USTR Looking Into Increasing Imports of... Tires?!?

For your ever-expanding "Do They Have A Clue?" file (maybe cross-referenced in your "It's All Politics" file), comes seemingly bizarre news today from the US International Trade Commission (ITC) that the Office of the United States Trade Representative (USTR) has formally requested that the ITC advise on the economic effects of allowing increased imports of passenger tires from Thailand to enter the United States duty-free under the US Generalized System of Preferences (GSP).  I say "seemingly bizarre" because, as you'll recall, USTR in September advised the President to impose prohibitive tariffs on Chinese imports of the very same product in order to protect the domestic tire industry from harmful import competition.  But now, only three months later, they're looking at maintaining zero tariffs on surging tire imports from Thailand?

What gives?

Well, it turns out that USTR has found itself in quite the pickle, and this situation provides us with a simply-too-good-to-be-true example of (i) the very real problems that arise when bad politics trumps good policy, and (ii) the folly of bilateral protectionism in a globalized world.

Please allow me to explain.  But before I do, I need to give you some very basic (read: boring) background, so please bear with me.

Pursuant to its authority to administer the US GSP program, USTR asked the ITC to provide "advice on whether any industry in the United States is likely to be adversely affected by a waiver of the competitive need limitation CNL and provide advice as to the probable economic effect on U.S. industries producing like or directly competitive articles (new pneumatic radial tires, of rubber, of a kind used on motor cars (including stations wagons and racing cars)), on total U.S. imports, as well as on consumers."  Under GSP, certain imports from certain "developing" (read: poorer) countries are allowed to enter the United States duty-free in order to help the countries' manufacturing sectors and threreby encourage their economic development (and benefit US consumers in the process).

GSP, however, does not give developing countries carte blanche to export unlimited quantities of covered goods.  Instead, each product has a "competitive need limitation" (CNL) which provides a country-specific ceiling on GSP benefits for the product.  A country will automatically lose its GSP eligibility with respect to a product if the competitive need limitation is exceeded.  For 2009, CNLs require the termination of a country's GSP eligibility on a product if, during the calendar year, US imports from that country: (i) account for 50 percent or more of the value of total US imports of that product; or (ii) exceed $140 million. When one of these limits is exceeded, products will be found “sufficiently competitive,” and by statute, all GSP treatment (not just above the threshold) for any article deemed to be "sufficiently competitive" will terminate on July 1 of 2010. 

However, if a country is granted a "CNL waiver" for a product deemed "sufficiently competitive," then the duty-free treatment will remain in place (i.e., the ceiling on the GSP benefits for that product will be removed).  The President (through USTR) may grant a CNL waiver - typically based on a petition to do so from a private party - if he (i) receives the advice of the ITC on whether any industry in the United States is likely to be adversely affected by the waiver; and (ii) determines, based on the ITC's advice, that the waiver is in the "national economic interest of the United States." (For you unstable/curious people, the full law is here.)

So now back to today's USTR request that the ITC to investigate granting a CNL waiver for imports of tires from Thailand.  Basically, USTR is asking the ITC to determine the "probable effect" that removing the "ceiling" on duty-free tires from Thailand, thus increasing such imports, would have on the US economy.  And USTR will use the ITC's report to determine whether granting the waiver is in the "national economic interest," and thus whether to raise the tariff on Thai tires from zero to the standard rate of 4% or keep it duty-free.  Normally, this process would be no big deal - indeed, just standard practice under GSP for CNL waivers - but this time around, it certainly warrants some attention because, as noted above, USTR in September of this year recommended that the President impose 35% tariffs on the very same imports from China under Section 421 of US Trade Law in order to protect US tiremakers and their workers from the "market disruption" (i.e., material injury) caused by such imports.

As a result of this (bad) decision, Chinese tire imports dramatically decreased in October, and imports from other countries increased due to the predictable (and predicted) "trade diversion" that occurred when US tiremakers - exactly as they forecast to the ITC months earlier - didn't increase their production.  US tire prices also skyrocketed by as much as 40%, with some retailers reporting major shortages and many poorer Americans being left unable to buy new tires during the busy - and dangerous! - winter season.  (Did I mention it was a bad decision?)

