Thursday, January 26, 2012

Classic: Poster Child for President's SOTU "Trade Enforcement Team" Is an Abject Failure

I've already spent too much time writing about the stale trade ideas in President Obama's 2012 State of the Union, but one of the President's many comments on trade - reminded to me by Cato's indomitable Sallie James - deserves more pointed criticism (emphasis mine):
I will go anywhere in the world to open new markets for American products. And I will not stand by when our competitors don’t play by the rules. We’ve brought trade cases against China at nearly twice the rate as the last administration –- and it’s made a difference. Over a thousand Americans are working today because we stopped a surge in Chinese tires.
The President's aforementioned job-creation boast relates to his 2009 decision to impose prohibitive tariffs on Chinese tires under "Section 421" of US trade law.  One aspect of that boast is true - Obama's tariffs did cause a dramatic decline in surging Chinese tire imports (as prohibitive tariffs tend to do).  However, another aspect of the President's statement is shamefully misleading: those tire tariffs had absolutely nothing with China's "not playing by the rules" because Section 421 addresses surges of fairly-traded Chinese imports.  I actually corrected this fallacy when the administration first started pushing it after the tariffs were imposed:
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.)
Despite my repeated clarifications, the President and his team are still relying on this "unfair trade" fallacy when they speak of the tires case (gee, it's as if they don't read my blog or something).  Of course, if they did honestly mention that their vaunted tires case was about simply preventing US consumers from purchasing fairly-traded Chinese tires, then the President's awesome "new" enforcement team might not sound so awesome... especially considering the many real problems with the President's Section 421 decision.

I recently noted some of those problems following the release of a new report by the US-China Business Council which examined the first two years of the Section 421 decision and found that, while Chinese tires did decrease dramatically, they were replaced by other imports rather than increased US production:
The [USCBC] paper goes on to show that, according to US government data, "[t]he biggest beneficiaries of the tariffs are probably tire producers in Korea, Thailand, Indonesia, Mexico and other countries that replaced supply from China."  Of course, anyone who understands trade diversion could have predicted this outcome (and a lot of us did - including US Trade Representative Ron Kirk who hilariously told a Brazilian delegation that they should welcome the President's decision because they'll export more tires to the US).  Unless US manufacturers are the second-most competitive producer of widgets on the planet, tariffs on imports from the #1 widget producer will almost always result in an increase in imports from other countries' widget producers, not from the US producers.  This is not just basic economics, it's also common sense - very well-documented common sense. 
The only thing not mentioned in the new USCBC report is another commonsense outcome of protectionist tariffs - pain for American consumers in the form of higher prices.  In the case of tires, I've cited anecdotal evidence of such price increases, and a previous USCBC report documented significant price increases in the 10-month wake of President Obama's decision.  It'd be good to see more such analysis in the future.  And, of course, there's that sweet Chinese retaliation against US exporters in direct response to the Section 421 announcement.
The Wall Street Journal recently followed-up on my blog post with more distressing facts about the President's tire tariffs.  Most notably, they found (i) further evidence that Obama's decision caused trade diversion abroad and sky-high tire prices at home and (ii) very little evidence that it created a "thousand" jobs like he boldly alleged in Tuesday's State of the Union Address:
The [Section 421] measure was meant to whack imports of passenger and light-truck tires and give a boost to manufacturers and job creation in the U.S.

Yet, for a variety of reasons, it has apparently done little of either—and has surely raised prices for consumers.

"So far as saving American jobs, it just isn't working," says Roy Littlefield of the Tire Industry Association, which has 6,000 members. "And it really hurt a lot of people in the industry—smaller businesses that geared up to bring these tires in from China."...

Mr. Everett, the tire shop owner, says prices jumped not just for China-made tires but for tires made in the U.S., too. Wholesalers, he said, used the cover of the tariff to raise prices across the board. Bob Ulrich, editor of Modern Tire Dealer, a trade publication, says prices are up 29% in the replacement market since 2009. Large increases in shipping and raw-material costs have contributed to the rise, as has recovering consumer demand in the U.S....

Some companies have indeed added production and employees, but whether that is a result of the tariff or the recovery in the U.S. economy isn't entirely clear.
Yes, it isn't "clear" because such results would defy all available evidence and, you know, the laws of basic economics.  As the WSJ article notes (and as I've repeatedly explained), low-end Chinese tires simply don't compete with high-end US tires, and the tariffs simply caused Chinese tires to be replaced by other imports.

So there you have it, folks: Obama's vaunted tire tariffs - literally the centerpiece of his "new" unfair trade enforcement initiative - have nothing to do with unfair trade and have proven to be an abject failure.

So if that's the best he can do...

UPDATE: Heritage's Bryan Riley beat me to the punch on this one and comes to a similar conclusion: "In his State of the Union Address, President Obama followed up his tire tariff story by calling for a brand new federal bureaucracy to investigate unfair foreign trade practices. In fact, the tire tariff is a cautionary tale that should remind policymakers that to the greatest extent possible, the determination of whether a particular transaction is fair or unfair should be made by the people spending the money, not by officials in Washington, D.C." 


alternative investments said...

Scott: What people do not realize is that many products made in China do not compete with anything in the US at all. Do you think some cheap plastic toys or dolls are the like are ever going to come back to the US?? If the manufacturing of items like these ever leaves China, it will go even cheaper countries like Vietnam, Bangladesh etc. People just do not seem to get this basic fact.

Scott Lincicome said...

Correct, AI. And it looks like we can count President Obama among those "people."

RickRussellTX said...

I was absolutely floored that he picked the Chinese tire tariff as his great example of US policy at work.