Tired of Free Trade

On Friday, President Obama, acting on a recommendation from the U.S. International Trade Commission (USITC), raised import duties on tires from China by a large margin.  The increase will take effect September 26; duties will go from 4% to 35%.  The additional duty will be phased out over the next three years.

The action came under Section 421 of the Trade Act of 1974, a section that was added in 2000 as part of the agreement that allowed China to join the World Trade Organization.  Section 421, which applies only to China, says that the United States can impose import duties on Chinese products if they cause material market disruption in the United States.  It is important to note that we don't need to show that China is engaging in unfair trade practices to use Section 421. (A number of commentators supporting the decision have misleadingly used the term "sanctions" to describe the action.)  The United States has discretion in applying Section 421; President George W. Bush never applied the statute, despite the fact that the USITC issued several recommendations finding material disruption to U.S. industry from Chinese imports.  (The first Section 421 case involved pedestal actuators, which lower and raise the seat of motorized wheelchairs.  The USITC found disruption, but President Bush declined to impose tariffs, citing the added cost to disabled buyers of such wheelchairs.) President Obama is now the first President to impose tariffs under Section 421.

So what will this do? Will it help American tire manufacturers? The markets seem to think so, as stock prices for Goodyear and Cooper bumped up today.  Interestingly, however, neither of these tire companies supported the petition asking for tariffs under Section 421, which was filed by United Steel Workers.  Here's why: these companies have outsourced much of their low-end tire production to China, so while the tariffs may cut down some of their competition, they affect them too. 

Consumers will almost certainly see prices of low-end tires go up. (High-end tire prices will be less directly affected, as production for them has remained in the United States.) Customers may have less choice in tires, until tire companies find alternative suppliers, either in the United States, or, more likely, in other countries with low production costs.

China is understandably unhappy with the action, and is reportedly looking into ways to block U.S. exports of poultry and auto parts in retaliation.  A full-out trade war seems unlikely, however, as both the United States and China understand the folly of such a war in this crucial period of economic recovery.

Some analysts have attributed today's drop in the stock market to Friday's 421 decision.  It is difficult to attribute stock market movements to particular events with any certainty, but even if the drop is related, it may not mean that markets expect a large negative fallout from this decision.  Rather, it may reflect perceptions of the President's position on free trade, with market participants viewing this as a test case for future administration policy.