Tire Tariff Cost US About $1.35 Billion

The consequences of Obama’s 35 percent tariff on imported Chinese tires are now starting to become apparent. An Associated Press article yesterday (via Pushing Possibilities) identified a few of the explicit and implicit consequences of the tariff.

Explicit costs include:

Under the government’s new tariff, which went into effect in September, a set of Chinese tires that would have cost $280 now cost nearly $100 more.

Implicit costs include:

Jennifer Stockburger, a tire test engineer for Consumer Reports, says six of the top ten all-season tires recently tested by the magazine were made in China by major manufacturers.

To calculate the true cost of the tariff, Pushing Possibilities conducted a cost-benefit analysis:

17% of the tire market is made up of Chinese tires.  Tire sales for 2008 was around $27 billion, which means that about $4.6 billion is Chinese tires. With an average price of $280 for Chinese tires pre-tariff, the total quantity of Chinese tires sold would amount to 16.4 million.  With a $100 price increase, assuming that domestic tire price increases offset the tariff increase, U.S. consumers are expected to lose out on a net savings of over $1.6 billion.  And that of course does not take into account the implicit cost of quality loss.

The tariff was expected to stop the loss of employment in the U.S. tire industry.  By assuming there would be a benefit of saving 5,000 jobs in the tire industry, even at the median U.S.  income, that only amounts to a very large estimate of over $250 million of saved income.

Therefore, Obama’s tire tariff cost the U.S. over $1.35 billion dollars.

A short guide to protectionism

From the Telegraph:

1.  Smoot-Hawley

The most famous act of protectionism took place in the 1930s when the US government, facing the early forces of depression, legislated to impose tariffs on over 20,000 imported goods – some significantly. The act triggered a spiral of retaliatory protectionism across the world, and in the view of some economists, fuelled both the Great Depression and the geopolitical tension that led to the Second World War.

2. Common Agricultural Policy

Under the CAP – a European scheme, although similar programmes are in place in the US and throughout the developed world – domestic farmers are given subsidies for producing (or in some cases not producing) food. Without such subsidies many domestic agricultural businesses would collapse, since they cannot compete with the cheap prices charged by overseas exporters for everything from vegetables to livestock to cotton.

3. Shoe wars, bra wars

Recently, in his former role as European Trade Commissioner, Peter Mandelson accused China of illegally dumping vast numbers of shoes – and later bras – on the European markets. “Dumping” is the name given when a country exports a product at a price even lower than that paid in its domestic market. Under the WTO code, it can act against such moves under so-called “anti-dumping” rules.

4. Chinese tyres

China and the US are currently locked in a trade battle over the trade in car tyres. In September, the US Congress accused China of illegally swamping the US market with cheap tyres and imposed tariffs on those imported from the Asian giant. China in turn accused the US of protectionism, arguing that exports to America had actually dropped last year. But with thousands of American jobs on the line, the case is still the focus of heated debate.

5. India vs China

The WTO is not merely a mechanism for the West to fight its own corner against cheaper emerging market exporters. Emerging and developing nations also use it as a forum to tackle their own independent trade battles. Recently, China and India have been locked in debate over trade, with India accusing China of expanding overly aggressively into its silk and satin markets. India argues that Chinese prices are so cheap that its key domestic industry is simply unable to compete.

China-America trade war continues

China Set to Impose New Tariffs on Nylon (via Greg Mankiw):

China’s Ministry of Commerce has made a preliminary ruling to impose tariffs of as much as 36% on certain nylon imports from the U.S., saying the imports have damaged the domestic industry….The move is the latest in a series of Sino-U.S. trade disputes after the Obama administration said in September that it would impose duties of between 25% and 35% on imports of tires from China for the next three years. China followed that decision with probes of potential antidumping measures on U.S. auto parts and chicken.

Economic vandalism: Barack Obama and free trade

The Economist has a timely and spot-on article on Obama’s “string of ominously protectionist policies” highlighted recently by his decision to impose a 35 percent tariff on imported Chinese tires. The magazine writes:

This newspaper endorsed Mr Obama at last year’s election (see article) in part because he had surrounded himself with enough intelligent centrists. We also said that the eventual success of his presidency would be based on two things: resuscitating the world economy; and bringing the new emerging powers into the Western order. He has now hurt both objectives.