A quick review of the import data for January-October 2009 indicates that a little over $120m worth of Thai tire imports have entered the United States under GSP - up about 16% over 2008 levels and quickly approaching the $140 million CNL threshold for 2009, particularly considering that the 421 ruling didn't take effect until late-September.  As a result, four companies - Bridgestone (a US company, by the way), Yokohama, Sumitomo, and Falken - each petitioned USTR in November for a CNL waiver so that post-July 2010 imports from Thailand will still be able to enter the United States a zero duty (instead of the standard 4% duty rate).

These petitions spurred USTR's lawful procedures for considering a CNL waiver, including its request to the ITC, in order to decide whether to increase tariffs on tires from Thailand.  And, boy, have they put USTR in a bind - one entirely of it's own making, I might add:

• On the one hand, the Section 421 decision has wreaked havoc on the US tire market, thus causing (i) US tire prices to careen out of control, and (ii) imports from Thailand to abnormally spike and thus potentially face a long-term tariff increase because they unexpectedly exceeded the CNL in 2009 (and probably thereafter).  Thus, granting the CNL waiver and keeping tariffs on Thai tires at 0% would greatly benefit US consumers, importers and retailers, as well as Thailand and its exporters (including US-based Bridgestone).  It also would be a show of goodwill to a foreign ally and developing country that was an innocent bystander in the Section 421 mess.
  
• On the other hand, USTR said in its Section 421 decision that trade protection - through higher tariffs on tire imports - is absolutely necessary to prevent further harm to the US tire industry and its workers, represented by the United Steelworkers union (USW).  And because the tires at issue are a pretty fungible commodity (i.e., low-end Chinese tires are basically interchangeable with low-end Thai - or Korean or any other country's - tires), any formal, discretionary decision by USTR to refuse to increase tariffs on tire imports from another foreign country through the CNL waiver process (thus leading to more imports, of course) would completely undermine the Obama adminstration's Section 421 rationale and expose the President's decision for the silly political stunt that we all knew it was.  And it would also inevitably lead to howls by the USW.
  

Quandary!  (You see, this is why politicians make bad policymakers, and why bilateral protectionism is a really stupid game.)  So what's USTR going to do?

Well, first they'll try to get cover from the "non-partisan" ITC to say that the CNL waiver will or won't be in the "national economic interest" - after all, US law (19 USC 2463(d)(2)) requires the ITC report on the waiver's probable economic effects and requires the President to consider the ITC's findings when deciding whether to grant a waiver.  So the Obama administration can use the ITC's findings (and US law) as their excuse for granting/denying the CNL waiver once the full 2009 data are complete in February 2010.

Hooray for political scapegoating!

But there's only one problem: what kind of cover will the Obama administration really get from the ITC?  Keep in mind that the President's Section 421 decision also was based on a discretionary determination of whether the tire tariffs were in the "national economic interest," and it relied on the same kind of ITC economic projections.  So can the ITC models used to determine that (i) increased Chinese tire imports were harming US producers, and (ii) high tariffs wouldn't harm the US economy, now show that (i) increased Thai imports won't harm US producers, and (ii) zero tariffs would help the US economy?  Put simply, can the ITC, and by extension the President, really say that Chinese tires are bad for the economy (and thus warrant tariffs), but Thai tires are great for it (and thus should be duty-free)?  If they do, then the ITC's new decision would essentially prove that its conclusions re: the Section 421 tariffs not harming the US economy were dead wrong (or that something fishy's going on - which I doubt from the straight-shooting ITC).  Yet if the ITC finds that granting the CNL waiver would, as the Section 421 tariffs have already shown, hurt US producers, then US consumers/retailers/importers and Thailand all get slammed.  And how can that be in the "national economic interest"?

And thus how will the ITC's report really solve anything?

Well, your guess is as good as mine, but I must admit that I'm going to enjoy the heck out of watching the spinmeisters at USTR attempt to wiggle their way out of this self-induced mess.