Tuesday, July 7, 2009

Tire Tracks Trade Telltale?

The US International Trade Commission has recommended safeguard tariffs on Chinese tires. The ITC's announcement says:
In accordance with Section 421 of the Trade Act of 1974, we have determined that imports of certain passenger vehicle and light truck tires from China are being imported into the United States in such increased quantities that they are causing market disruption to the domestic industry producing such tires. Under Section 421(f) of the Act, we have the responsibility of recommending actions that will remedy the market disruption. We have considered the relevant factors set out in the statute, the written and oral submissions of all parties, and other information obtained in the investigation.

To remedy the market disruption caused by rapidly increasing subject imports, we propose that the President, for a three-year period, impose a duty, in addition to the current rate of duty, on imports of certain passenger vehicle and light truck tires from China. This duty would be 55 percent ad valorem in the first year, 45 percent ad valorem in the second year, and 35 percent ad valorem in the third year. In our opinion, these tariff levels would remedy the market disruption that we have found to exist.

See also this Reuters story. The recommendation next goes to the President. Recalling that Obama's views on trade were somewhat murky during the campaign, Greg Mankiw suggests his determination in this case will be revealing. "This Chinese tire case may be one indication of the president's true feelings about trade."

Although safeguard tariffs are explicitly protectionist, not all "free traders" are opposed to them. While trade theory emphasizes the gains from trade by comparing welfare under different policies in equilibrium, much of the public concern over trade really comes from the dislocation associated with the transition between equilibria. By providing a mechanism to cushion the adjustment, safeguards may help reduce opposition to trade liberalization. Moreover, safeguards may be a preferable alternative to the more frequently utilized antidumping actions. A 2005 article about antidumping in Foreign Affairs (JSTOR) argued:

A better way to protect industries adjusting to increased competition would be through the increased use of "safeguard tariffs," a type of trade barrier that is explicitly temporary. Increased use of safeguards may fall short of the free-trade ideal, but they cost the U.S. economy far less than do antidumping tariffs. (When tariffs are in place for more than three years, the WTO allows countries whose exports are affected by the safeguards to levy retaliatory tariffs.) Like antidumping duties, safeguards can be put in place only if the ITC determines that specific imports are hurting a domestic industry. The legal hurdle for getting a safeguard, however, is higher: unlike antidumping tariffs, which can be levied when imports merely cause material injury, safeguards are permissible only when the ITC finds that no other factor is more important than imports in causing harm to a U.S. industry. In return for the higher standard of injury with safeguards, import-competing firms in the United States do not have to show that the foreign firms took any particular actions. No consideration is given in safeguard determinations as to whether trade is fair or unfair.

The law governing safeguard tariffs also gives the president an opportunity to balance the needs of the import-competing community against the interests of the rest of the country. Although the ITC issues a recommendation, the president, according to the legislation, has the discretion to impose trade barriers as he sees fit, balancing "the short- and long-term economic and social costs" of the safeguard tariffs with "other factors related to the national economic interest of the United States." And in return for trade barriers, the domestic industry must put forward a plan for adjustment and show progress in making the adjustment--or face the prospect of having the safeguard tariffs removed by presidential action.

The authors of that article? Greg Mankiw and Phil Swagel. While it will be interesting to see how the President deals with this, it would be a stretch to proclaim him a "protectionist" if he follows the ITC's recommendation.

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