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“It’s obviously a measure that does not help recovery and does not help increase world trade.”

-          Alejandro Jara, Deputy Director-General of the WTO referring to the U.S. Government’s tire tariffs

President Obama took an aggressive stance on Chinese tire imports this weekend, announcing duties of 35% on $1.8 billion of automobile tires from China that are imported into the United States every year.  In the scheme of total Chinese exports to the United States, tires are only a small component at just over 0.5% of the entire $252 billion.  As a result, this only has a marginal impact on the overall flow of trade, but it certainly does, in the short term, create some bad blood with The Client (or China as we like to call her).

The immediate response from the Chinese was an official announcement to investigate whether the United States government was unfairly subsidizing both the chicken and automotive industries.  The estimated export value of those industries is approximately $957 million and $2.9 billion respectively, which could make this a much more than zero sum game if the Chinese were to take specific actions against these U.S. industries.

The ultimate question, though, is whether this is merely a tactical move by President Obama, or whether this is potentially the first move in a broader trader war with China.  If the answer is that it is a tactical move, this would dove tail with initial moves by other Presidents harkening back to Ronald Reagan.   President Reagan imposed duties and quotas on steel imports and President George H.W. Bush extended them in 1989.  President Clinton limited auto part imports from Japan and President George W. Bush attempted to protect the U.S. steel industry.  While all of these moves were protectionist in nature, all of the prior four Presidents also went on to cut trade barriers and tariffs. 

The unique aspect of President Obama’s tenure, as it relates to trade, is that China is now the primary creditor of the United States.  As a result, there are important considerations beyond safeguarding the domestic tire industry.  The New York Times reported today on the reaction by Chinese nationals to the Obama administrations, which were quite emphatic.  According to the article:

“The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds.”

While obviously these comments are anecdotal and not indicative of broader Chinese government policy, there are, nonetheless, important to monitor as a measure of sentiment of the Chinese populace.

There is likely some merit to the U.S.’s actions, and as we are seeing via the stock prices of Goodyear Tire and Cooper Tire being up roughly 4% and 12% today, that there is immediate economic benefit to the domestic tire industry.  Given the importance of the broader economic ties with China, President Obama will have to be very cautious in ensuring moves such as the tire tariff are tactical in nature and not indicative of a broader shift in U.S. trade policy.  If it is the latter, all bets are likely off as it relates to the reciprocal actions from China . . .

Daryl G. Jones
Managing Director