exploration and follow-up with USTR, especially considering the numerous negative ramifications of the 421 decision beyond the direct economic harms mentioned above.

UPDATE: For anyone who thinks that the ITC's recommendations somehow exonerate the President of his responsibility for the 421 decision (and thus USTR Kirk for his unscripted moment of truth), please note the following:

1) As Chairman Aranoff clearly states on p. 42 of the ITC report linked above, the Commission is not legally bound to consider nonsubject (e.g., Brazilian) imports when deciding a remedy, only whether the "proposed tariff scheme will remedies the market disruption attributable to subject [Chinese] imports."

2) I ask you to read footnote 209 of the majority opinion and pages 59-66 and 70-71 of the dissenting opinion in the ITC report. In the footnote, the majority acknowledges that (a) their recommended protection would cost US consumers "$459 million to $534 million" in the first year alone, and (b) including increased tariff revenue (which assumes, of course, that Chinese imports could still compete post-tariffs) the net impact on the US economy would range from a "$71.0 million loss to a $73.3 million gain." In other words, even by the majority's estimates, US consumers lose hundreds of millions of dollars, and the relief has an equal chance of harming the US economy as of benefiting it. And that's based on many assumptions that are very, very favorable to the domestic tire industry, including a basic disregard for the fact that American tire manufacturers uniformly indicated that they would not, contrary to the ITC's models, make changes to their domestic operations (i.e., increase production of products that competed directly with the Chinese tires) if protection were imposed. The dissent, on the other hand, demonstrated that a high tariff would effectively ban Chinese tires from the US market, would not benefit US producers, and would harm US consumers, almost all of whom are on the lower end of the income spectrum. Hmmm.