Obama tires of free trade

By Phil Levy

We know President Obama is proud of his proposal to reform the nation’s health care system; he spoke of it before a joint session of Congress last Wednesday evening. Judging by the timing, he was distinctly less proud of his decision to slap three years of hefty tariffs on low-cost tires imported from China. That announcement came at 9:45 pm on Friday. The decision was due this week, but the move smells of rank protectionism, and there was no better opportunity to bury the story than last Friday night.

It made for an awkward sendoff for Wu Bangguo, Chairman of China’s legislature, who had just been visiting Washington. It did not escape notice back in Beijing, either. The Chinese had been sending warnings about how seriously they took this case for months. A Chinese Ministry of Commerce official was quoted on Saturday as saying that China "strongly opposes the serious act of trade protectionism," and that the tariffs mark a breach of U.S. pledges made at the April G20 summit in London to avoid raising trade barriers. Fortunately, there is no indication that the spokesman actually uttered the phrase, "You lie!"

Nor has any Chinese official been heard to say: "Don’t worry. We understand. It’s just economics." Obama has long seemed to draw a distinction between a warm, multilateral approach to international diplomacy, and a cautious or even hostile approach to international economic relations. For many countries, however, international economic relations are so important to their well-being that they are inseparable from those countries’ foreign policy concerns.

Increasing tensions with China have also featured some classic international relations misunderstandings, such as misattribution of intent. The Chinese were already upset about a U.S. countervailing duty decision last week that imposed new barriers against Chinese steel pipe. The pipe and tire decisions seemed to constitute a trend of protectionist U.S. actions. In fact, the two decisions are very different. Obama had full discretion over the tire tariffs and none over the pipe decision.

But the Chinese were not the only ones to be confused. In the wake of the tires decision, United Steel Workers President Leo Gerard exalted, "The President sent the message that we expect others to live by the rules, just as we do." U.S. Trade Representative Ron Kirk certainly encouraged this interpretation, by linking the decision to the Obama administration’s campaign for enhanced enforcement of trade laws. In fact, the tires decision had nothing to do with malfeasance on China’s part.

To clarify, there are a number of ways the United States might slap tariffs on a country. Congress could pass a tariff bill, in the tradition of the Smoot-Hawley Act of 1930, but that’s very rare. It’s much more common to use mechanisms that are permitted under world trade law. Two of these, the antidumping (AD) and countervailing duty (CVD) mechanisms, address transgressions by trading partners. The steel pipe decision was an interim step in a CVD (anti-subsidy) case. Congress allows the president no role in these cases. Even if Obama had thought the steel pipe decision was ludicrous, there was nothing he could have done about it. 

In contrast, Friday night’s tire decision was the culmination of a "safeguard" case. Safeguards allow the president to respond when a U.S. industry has been injured by a surge in imports. The ITC can recommend a remedy, but the president is free to accept, modify, or reject that recommendation. In the tires case, Obama imposed lower tariffs than the ITC called for. The China-specific safeguard he relied upon was agreed as part of China’s entry into the WTO in 2001.

President George W. Bush had four opportunities to impose such tariffs on Chinese goods and turned down all four. Critics decried these decisions as selling out U.S. workers, appeasing China, and demonstrating a slavish adherence to free-trade ideology. I played a very small role in two of those four decisions and remember the reasoning somewhat differently. The only beneficiaries of tariffs in those cases would have been Vietnamese, Brazilians, or Indians.

Here’s the problem. The China safeguard is a bilateral policy in a multilateral world. The Chinese are often the lowest-cost suppliers of a good, but they’re not the only suppliers. In the Bush cases, importers testified credibly that if Chinese imports were blocked, other countries would undersell U.S. manufacturers in these particular products.

The tire situation appears to be similar. U.S. tire producers did not even support the case; they said they were more interested in producing high-end tires. The petition was filed by the United Steel Workers. If U.S. tire producers are uninterested, then there is little prospect of gains for American workers. The tires will just be sourced from other countries at somewhat higher cost.

So where does this all leave us? New American jobs appear unlikely. Prices should rise a bit for U.S. consumers. Some lucky third country will gain new American orders, redirected away from China. And there is real concern that other countries will follow the U.S. lead. China is exploring ways to block U.S. cars and poultry. Later this month, Pittsburgh G20 discussions of how to pursue open markets together should be particularly awkward. But at least Obama retains the support of organized labor.