Fairness or otherwise?

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In 1981, ‘voluntary’ export constraints were implemented limiting the importation of high-quality, fuel-efficient Japanese cars into the USA. Ironically, these were desired by much of the American motoring public in response to government imposed CAFE mandates. Later in the decade, a 100% tariff was placed on selected Japanese electronic products for ‘dumping’ computer memory chips.

Today, inexpensive Chinese tires are flooding the US market, as happened here five years earlier. These smaller-size consumer tires, like small cars, are not profitably produced in American plants. Predictably, the labor union (USW) representing domestic tire workers has again requested political intervention in the form of anti-dumping measures and countervailing duties. It is difficult for politicians to resist protectionist pressures from their affected constituents, even though such ‘protection’ will artificially raise the cost to detached consumers. Fair trade, not free trade, is often cited as an issue by tariff advocates – which is often a code word for protectionism.

The one immutable fact that most of us remember from economic studies is that taxing a good suppresses demand for it – while simultaneously increasing costs. These and related concepts, like comparative advantage and free trade, were addressed by Adam Smith, the founder of classical economics in 1776; he would certainly be suspicious of any regulations that benefit special interests such as labor unions. This is the second time in five years the USW has requested relief from entry-level Chinese tire imports in the form of punitive tariffs. In 2010, the US applied a tax (starting initially at 45%) on such tires over the ensuing three-year period. As expected, Chinese tire imports plummeted (see Data Directory, TTI, November 2013), but rose again when the elevated tariffs ended in 2012.

The Petersen Institute, a non-profit, non-partisan think tank, recently issued these findings from the 2010-2012 tire tariff experience: “The tariff saved a maximum of 1,200 American jobs in tire factories. The total cost to American consumers from higher prices resulting from the tariff was around US$1.1bn. It seems likely that tire protectionism cost the US economy around 2,500 jobs, when losses in the retail tire sector are off-set against gains in tire manufacturing.” Adding further to the loss, China retaliated by imposing anti-dumping duties on some agricultural exports, costing US farmers around US$1bn in lost sales. Most of the money that would have gone to Chinese tire manufacturers went instead to companies elsewhere in Asia, principally Thailand and Indonesia. Remarkably, the already quite profitable North American tire companies might see further improvement in profit margins as a result of any punitive tariffs on low-end tires as they sell more up-market product lines.

With Chinese tire imports rising a second time, the scene has been set for renewed political intervention. Two different US agencies work in tandem when such grievances are filed. The International Trade Administration (ITA) of the Department of Commerce promotes trade while ensuring that trade is fair; the International Trade Commission (ITC), a quasi-judicial but independent federal agency, provides policy advice to other branches of government in making determinations involving imports claimed to have injured a domestic industry. Together, these two agencies will set duties and timelines for any punitive tariffs. While not an issue here, several recent ITC cases involve tread design patent disputes between foreign tire manufacturers with US sales.

Study after study by impartial groups indicates that consumers pay more for products whenever trade is restrained. Any tire tariff will serve as a tax on poorer and some middle-class Americans who might normally purchase low-cost, entry-level tires for their vehicles. But to this observer, the aroma emanating from past US government rulings dealing with automobiles and tire import restrictions smells mostly of politics. The interaction of the ITC and the ITA reminds one of a kabuki dance with a predictable outcome. In their perceived zeal to be useful, I believe such government agencies often hurt more people than they help – especially those most likely to purchase inexpensive tires from independent tire dealers. Expect to see a second round of punitive tariffs and increased prices on future Chinese tire imports to the USA. In essence, money will be taken from one class of consumers and doled out to protected workers.

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