…The tyre decision needs to be set into the context of a string of ominously protectionist policies which started within weeks of the inauguration with a nasty set of “Buy America” provisions for public-works contracts. The president watered these down a bit, but was not brave enough to veto. Next, the president stayed silent as Congress shut down a project that was meant to lead to the opening of the border to Mexican trucks, something promised in the NAFTA agreement of 1994. Besides these sins of commission sit the sins of omission: the president has done nothing at all to advance the three free-trade packages that are pending in Congress, with Colombia, Panama and South Korea, three solid American allies who deserve much better. And much more serious than that, because it affects the whole world, is his failure to put anything worthwhile on the table to help revive the moribund Doha round of trade talks. Mr Bush’s tariffs, like the Reagan-era export restraints on Japanese cars and semiconductors, came from a president who was fundamentally committed to free trade. Mr Obama’s, it seems, do not.

Click here to read the full article.

Tire Industry Opposed ‘Punitive Tire Tariff’

Mark J. Perry points to an interesting New York Times article that claims the “punitive tire tariffs” against China were in fact opposed by the domestic tire industry (Goodyear and Cooper):

Last Friday night, Mr. Obama, responding to a complaint by the United Steelworkers, imposed a 35 percent tariff on Chinese tires for cars and light trucks. China quickly responded by threatening to retaliate against American auto products and chicken meat, raising fears of a possible trade war, an especially unwelcome prospect just as the global economy is struggling to recover.

China has deplored the administration’s decision, suggesting it caved to domestic support for protectionism. The Tire Industry Association, which represents American tire retailers, said the decision was ill-advised and would lead to higher prices for consumers.

Asserting that the decision would hurt tire retailers, the association said it “believes this was a politically motivated decision that will end up costing more jobs than it saves. These tariffs will not bring back the jobs that the union claims have been lost.”

Responding to New Tire Tariff, China Targets American Auto Parts and Chicken Products

Just days after Obama bowed to union pressure and imposed a 35 percent tariff on Chinese tires, China has retaliated:

Chinese officials lambasted the decision, accusing the U.S. of engaging in protectionism and violating World Trade Organization rules. They argued that the U.S. tire industry had long ago abandoned the low-end market that China covets and said Chinese tire imports had increased only 2.2% between 2007 and 2008, state media reported.

By announcing the probe of U.S. imports, the Chinese Ministry of Commerce signaled that it was prepared to challenge Obama’s decision.

“Recently, the commerce ministry has received word from domestic industries indicating that [chicken and auto] products had entered our nation’s markets via dumping, subsidies and other unfair trade means,” the ministry said on its website, giving no details about the specific products.

James Zimmerman, a partner in the law firm of Squire Sanders & Dempsey in Beijing, recently told the Los Angeles Times, “American business in China should be prepared for what might be a zealous retaliatory response from China, which might impact a broad range of U.S. commercial interests.” Just what we need.

Obama To Impose New Protectionist Tariffs

Market Watch reports:

The Obama administration will impose stiff tariffs on imports of Chinese-made tires after finding that a surge of imports has disrupted the U.S. domestic market.

President Barack Obama signed an order on Friday to impose the special punitive tariffs for three years, the White House announced.

The action is the first major trade enforcement action of his presidency and comes less than two weeks before a high-profile summit of the leaders of the Group of 20 nations, including China.

This is a highly disappointing victory for protectionists. Henry Hazlitt gives a short yet accurate anecdote on one of the consequences of introducting tarriffs:

Suppose that in our country we import woolen sweaters from country A, and the sweaters sell for $25.

The local sweater industry petitions the government to impose, say, a $5 tariff (duty) on the imported sweaters. They argue that they cannot produce woolen sweaters for $25 and need this tariff in order to compete with country A. So, the government imposes a tariff.

As a result, the local sweater industry is able to employ many people. However, the consumers now pay $30 for the same quality sweater. The consumers no longer have that $5 to spend on other things. Thus the local sweater industry thrives, but a hundred other industries shrink.

You can see the sweater employees going to and from the factory each day, and you think, “The tariff was a good idea, it has given employment to people in our country.” But you don’t see the hundred other industries that have shrunk and all the lost jobs from that.

Click here for Professor Mark J. Perry’s “Simple Economic Analysis of the Tire Tariff: Americans Will Be Punished By the Punitive Tariffs.”

UPDATE: Responding to New Tire Tariff, China Targets American Auto Parts and Chicken Products