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Obama Faces Decision Time on Trade

September 10, 2009

This op-ed of mine appeared in the Asia Times today (September 10, 2009).  The direct link is here.

Obama in Showdown over Chinese Tires
by Patrick Chovanec

Does US President Barack Obama believe in trade? For over a year, he’s been able to dodge the question. But as he returns from summer vacation, the president doesn’t just have healthcare on his plate. He also faces his first test on trade, a decision that could spark an open trade war with China.

The focus of this decision is an import-surge complaint, filed in April, against vehicle tires made in China. The suit is the largest of its kind, involving US$2.2 billion in trade. Lower-ranking officials have issued a ruling that would slap punitive tariffs, starting at 55%, on tires imported from China. The US Trade Representative (USTR) submitted his final recommendations last week, and Obama must make a final decision by September 17 whether to press forward with sanctions.

Normally petitions claiming unfair trade are brought by struggling US manufacturers, but this one is rather unusual. It was filed by a labor union, the United Steelworkers, who represent workers in about half of US tire-making plants. They and their parent, the AFL-CIO, played an important role in helping elect Obama and a Democratic majority in Congress and are now leaning on him to make due on his campaign promises to halt the loss of jobs to foreign competition.

US tire makers themselves – the companies that would supposedly be protected – oppose the union-initiated petition. Cooper Tire & Rubber, the second-largest US tire maker, and the US unit of Toyo Tire & Rubber, which has a plant in Atlanta, have gone so far as to file official briefs with the USTR in opposition. Their objection puts the president in the awkward position of trying to protect American manufacturers that clearly don’t want his protection.

The US companies see their only hope of survival in an integrated production strategy at home and abroad, making cheaper replacement tires in China to complement the premium tires they produce in the United States. The US no longer has any competitive advantage at the bottom end of the market, and two out of six International Trade Commissioners ruled against sanctions on the grounds they would not save any American jobs. Many observers believe lower-end tire production would merely shift to Latin America.

A study by a Rutgers University economist suggests that higher tire prices due to tariffs could cost US consumers $600 million to $700 million a year, lower national income by between $250 million and $300 million a year, and cost 25,000 American jobs in sales, marketing, and distribution. Even if they worked, tariffs would cost $300,000 per manufacturing job protected, and destroy 12 times as many jobs as they save.

Press reports often refer to the steelworkers’ petition as an antidumping case, which is incorrect. The petition was filed under Section 421, a special provision directed solely at China which has nothing to do with unfair trade practices. It is a protectionist measure pure and simple. The previous Administration considered and rejected seven Section 421 petitions, after concluding that sanctions would be harmful to the nation’s broader interests. For Obama to reverse this pattern would constitute a major and destructive shift in US trade policy.

The tire dispute is front page news in China, and Chinese officials have vowed to retaliate forcefully against any tariff the US imposes. They see it, rightly, as a betrayal of American commitments to free trade, and an ironic twist on US efforts to open Chinese markets. But the Chinese aren’t the only ones who are watching with great interest. South Korea, Colombia, and Panama all have signed free trade agreements awaiting Obama’s decision to submit them to Congress. These and other trading partners are looking for signs of how they will be treated by this administration.

Ever since the campaign, Obama has tried to have it both ways on trade. During the Democratic primaries, he told rallies in key blue-collar states he would renegotiate the North American Free Trade Agreement (NAFTA), while his advisors quietly phoned the Canadian embassy to assure them he didn’t mean it. He promised union supporters he would crack down on China, but told the Chinese at the recent Strategic and Economic Dialogue (S&ED) that he wants to work with them as valued partners. Now, finally, it’s decision time. Someone – either his union allies, on the one hand, or American job-creators and our key trading partners, on the other – will walk away unhappy. And we’ll know where this president really stands on trade.

The United States should never shirk from standing up to China when China is wrong. But we should not pick fights merely as a way of lashing out in frustration, when no good and only harm can come of it. Rejecting the proposed trade sanctions against Chinese tires is the right decision for America. Obama needs to stand up to his union supporters and say it.

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